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Fed Losing $9.6 Billion in AIG, Bear Stearns


As of Dec. 31, the Federal Reserve faces $9.6 billion in unrealized losses on $74 billion in assets from Bear Stearns and AIG.  An unrealized loss represents the current value of the asset versus its face value.  The central bank will realize the losses if the principle is not returned.  According to Bloomberg, "The central bank lent $2 trillion to financial institutions and has not disclosed information about most of the collateral backing those loans."  While it's unlikely that all $2 trillion of the collateral the central bank has accepted is as risky as the assets taken from Bear Stearns and AIG, the Fed may still face substantial risk.  

The Fed will eventually have to pay to absorb the losses.  The only ways it can get money is from the Treasury or by printing, so either way taxpayers will be made worse off by the Fed's bad investments. 

Instead of bailing out failing banks and insurance companies with $2 trillion in loans, the Federal Reserve should have allowed prices to fall and the market for these assets to clear.  If the prices had been allowed to fall without the government propping them up then private entrepreneurs would have bought up the profitable portions of AIG and other companies while the unprofitable parts failed.