Basically, the key takeaway is this: if any debtor happens to default on the MBS’s (and soon to be Corporate Bonds) that are listed on the New York Fed’s balance sheet, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley will only be liable for 1.8%.
As to Wall Street on Parade’s claim that the government will be on the hook for the remainder of these losses: that seems to be open to debate..
“The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.”
Wall Street on Parade is using the above subsection of the Federal Reserve Act as the basis for their conclusion, and it looks like what they are saying is mostly correct, but nowhere does it say in that subsection of the Federal Reserve Act that the government will be on the hook; it just says that the Member Banks (JPM, C, MS, GS, and Co..) will only be liable for twice the par value of their subscribed capital stock in whatever respective Reserve Bank that they are a member of — which in their case would be the Federal Reserve Bank of New York (which represents slightly more than half of the total consolidated holdings of all Federal Reserve banks in the United States).
Don’t forget, these Reserve Banks are private corporations, and they’ve even been seen using this argument in court for the purpose of denying Freedom of Information Act requests.
This is why it seems far more likely that it is actually them (“The Reserve Banks“) that will be on the hook in the event of default, and not the government.
The New York Fed is also technically immune to bankruptcy because they can literally just invent money out of thin air (with the approval of the Federal Reserve Board of course).
This isn’t to say Wall Street on Parade is incorrect; they just didn’t follow up with any additional sections of the Federal Reserve Act that would further clarify whether the government is in fact liable for the losses that are incurred by the Federal Reserve banks.