"The Fed is undercapitalized in the way that [Citigroup (NYSE: C)] is undercapitalized, at least before [Citi's] magical transference of preferred to common [shares]."

So says James Grant, the founder and editor of Grant's Interest Rate Observer. That's a pretty disturbing thought when we consider what we know about the bank … and about James Grant. No need to rehash the Citi fiasco; Grant isn't known for making wild pronouncements, and his track record is excellent (he was one of the few people who warned early on about the rising problem of inflated housing and credit markets).

Scary numbers
At the end of 2008, the Federal Reserve had $42 billion in capital for 2.23 trillion in assets, for a capital ratio of 1.9%. The following table shows the capital ratio for seven of the largest U.S. banks:

Bank

Total Capital Ratio (latest quarter)

Goldman Sachs (NYSE: GS)

19.5%

Morgan Stanley (NYSE: MS)

18.2%

Citigroup

15.6%

JPMorgan Chase (NYSE: JPM)

15.2%

U.S. Bancorp (NYSE: USB)

14.4%

Bank of America (NYSE: BAC) Continued...