Did anyone else notice the Chairman of the Federal Reserve casually admit recently that our central bank has no long-term strategy for handling the banking crisis? Jerome Powell was asked recently, perhaps by someone who read this newsletter, what would happen in March of 2024 when loans begin coming due from the Bank Term Funding Program (BTFP). He literally said that they hadn’t thought that far ahead.

Powell & Co. created a $100+ billion bailout facility with no exit strategy, and now they talk about it like it’s nothing. The attitude extends even to major banking houses like Bank of America, which has openly admitted that it has hundreds of billions of dollars of unrealized losses on its books but expects to realize none of them. In other words, everyone, the Fed included, is acting like the BTFP is a permanent facility.

The BTFP allows banks to effectively dump depreciated assets on the Fed because Powell & Co. will accept them at par as collateral on 1-year loans. After creating systemic interest rate risk and coercing many banks onto the wrong side of the interest rate trade, the Fed papered over the problem with the BTFP.

The predicament of these banks mirrors the Fed’s balance sheet with $1.3 trillion in unrealized losses and its accumulation of negative remittances, labeled a deferred asset. Loaded with low-interest-rate assets on one side of the ledger and high-interest-rate liabilities on the other side, the predictable result is massive losses. The assets originated when rates were low, but the liabilities are being created today, at today’s higher rates. Two of the chief liabilities right now for the Fed are the interest on reserve policy and reverse repurchase agreement operations, both paying over 5% today, so the red ink is piling up. How bad are the accumulated realized losses at the Fed? Over $120 billion – with a “b”: