The Wall Street Journal recently had an article about the Fed getting ready to start off-loading the $1.1T worth of mortgages they bought during the crisis (in an attempt to save the banks).
From the article (note, I added emphasis):
At $1.1 trillion in holdings of mortgage debt guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, the Fed owns roughly a fifth of all these outstanding instruments.
Some Fed officials are pushing for a more aggressive approach. In April, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, called for monthly sales of $15 billion to $25 billion to eliminate the Fed’s mortgage holdings within five years. “It is likely the Fed will have to sell a nontrivial amount of its MBS holdings,” he concluded. Some Fed policy makers—among them Charles Plosser of Philadelphia, Jeffrey Lacker of Richmond and Kevin Warsh at the Fed board—are sympathetic.
At first glance, so much money has been thrown around in the media that 1.1 Trillion Dollars seems like it’s not so big. To put it into perspective, let’s look at some prospective buyers and see how much they would be able to buy and how long they would last:
- Berkshire Hathaway (BRK.A) – According to Google Finance, Warren Buffet’s investment company had approximately $30.5B in cash and short-term equivalents at the end of the last fiscal year. Assuming they have the same amount of cash (which is probably inaccurate, but just simplifying), and also assuming that Warren Buffet wanted to buy as many mortgage backed securities from the Federal Reserve as he could get his hands on, and also assuming that he was prepared to use all of his cash to do so…he could only participate in a maximum of 2 months (let’s call it 1.5months) worth of sales by the Fed – before he runs out cash. So that’s one large investment company down, with only 58.5 months of sales to go.
- Goldman Sachs (GS) – had approximately $38.21B in cash and short-term equivalents. So they would be able to participate for 2 months. So only 56.5 months to go.
- The largest hedge funds in the World – with total assets under management of approximately $530B, if they were able to ‘magically’ liquidate their holdings and purchase from the fed…that entire process would take between 21.2 – 35.33 months. So only 25 more months to go (assuming some middle ground between both values is chosen).
- Google (GOOG) – had $24.5B cash on hand. So they can play ball for approximately 1 month.
- Microsoft (MSFT) – had $31B cash…so they can last 1.5 months as well.
- Coca-Cola (KO) – Only has $9B, so they can’t even sit at the table and participate (again, this assumes one company per month, to get the shortest time of getting rid of the mortgages as possible).
- Apple (AAPL) – Has $24B, so they can participate for 1 month.
Only 21.5 more months to go.
I know this is a major simplification, it’s just an interesting exercise to look at. Especially in this media climate with hundreds of zeroes thrown all over the place. Also note that I have not included large pension funds, retirement schemes, etc. that typically have very large wads of cash…mainly because those funds tend to be abstract to most people. When you see companies constantly in the news, it’s easier to visualize how big the Fed’s balance sheet is.
Hope that puts it into perspective.
Another thing I have been thinking about lately, is the part of the proposal that will regulate the financial industry (I am pro reform) that creates a ‘bailout kitty’. i.e. the liabilities of large financial institutions will be taxed and stored in this kitty. What I am wondering is this: Where will that money be invested and who will manage it? If they (the managers of said kitty) ‘play it safe’ by investing in sovereign debt, which country’s debt? Won’t that create some perverse incentive for countries to keep running fiscal deficits because they have a literal ‘large pot of gold’ sitting down at their disposal that will allow them to finance any program they want to finance? i.e. moral hazard of the political sort.
Not saying the liabilities shouldn’t be taxed, and the kitty not created…just saying…it might have unintended consequences that are not currently being discussed. However, that might be the subject of another post.
P.S. Image courtesy of Mykl Roventine on Flickr.