Monday, August 3, 2009

The hidden bailout

FT.com (Financial Times):

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.


However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.


A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”



Here is how the FED works this scam, this hidden bailout.

They announce, ahead of time, that they will sell some security at, say, price of $10.

A week later they announce that they will buy the same security at, say, price of $11.

No politically dangerous bailout needed, no senators need to be kept in the loop, and no need to alert the media to the oh so complicated way the financial world works.

Any questions, children?

Put the DIGG here.


Bonus Material

If you are interested in more detail, and also on how the TARP "they paid the taxpayer back!" really worked, one of my favorite blogs has a piece on this topic.

Mosey over to nakedcapitalism.com

Goldman is a great firm with a stellar culture, and in most circumstances it's risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities....In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm. While JP Morgan Chase CEO Jamie Dimon prefers to poke a stick in the eye of the Treasury, seeking to negotiate down the payment to buy back the TARP warrants, Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion... $1.1 billion...Hmm...something doesn't seem right. You know why it doesn't seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.


See how it works?

Excuse me while I go bang my head against the wall, slowly.

1 comment:

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