The Fed Is Gifting Primary Dealers With A Monthly Commission Fee Of Over $5 Billion

Tyler Durden's picture

The topic of how much money the Fed is gifting to the Primary Dealers via POMO commissions has to become front and center right now. While we appreciate fluff "profile" pieces in the NYT addressing the issue tangentially, and assuring us via worthless promises by people whose one purpose in life is to pad the pockets of their future employers in preparation for that inevitable day when said parasites move from faux public service to doing the hard core biddings of a vampire squid, the truth is that this is daylight robbery and it is happening in front of everyone's eyes. As a reminder, per the NYT: "As offers to sell Treasuries flash on a bank of trading screens, a computer algorithm works out which ones to accept." We contest that this algorithm is costing tapxayer billions each and every month and demand that Bill Dudley, Brian Sack, Josh Frost or one of the 20 year old henchmen traders immediately disclose just what the operatinal terms of the algorithm are, and what the slippage is. The reason: we have reason to believe that the Fed's slippage rate is up to 5%. On a monthly POMO notional total of over $100 billion, this means that the Fed hands out well over $5 billion each and every month to the Primary Dealers. This is an abortion of the Fed's fiduciary responsibility and should be criminal if proven to be in fact correct.

John Lohman explains:

If the Fed’s POMO desk had one single Bloomberg, they could compare their weighted average accepted prices with each cusip’s 10:59 price (one minute before the POMO closing) as a means of determining the efficiency of their “computer algorithm”.  A sampling of about 30 issues from the latest report confirms an average of 5% slippage.  This means the most recent month of POMOs gifted $5 billion in commissions directly to the PDs.  If they won’t drop the charade and go directly to auction (where the $5 billion would at least be gifted indirectly to the taxpayer via lower auction yields), they should consider signing up for TradeWeb and buy anonymously like the rest of us.  And send their “computer algorithm” back to Moody’s.

Surely there is one Congressman or woman who is not so bloody stupid, and actually understand that this is nothing short of legal and mandated theft from taxpayers, with the money being handed out directly to the Primary Dealers.