There were loss carry forward provisions going back to the 1918 Act as I remember.

Besides, the big banks got a special basis rule suspension in order to facilitate the big mergers of banks and investment banks last year. This was done by Revenue Ruling and was not even a law change. That was far more important than these carry back changes to the big guys in the financial system.

The entry would be Debit Reserve Demand Deposits $1.044 Trn and Credit Federal Reserve Notes Outstanding $1.044 Trn.

Of course , we are not China where there are almost no personal checking accounts. Consequently, the FRN’s would get deposited and turned back in by the banks . Thus,their Reserve Demand Deposit Account increases.

There is an out here but it would take a law change allowing electronic funds for general circulation on the same basis as currency. I can find no central bank monetary system that allows general circulation of electronic funds. But , if it were allowed, those Reserve Demand Deposits would easily go to zero as fast as the banks could place the funds.

When I discuss this with other Green Eyeshade types, I call these new general circulation electronic funds ” Electronic Gold Funds. All it takes is a parallel account the same as Federal Reserve Notes Outstanding.

So , absent the ability of central banks to issue circulating electronic funds , the monetary system is frozen out of any action other than issuing currency and very short term other devices until the short term devices are absorbed by increased daily levels of outstanding Federal Reserve Notes.

The reality is that the Federal Reserve is hog tied. The system was designed when US money needs were as heavily cash as China is now. I received a pay envelope and so did my wife as late as 1959. Very few people had checking accounts sixty years ago. They bought money orders if they did not pay in person. Most bills were paid in person.

Just to show how parlous the cash position is at the banks, last week bank cash and equivalents was $1.209 trn. Included were Reserve Demand Deposits of $1.044 trn. The total included vault cash which has recently been around $50 bn. That leaves other cash to use for loans of $115 bn. Much of this number must be relationship invested with other banks and would not be loanable. That means the banks loan daily net cash inputs , if that. In short, they can loan repayments of principle they get in and not much more plus net increased deposits.

But my only real point here is that the Cash and Equivalents of banks is only technically so. There is no real liquidity in the banking system unless they sell off their Treasuries. Given the need to raise around $100 bn a month at the Treasury, they dare not dump Treasuries to loan to business.

Actually, the central bank transactions are not that difficult if the mind set is changed to the central bank being a bank for banks only.

For starters, compare a simple commercial unsecured loan by a bank to a commercial customer. Normally it starts out with a credit to the customers checking account. A simple bookkeeping entry. Debit loan receivable from Customer $1 Credit Demand Deposit of customer $1 The bank does not need to cover the loan until the customer writes a check on his demand deposit account for $1. Then the bank needs live funds to transfer $1 to the bank of the payee of check.

Well , all that happened at the Federal Reserve was that the FRB bought near $800 bn of mortgage backed securities and credited the member banks reserve demand deposit account.There it sits and sits and sits for a whole year now if you include the Central Bank Liquidty Swap period as well. Prior to September 2008 the FRB’s paid no interest. Special legislation was needed to pay interest. They pay 16 basis points. The FRB’s bought mortgage backed securities with an interest average somewhere around 4% or a bit more net of servicing costs held back.

From a forensic accounting perspective you must note two things. First. The member banks are sitting on payments for $800 bn and not transferring the funds. Second. The interest spread is not showing up in the equity of the FRB’s. But , it is showing up most likely in the general demand deposit account of the Treasury. Virtually all FRB profits effectively escheat to the Treasury. The net interest spread on the mortgage backed securities should be around $ 10-15 bn and indeed the increase in the Treasury demand deposit account is commensurate with such an observation with an year over year increase of near $13 bn.

Now , why would the banks forgo $13 bn in exchange for less than $1 bn? And not even take down their Reserve Demand Deposit account to as near to zero as possible? Prior to September 2008, the banks took down their Reserve Account to absolute minimum for the preceding 95 year history of the Federal Reserve System.

I see no commentary on this and wonder why?

As in my prior post, what property would the member banks receive if they took their reserve demand deposit account down to effectively zero as they always did before? In the past, outside of posted daily net clearings charged or credited to their account the member banks tended to turn in or settle out with currency.

As an aside here, if the Federal Reserve loaned money to the bank, they would ship the value in currency to the bank to increase their vault cash as they did in 1933. Otherwise, the FRB sells Treasuries to settle the loan with proceeds from sale of the Treasuries. But these were always peanut numbers: low billions to millions and as a loan to a given bank. Here we have $1 trillion and counting from many banks as policy.

It is an exercise in humor to go through what happens in very short order if indeed the member banks took out currency of $1 trillion. The humor goes well beyond the fact that printed currency stock on hand is less than less $200 bn.

That leaves selling mortgage backed assets which is patently absurd since they would be required to be at
100 . The only buyer would be the very banks trying to cash out their Reserve account.

If you cannot draw down the funds in a bank account you have loan receivable and do not have “cash”.

Would you consider a one year post dated payroll check as money in the bank? Well, the Federal Reserve Banks must now be doing just that.

Ask yourself this as a member bank this question. If we all took our deposit down to near zero, what property would we be given to pay us off? There are only two legal choices. Both are practically absurd from the traditional view of a cash or equivalent. Obviously, assuming enough currency was on hand, you could be provided with Federal Reserve Notes. But that would be moot because how could $1 trillion of FRN’s be used in the present banking system. The other solution is that the Federal Reserve Banks sell their mortgage backed securities plus some other assets and utilize the proceeds to wire funds to the banks taking down their reserve accounts. The banks must find a buyer for the entire $800 bn of mortgage backed securities they own and carry at 100. Even a small loss would destroy the Federal Reserve Banks entire equity of a little over $50 bn.

My point here is to show that the present total of Reserve Deposits of member banks is really very much illiquid and only technically a cash and equivalent as shown in line 25 of Table 8- the combined bank balance sheets presented on the Fed website.

Last week the Fed Table 8 Cash and Equivalents was $1.2 trillion including $1 trillion of Reserve Demand Deposits at the Fed.

A lot of “frozen assets” are shown as cash and equivalents on the bank balance sheets.

Look at footnote 4 on the Fed consolidated weekly balance sheet. ” Guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Current face value of the securities which is the remaining principal balance of the underlying mortgages”.

If you go back to before September 2008, bank cash and equivalents on Line 25 in Table 8 were around $250-$300 bn with included Reserve Demand Account totals averaging less than $10 bn. That $10 bn tended to be covered by daily asset sales or currency issued and was very small.

My sole point is to show that there is around $1 trillion of”practically frozen” liquidity on the banks books. That liquidity might be said to have been “a mere reclassification entry” on the bank’s books. Debit cash and equivalents $1 Trillion Credit illiquid Mortgage Backed Securities and Agencies $1 trillion.

The Fed could do nothing more to stop the bank panic a year ago. It looks like the ploy worked due to the intervening asset ” Central Bank Liquidity Swaps”. The transaction was not fictional. The securities were bought by the FRB’s and sold by the banks. Just think of the freed up valuation reserves . Were these transactions really just a vast longer term repo where a legal sale occurred with a presumptive separate repurchase at par by the banks?

At best this is a sequestered demand deposit.

I am not a central banker but a retired tax accountant. I would love to be enlightened about why the post September 2008 Reserve Demand Deposit of member banks is a cash equivalent. Every accountant I raised this question with were stunned by the implications that these balances were not freely employable capital for any investment member banks cared to make. Certainly a small portion is freely employable… a very small portion at that.

I have found nothing written on this conundrum since the FRB’s began buying mortgage backed securities.

I speak here of the dead mortgage giants and corporate groups like AIG. In all these cases the Federal takeover planning made sure the current affiliated group was not broken.

In my view, it was the Treasury itself that most desires a five year carry-back. The Treasury and Fed understand that these big financial group tax refunds are back door financing to keep them going. A huge tax refund reduces direct funding via Congress and reduces the political gnashing of the teeth .

Every takeover by the Treasury was deliberately structured to acquire less than 80 % of voting stock control. That 79.9 % stock deal is elementary tax planning. It is the chance to trigger hard inside basis on all kinds of foreign assets in particular offsetting triggered losses to the point where losses remaining just about cover carry-back availabilities.

I looked at quite a few big institution tax provisions 2008 annual report and many had a Currently Payable Federal Tax Provision and quite a few had Currently Refundable Federal Tax Provisions.

It was clear to me though that there was sizeable repatriation of foreign earnings in 2008 which , of course, were fully provided for. The crisis hit in September and many net refundable current provisions were far less than one would expect and the deferred provisions were reductions. That suggests earnings were repatriated out of desperate need.

Another aspect of the tax carry-back mine is that many big institutions had low currently payable provisions in 2003 due to carry-forwards from 1999-2001 losses being applied.

While we will not know for sure until next spring but 2009 carried back to 2004 probably represents the big gold mine based on tax planning in 2009 .

I fully expected a five year carry-back law change under the circumstances.

On the other hand, the Federal Reserve Banks bought almost $800 bn of mortgage backed securities they carry at 100 on their books from member banks. The sale proceeds to the banks simply sit in their Reserve Demand Deposit Accounts earning 16 basis points. This suggests that the banks have little or no realized tax losses on the sale of these mortgage backed securities to the Federal Reserve Banks. They sold at par to keep frozen funds at the Fed unless the Fed sells these same assets back to the member banks. Barring settlement in currency, of course.

There is a huge story here that has seen little investigation by the financial press.