Following up on the new Fed document dump, our latest find is an aparent deception by the Fed about its MBS purchases. To wit, the Fed's new MBS page
states as follows (brackets ours):
"Outright [MBS] purchases were conducted via competitive bidding to ensure that trades were executed at market rates."
Because the MBS purchases were arranged with primary dealer counterparties directly, there was no auction mechanism to provide a measure of market supply. Instead, the pace of purchases of each class of MBS was adjusted in response to measures of whether that class appeared relatively cheap or expensive. To avoid buying at excessively high prices and to support market functioning, purchases were increased when market liquidity was good and were reduced when liquidity was poor.
Now we recognize the Fed has the tiniest bit of weasel room here because the terminology is slightly different and, in fact, the Fed is in the business of weasel phrasing, but it seems at the very least disingenuous to now claim that MBS securities were purchased via "competitive bidding" when no "auction mechanism" was used and they were arranged "directly" with the primary dealers.
According to the Brian Sack paper, it was market liquidity itself based on class-wide evaluation that was used to avoid paying excessively high prices (i.e., attempting to execute at market rates), and not any sort of competitive bid procedure (even if it were not an outright auction). Also, note that "high prices" devoid of the "excessively" qualifier might be deemed a-okay by the NY Fed.
So just what was the nature of this "competitive bidding" process that the NY Fed now says was followed? Perhaps there was merely a fuzzy price discovery process followed by a conference call and subjective award of the transaction at a mutually agreed upon price. Hardly sounds competitive, though.
Here's another thought: the new Fed statement is in the context of outright Fed purchases, so that those "bidding" would actually be the various investment managers acting on behalf of the NY Fed (e.g., Pimco, BlackRock, Wellington & Goldman). The primary dealers (also including Goldman) would be "offering". Thus, it may be that the Fed is imputing it paid market prices based on its own hired managers competing for the MBS assets of the PDs (did we point out that Goldman was on both sides?). That this would result in market prices being paid is facially absurd.