NEW YORK (TheStreet) -- One hundred years later, the Federal Reserve System now may be the single largest, grievously wounded financial entity on the planet. As pent-up stresses unfold, the combined Fed (all of its banks) ultimately may not survive a tough "independent" audit as of Dec. 31, 2013, without a massive equity infusion.
According to its 2012 Annual Report, Federal Reserve banks combined have total "equity" of $54.7 billion compared to total assets of $2.917 trillion. Their ratio of stated equity to assets was, at Dec. 31, 2012, a skimpy 1.88%. By comparison, JPMorgan's (JPM) ratio was 8.05%; Goldman Sachs' (GS) was 8.07%; Citigroup's (C) was 10.24%; Bank of America's (BAC) was 10.72%; and GE Capital's (GE) was 15.32%.
This surface-level comparison does not raise red flags high enough.
Financial statements issued by the Fed are not audited using comparable techniques employed for publicly traded financial institutions. Moreover, these tougher approaches did not catch evident problems before and during the crash of 2008 and 2009.
Contours of the Impending BailoutThough debt securities are easier to understand than equities and commodities, investors have failed to concentrate upon alarming realities in the U.S. debt market, at their great peril. Unlike September 2008 through May 2013, yields on benchmark 10-Year Treasuries continue to soar as challenges mount throughout the global economy. Put simply, securities issued by the U.S Treasury and core holdings of the Fed are no longer the safest port in the storm.
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