Right before the Treasury created the Super SIV, the Fed’s own holdings totaled $869 billion. Today, that number has tripled to nearly $3.2 trillion. Essentially, the Fed has become the financial system’s Super-Super-SIV. An institution that is supposed to confine its holdings to plain old U.S. Treasury bonds now owns $918 billion worth of mortgage-backed securities. The Fed also holds $64 billion in investments in “support for specific institutions,” including what’s left of the Bear Stearns toxic assets and AIG’s mortgage-related mess. The Fed says that it values these things at “fair value,” but that’s a canard. It’s like dropping an elephant into a half-filled swimming pool and announcing that the pool is now full of water. The financial system knows that the Fed has to get out of the pool eventually, and when it does, the water level—the prices of these toxic assets—will drop.
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