Taxpayers are liable for the Fed’s $6.98 trillion in loans.
Each of the 12 banks that make up the U.S. Federal Reserve System are owned by member banks in the region of its jurisdiction. Unlike corporations for which stockholders are on the hook to pay for corporate losses, taxpayers – not member banks – will have to cover 98 percent of the Fed’s losses if any of its $7 trillion in bailout loans and junk-bond buys go bad.
For example, the Federal Reserve Bank of New York has made $3.9 trillion in loans during the current bailout frenzy, about 56 percent of the balance sheet of the entire Fed.
But the esoteric formula by which the Fed’s member banks assume liability for their bad loans calculates each member’s liability based on just 6 percent of the bank’s assets. In other words, the New York Fed’s member banks, which include Goldman Sachs and Morgan Stanley, are responsible only for $42.6 billion of any losses in its $3.9-trillion portfolio. Taxpayers would be stuck with the rest of the tab.
Applying the formula to member banks across all 12 Federal Reserve jurisdictions, member banks are responsible for only the first 1.8 percent of the $6.98 trillion in loans and junk-bond purchases the Fed has made during the current crisis, according to reporting by Wall Street on Parade.
If the Fed’s losses on corporate and junk bond purchases amount to more than 1.8 percent of its loans, taxpayers will get the bill for the rest.
