Grand Rapids, MI (PressExposure) March 15, 2011 -- Financial advisor Dennis Tubbergen, CEO of USA Wealth Management, LLC, a federally registered investment advisory company, has been talking about the Federal Reserve for the past several months. Tubbergen discusses such issues in his financial blog and his monthly newsletter, Moving Markets.
In his February issue of Moving Markets, Tubbergen recalls a piece he wrote in March of 2009 regarding his fictional farmer "Fred" from Nebraska.
"We've been fielding a lot of questions about the actions of the Federal Reserve and how it might affect our readers," notes Tubbergen. "Given the number of inquiries from readers, we thought that this month we'd explain it from the perspective of the Nebraska farmer that came to visit us a couple of years ago as the federal government was bailing out large 'too big to fail' financial institutions."
In the 2009 version, Fred has a 1997 Cadillac Deville worth between $2,500 and $3,500. When the car needs repairs of $4,500, Fred sells the car for the cash he can get out of it and buys a different car.
"Good thing Fred isn't a congressman or a Washington Bureaucrat," Tubbergen stated. "If he was, he'd not only spend the $4,500 to make the repairs to the $2,500 car; while he was at it he'd get new leather seats installed at a cost of $4,000, get a paint job added for another $4,000 and put new tires on the car at a cost of another $1,000.
Tubbergen believed Congress would not only repair something that didn't make financial sense to repair, they'd make unnecessary repairs as well.
"Too bad no one in Washington summoned Fred and asked for his advice prior to the financial industry bailout," noted Tubbergen in 2009. "Fred would likely have made far different choices."
Tubbergen went on to explain in March of 2009 the AIG bailout had already cost taxpayers $182.5 billion for a company whose market value was $3.7 billion.
"In February's Moving Markets?, Fred the Nebraska farmer helps us explain what it means to have the Federal Reserve 'expand its balance sheet' by 'absorbing the toxic assets of these too big to fail banks,'" states Tubbergen. "It should be noted that the Federal Reserve is also expanding its balance sheet by buying U.S. Treasuries, a.k.a. government debt."
Tubbergen begins his latest story of Fred by having the usually frugal Fred deciding to invest in a retired race horse and a couple of brood mares with great bloodlines. Fred had always loved horses, he had a few dollars put away, and he decided to take some of that money and begin a racehorse breeding operation, largely as a hobby but with the possibility of making some money selling fillies and colts down the road.
"It was a big step for conservative Fred to spend $85,000 on a stallion, but it was something he'd wanted to do for almost the entire 64 years that he'd been on earth," continues Tubbergen. "And, Fred had done enough research to know that he would likely get most of his investment back in a few years if he grew tired of the breeding business."
Fred got his barn ready and moved his new horses in. Every day Fred cleaned out the stalls, scraping out the horse dung and piling it up outside the barn. A few years passed and Fred found himself enjoying his new business. He'd sold a few colts for a good price and his little business had positive cash flow. His stallion was worth every penny he had paid for him; in fact, Fred turned down a few offers to buy the stallion. Fred even enjoyed the time he spent cleaning the stalls. After two years, the pile of horse dung outside his barn was pretty substantial - his horses were healthy. Then one day Fred went to the barn only to find his prized stallion dead in the stall. After calling his insurance agent, Fred learned he might be better off not filing a claim with the insurance company that he'd used to insure the stallion.
"His insurance agent told him that there was a government program that was established to help farmers who had dead horses," explains Tubbergen. "Seems the government would take the dead horse off Fred's hands and haul away the horse dung and give Fred his $85,000."
The government didn't do this outright; the Federal Reserve administered the program since they controlled the money supply. The central bank would simply print $85,000, give it to Fred, and record the value of the dead stallion and the pile of horse dung on its books as $85,000. If anyone asked what asset was valued at $85,000 on the books, the answer would simply be 'toxic assets.'
"While the Federal Reserve has never actually purchased horse dung for an exorbitant price as far as I know, maybe it would be more valuable than some of the assets that it has purchased - at least horse dung has some value as fertilizer," asserts Tubbergen. "The assets that the Federal Reserve bought from the big banks were largely loans that would never be repaid, at least in full. So rather than have a large number of bank failures, the Federal Reserve came in and took these 'toxic assets' off the bankers' hands, presumably for a lot less than what the assets were really worth."
Tubbergen explains that on top of that, the accounting rules that the banks are required to use to report the values of their assets were changed so that 'mark to market' accounting didn't have to be used. (Mark to market accounting requires that the true market value of the asset be recorded rather than the face amount or original value of the asset.) This means that banks and the Federal Reserve likely have assets on their books worth far less than the original value or loan amount.
To back up that statement with regard to the current problems with our economy, Tubbergen refers to a January 20, 2001 editorial published on The Huffington Post. In part, the article talks about the recovering economy and how some factors which affect a healthy recovery are not discussed too much.
"The Fed is holding over $1.4 million in toxic assets of the big banks; assets that were supposed to be rescued with TARP (The Toxic Asset Relief Program). TARP was used for another purpose - bailing out the banks - so the Fed covertly bought the assets, most likely above their market value. They also loan to banks at zero percent and the banks buy U.S. debt with a two or three percent return; debt they had a part in creating."
The article goes on to say, "The Fed balance sheet could be a more serious problem than is being discussed, and the lack of transparency is problematic."
"Where was Fred when we needed him?" asks Tubbergen. "The problem is that the hole that we're in is so big that speaking candidly about its size would be quite unnerving to many citizens who are blissfully unaware of the serious nature of the problem."
Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in the USA Wealth Management Building in downtown Grand Rapids, Michigan. Tubbergen is CEO of USA Wealth Management, LLC and has an online blog that can be viewed at http://www.dennistubbergen.com. His weekly talk show The Everything Financial Radio Show is simulcast on two Michigan metro stations and also airs to over 600,000 financial advisors, with recent podcasts available at http://www.everythingfinancialradio.com. His seminar schedule can also be viewed at the above radio link.
The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.