Is Sam Bankman-Fried Another Bernie Madoff? Buyer Beware Or Rely On Government For Protection? (FTX Held Less Than $1bn In Liquid Assets Against $9bn In Liabilities)

Any person or organization must always be prepared for the scenario of all liabilities coming due at once.

For me personally I only have 3 types of liabilities and their sum is less than 10% of my cash & liquid securities. If I had to pay them all today then I could do it all with just touching the cash part of my checking/savings/investment accounts.
(a) Tenant Deposits - over half of all my liabilities and as long as I’m a landlord I’ll have plenty amount in this category
(b) Property Taxes & Property Insurance - most due January 31st
(c) Less than 5% of total liabilities - Monthly bills - mobile phone, other utilities, credit cards

In the case of the Federal Reserve’s biggest categories it works like this.
3.0 trillion - Other deposits held by depository institutions - the banks park almost all of their money (daily) here with the Federal Reserve in order to earn 3.75% and they could drain this very quickly if they needed to do so
2.6 trillion - Reverse repurchase agreements - essentially the derivatives for the securities held & much the same like the 3.0 trillion in being drainable very quickly
2.2 trillion - Federal Reserve notes - if everyone spent their notes or deposited them at the banks & the banks traded them in to the Fed for electronic funds then this would be drained very quickly too.
0.5 trillion - U.S. Treasury, General Account - this account goes up and down depending on when tax revenues & other receipts come in, outlays go out, and Treasury Notes/Bonds are issued, mature, and interest paid. This could be drained very quickly too.
0.2 trillion - everything else - these also could be drained very quickly too

If there was a run on the Federal Reserve then the most likely scenario would be that they would turn on the printing presses quickly by lowering interest rates dramatically and buying up lots more Treasuries/MBS. That would cause hyperinflation that would exceed any inflation we’ve ever seen in US history so far.

The only solution to this problem is for the US federal government to stop increasing its level of debt. I agree with the news media that the 31.4 trillion debt ceiling level is the wrong amount. But I disagree with them on the direction it needs to go. I believe that the Debt Ceiling needs to be lowered.

In the case of the Federal Reserve's biggest categories it works like this. 3.0 trillion - Other deposits held by depository institutions - the banks park almost all of their money (daily) here with the Federal Reserve in order to earn 3.75% and they could drain this very quickly if they needed to do so

Right, so when a bank parks its money at the Fed and wants to get it back, why do you feel the Fed can't make good? When a bank gets it back, where does it go?

2.6 trillion - Reverse repurchase agreements - essentially the derivatives for the securities held & much the same like the 3.0 trillion in being drainable very quickly

You must have reverse-repos confused with something else. When the Fed wants to drain overnight cash from the banking system, they exchange some Treasuries for cash. The next day they return the cash and get the Treasuries back. Why do you feel the Fed can't make good?

2.2 trillion - Federal Reserve notes - if everyone spent their notes or deposited them at the banks & the banks traded them in to the Fed for electronic funds then this would be drained very quickly too.

If everyone spent their notes, why does the Fed notice or care? The Fed can't provide electronic funds? Why not?

0.5 trillion - U.S. Treasury, General Account - this account goes up and down depending on when tax revenues & other receipts come in, outlays go out, and Treasury Notes/Bonds are issued, mature, and interest paid. This could be drained very quickly too.

This is the US Treasury's checking account. When they buy a tank or send a tax refund check, the money comes out of this account. Where could that money possibly go that the "drain" would matter to the Fed?

I have direct deposit for my tax refund. The Treasury account at the Fed drops, the account of my bank at the Fed increases. How is the solvency of the Fed impacted?

What does a "run on the Fed" look like?

The ability to print up infinite amounts of notes doesn’t change the fact that they are insolvent when liabilities exceed assets. Every dollar that’s printed becomes both an asset (while they have physical possession) and a liability (responsibility to exchange note for money) on their balance sheet.

Now what changed in August 1971 “temporarily” was that they’d no longer exchange the Federal Reserve notes for money. Instead if a customer gives the Federal Reserve one of their notes back they get an electronic entry on their ledger that they have funds in the amount of that note in the system.

The ability to print up infinite amounts of notes doesn't change the fact that they are insolvent when liabilities exceed assets.

That wasn't your original definition.

not solvent; unable to satisfy creditors or discharge liabilities,

There were no liabilities that you listed that they cannot satisfy.

Their bond holding have dropped in value, obviously. Instead of turning over their annual profit to the US Treasury, they may have to retain it, against their unrealized losses. But there is no scenario I can see where a "creditor" comes to the Fed to get their money and the Fed is unable to give that creditor either FRNs or an electronic ledger entry.

Can you?

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