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Fed Marks Maiden Lane 1 At Multi Year Highs, Even As BlackRock Strips Away 60% Of Interest Rate Blowout Hedges

Tyler Durden's picture




 

According to today's H.4.1 report, as of yesterday, the Fed evaluates its holdings of the CDO-laden, Bear Stearns legacy Maiden Lane 1 portfolio at $28.4 billion, the highest it has been since October 2008. This represents a value of about 40% of what the Fed disclosed were Maiden Lane 1's assets as of March 31, or $73.4 billion. This in itself is not all too remarkable: as the chart below shows, the Fed's MaidenLane 1 custodian and manager, BlackRock, seems to correlate the asset vallue of ML1 not with any particular market, but merely with the exponential curve. The likelihood that this most recent "pricing" is indicative of the true value of the ML1 assets is laughable.

What we do note, however, was the May 21 update that the FRBNY posted to its ML1 holdings, which we had missed previously. Going through it, it becomes apparent that even as the passive section of the portfolio is completely dormant as it should be, BlackRock is actively rolling off interest rate hedges in what is certainly a sign that the Fed is ever less worried about increasing interest rates.

The table below indicates the Rate/FX hedges on Maiden Lane 1 as of January 29

While the hedges as of March 31 are shown below:

It is obvious that even as the Fed rolled its March 5,10 and 30 Year hedges into June, it let the March 2010 Eurodollar hedges expire without a comparable roll into March 2011, and neither did it roll the Mar10 TY C, and the Mar10 TYH0 P, and the April10 TYM0. Oddest is that while the March contracts, one can argue, merely expired, the April TYM0 was actively sold off as this is a snapshot as of March 31, i.e., prior to expiration. Also, the actual notional of all hedges, with the exception of the June and Sept Euro$ hedges, declined. And even that particular increase is a bet on potential FX vol, not interest rate volatility!

This is very troubling.

As the cost to roll and retain these hedges is negligible, especially since taxpayers are paying the cost of carry, this kind of lack of fiduciary prudence is cause for alarm. Either the Fed is convinced there is no chance in hell rates will ever go higher, or it is perfectly happy to risk impairing a $28 billion portfolio from a spike in interest rates. We previously discussed the hedging of Maiden Lane 1 by Blackrock here, when we asked why the Fed bothers to hedge its Maiden Lane portfolio when it has $1 billion DV01 on its broader interest-rate sensitive asset holdings. We now have our answer: in under a month, the Fed has reduced its interest rate hedges by roughly 60% (we don't have enough data to construct a full delta-hedged profile of ML1 at this point, and since the Fed is a bastion of secrecy, we likely never will).

What is critical is the thinking behind this process. Obviously the Fed, in an act that has no economic utility to taxpayers, has decided to save a few nickels as it is all too aware there is no interest spiking risk. As such, any interest rate hedging now is fully token. But one wonders, why did the Fed increase its FX hedging, even as it cut massively interest rate risk? Who else would do such a thing absent the near certainty that rates are not only going to stay flat, but decline? Is this indirect evidence that the Fed is continuously manipulating rate markets in a fashion that removes any uncertainty about widening? We submit this, among the other thousands of questions, that the only knowledgeable regulator, Brooksley Born, should ask of Ben Bernanke at the next opportunity by the FCIC to question to Fed chairman.

 

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Thu, 07/01/2010 - 19:12 | 447850 bugs_
bugs_'s picture

"blowout" has a bad connotation now.

Fri, 07/02/2010 - 08:16 | 448693 EB
EB's picture

I did a forensic analysis of the ML holdings here.  Not only did BlackRock illegally acquire at least one non-Agency CMO (of JPM vintage, no less), the intra-quarter valuations were found to be truly Madoff-like.  

 

Not even the flash crash fazed 'ol MLI.

Thu, 07/01/2010 - 19:13 | 447852 Boilermaker
Boilermaker's picture

This is going to be even more 'profitable' for taxpayers than TARP!  Give it a chance.  It could happen....what?  Why is everyone looking at me like that?

Thu, 07/01/2010 - 19:23 | 447865 RichardP
RichardP's picture

Slightly OT, but has this document been posted at ZH before.  I can't keep up with everything so maybe it has and I missed it.  Quite an interesting read.

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

Deflation: Making Sure "It" Doesn't Happen Here

Remarks by Governor Ben S. Bernanke

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Supposed you printed money and nobody wanted to spend?

Thu, 07/01/2010 - 19:30 | 447883 Hansel
Hansel's picture

Psh.  I'd spend it on acquiring majority ownership of bankrupt auto companies, residential mortgage debt with no chance of repayment, CDOs packed with all kinds of crap (I don't care), ownership of a bankrupt insurance company, the downside of a portfolio book of a bankrupt investment bank, maybe spread out into currencies of bankrupt countries, Red Roof Inn stock.  Man, I'll bet my spending spree is so expensive I'll need more and more money as I go.

Thu, 07/01/2010 - 19:37 | 447890 Shameful
Shameful's picture

Bingo.  The Fed has an enormous supply of places to spend money, anything on Earth that is for sale.  If needs be the Fed can go in and bid on EVERYTHING.

Thu, 07/01/2010 - 19:41 | 447902 RichardP
RichardP's picture

If the Fed buys everything, because no one else will, then China can take over the United States simply by buying the Fed - through a front company, of course.

 

Thu, 07/01/2010 - 21:47 | 448126 Ungaro
Ungaro's picture

GS is already working on the CDS on the LBO paper. Can they sell those to the Feral Reserve?

Thu, 07/01/2010 - 19:48 | 447915 Hansel
Hansel's picture

Can't wait til they start bidding on gold.  They've got to want something of value on their balance sheet eventually... right?

Thu, 07/01/2010 - 22:35 | 448241 Careless Whisper
Careless Whisper's picture

"unaudited" balance sheet = fed don't care

maiden lane i = $28 billion = fed don't care

blackrock in charge = fed don't care

 

Fri, 07/02/2010 - 00:28 | 448450 CustomersMan
CustomersMan's picture

 

 

They may be thinking of taking yours away first, after being short.

 

Then buying every hedge on the long side, before exchanging fiat paper currencies for physical gold, silver and other PM and strategic minerals/metals.

 

There are probably some moves we haven't considered since we're not in the thick of it.

Thu, 07/01/2010 - 20:42 | 448012 Fazzie
Fazzie's picture

 Thats it? Why do we need a Fed then. Just institute a policy printing dollars whenever deflation threatens. A computer program could do it.

 Couldnt they shorten the PHD requirements for economics to a 40 hour course, defining inflation and deflation and how many dollars to print to keep a balance?

 Bernake would be like a medical doctor with 12 years training who prescribed the same pill for every diagnosis.

 

  Let that SOB keep painting himself into a corner, if economic ruin is what it takes to get rid of the either incredibly blind or corrupt Fed, at least future generations might realize the USAs potential.

    From the industrial giant of the world, rich in resources, to a bizzare mess where college grads are paid NOT to work with UE benifits of over a year the new normal.

If the benefits run out, the efficient allocation of all those billions in grants will result in a degreed person working a mediocre service job.

  What a goddamn joke, Ive seen this country seriously go downhill in the last decade, under the 2 party system.

 What the Fed dosent realize is that deficits dont matter sure, until they do, and then then we are buried in absurd debt with no non-draconian options.

   (rant off) Full disclosure: Im a skilled electronics tech on UE myself, due to downsizing, and in another month my career will go from diagnosing and repairing high tech equipment to saying "you want fries with that?", if things dont turn up.

Thu, 07/01/2010 - 23:24 | 448344 JR
JR's picture

What an oxymoron from a corrupt puppet of a bankers’ counterfeiting cabal engaged in stealing quadrillions in wealth from the people and transferring the stolen loot to the international bankers:

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

No cost? This is not only robbery in terms of confiscated goods and services, it is economic tyranny—i.e., slavery.

Fri, 07/02/2010 - 00:22 | 448442 brushfire
brushfire's picture

bernanke's arrogance will be his undoing. he is basing an unprecedented expansion of monetary policy on a simplistic and intellectually bankrupt premise. his lack of respect for markets is breathtaking. history will be unkind to chairman bernanke.

Thu, 07/01/2010 - 19:23 | 447868 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Turn the Fed into a museum!!!  Turn the Fed into a museum!!!

Thu, 07/01/2010 - 19:30 | 447881 Teaser
Teaser's picture

As the cost to roll and retain these hedges is negligible, especially since taxpayers are paying the cost of carry, this kind of lack of fiduciary prudence is cause for alarm. Either the Fed is convinced there is no chance in hell rates will ever go higher, or it is perfectly happy to risk impairing a $28 billion portfolio from a spike in interest rates.

I love a good conspiracy theory as much as the next ZHer,  but, I'm going with a lack of fiduciary prudence.  It's been this lack all along, why start suspecting anything different now?

Thu, 07/01/2010 - 19:38 | 447899 lizzy36
lizzy36's picture

Ever think that perhaps"lack of fiduciary prudence" is exactly what you are supposed to think?

As long as you reach for the same explanation it stops one from suspecting that something different is going on.  And thus stops one from questioning what the hell the Fed is doing here.  Just saying.

Thu, 07/01/2010 - 19:30 | 447882 Cheeky Bastard
Cheeky Bastard's picture

HAHAHA

1B DV01; Jesus; market moves a bit and you're suddenly 50B in the hole.*

 

 

disclaimer: this is meant only to be considered as humor and not as a factual statement regarding FED loses on the underlying assets it holds on its balance sheet. So dont fume bitches.

Thu, 07/01/2010 - 19:38 | 447898 Problem Is
Problem Is's picture

... fume ....

Thu, 07/01/2010 - 19:41 | 447904 lizzy36
lizzy36's picture

CB, should amend disclaimer to state: "not as a factual statement regarding FED loses on the underlying assets it holds on its balance sheet, YET".

Thu, 07/01/2010 - 20:07 | 447947 Cheeky Bastard
Cheeky Bastard's picture

I have no idea how much they paid for all that agency MBS and ABS garbage; but if they paid par [maybe even more; the prices of that paper now are ridiculous; something like 104.xx fucking LMAO] any change in the interest rate policy [meaning an increase] of only 25 bps would ass rape them like Ron Jeremy on meth. Hence hovering just above 0 with a large chance we will actually have 0% interest rate in the future. 

Thu, 07/01/2010 - 19:59 | 447931 pitz
pitz's picture

What business does the Fed have buying any interest rate hedges or swaps? 

Thu, 07/01/2010 - 20:21 | 447970 buzzsaw99
buzzsaw99's picture

no squid left behind policy. duh.

Thu, 07/01/2010 - 20:10 | 447952 4shzl
4shzl's picture

Is this indirect evidence that the Fed is continuously manipulating rate markets in a fashion that removes any uncertainty about widening?

You better believe it.  Some asset values are really difficult to goose (e.g., real estate), but when it comes to interest rates, the Fed is playing on its home turf.  They have the means, they have the motive, and they have the opportunity -- so guess what: they will because they can.  Plus, they already paid the political price for this strategy: savers have whined, are whining, and will continue to whine.  So if the Fed fucks them over a little harder, it hardly matters.  TYX punched through the October lows (3.88) today, and then bounced back to close just above.  I expect profit-taking in the long end near term, then a test of support for 30-yr. yield at 3.40, and eventually a flirtation with one handle.  We have the Japanese disease -- get used to it.

Fri, 07/02/2010 - 09:28 | 448876 Minyan Vince
Minyan Vince's picture

its not "so" much Fed manipulation as it is clearly viewed by the Fed that the monster of deflation will persist for a while and there is no fear of interest rate spike...

Thu, 07/01/2010 - 20:20 | 447968 Quinvarius
Quinvarius's picture

It is a strange state of affairs when you print money, steal half of it, and use the other half to manipulate the market in order to make it appear as though no more money is being printed.

Thu, 07/01/2010 - 20:50 | 448025 Rusty_Shackleford
Rusty_Shackleford's picture

Ha!

Love it.

Thu, 07/01/2010 - 22:38 | 448245 Wilderman
Wilderman's picture

And how!

 

I'm still trying to figure out why fiat is worth more than assets today.  Deflation seems a tad stubborn.

Fri, 07/02/2010 - 00:44 | 448480 Wilderman
Wilderman's picture

And how!

 

I'm still trying to figure out why fiat is worth more than assets today.  Deflation seems a tad stubborn.

Thu, 07/01/2010 - 21:00 | 448038 Pez
Pez's picture

Maybe the Fed is just trying to throw off the Russian financial spies.

Thu, 07/01/2010 - 21:17 | 448071 Carl Marks
Carl Marks's picture

What happens when all the middle class owners of 401Ks wake up and realize that they've been had?

Thu, 07/01/2010 - 21:35 | 448106 Monkey Craig
Monkey Craig's picture

Answer: they beg for the microchip, which the oligarchy will claim will save their Social Security

http://www.youtube.com/watch?v=7nD7dbkkBIA

 

Thu, 07/01/2010 - 21:28 | 448095 Monkey Craig
Monkey Craig's picture

Please DON"T PUT GARBAGE in the FEDERAL RESERVE

 Dear Mr. Bernanke:

    I was afraid that if simply wrote you this letter you might never see it. I thought this message was important and worthy of effort to attract your attention.

    I am sure that you are hearing from the Wall Street crowd about how stupid the marketplace is because the market won't buy all the great loans that Wall Street has produced and how stupid or illiquid the market is because AAA RMBS are being offered at 60 cents on the dollar with no takers. First mortgage syndicated bank loans are offered for 70 cents on the dollar and Wall Street simply cannot believe buyers aren't standing in line to buy.

    Consider for a moment that many corporate bonds are trading at premiums above par value. How can this be? If the market is so stupid and there is no liquidity, who is buying those good corporate bonds at 105 cents on the dollar??

    Many AAA mortgage bonds are actually extremely high risk because of little-considered nuances in the hundreds of pages of trust indentures and servicing agreements. In addition to widely understood mortgage default and other concerns, these contracts permit the loan servicers to advance payments on behalf of defaulted homeowners for years and years and years at interest rates of 12% and more. These "servicer advancements" put funds back into the trust to be paid out to junior security holders. The "servicer advances" are subsequently repaid FIRST from foreclosed home sales. Therefore, foreclosed home sales may result in little or no proceeds, or even a liability, to the AAAs. This mechanism effectively transfers funds that really should belong to the AAA securities to junior securities. Servicers that own junior securities are incredibly motivated to drag their feet resolving defaulted loans, which results in great loss to the AAA holders. This is not a misprint: Defaulted first mortgage home loans may become a net liability, not an asset, to some of the AAAs. This is still not widely understood.

    Simlarly, "first mortgage syndicated bank loans" issued since about 2004 are routinely garbage and not traditional first mortgages on anything determinable at all. Many, if not most, of these loans permit the borrowers to sell the collateral, keep the money, and reinvest in almost anything they want to, including stock, junk bonds, defaulted loans, or perhaps ice cream cones. Many, if not most, of these syndicated bank loans also permit UNLIMITED amounts of additional swap debt that is either senior to or of equal priority with the syndicated loan. These provisions are also not widely understood and are sometimes even disguised in the loan documents.

    Falling prices for these type assets reflect people finally reading the hundreds of pages of fine print, not a problem with the marketplace. Prices should continue to fall as people wake up to the true nature of these assets. Many "last out" AAA RMBS are still overvalued at 60% of par. Many first mortgage syndicated bank loans are overvalued at 70% of par. Smart buyers won't touch any of this garbage at any price remotely close to what it originally sold for.

    The Fed may be walking on very slippery ground. My fear is that the Fed has little more undersanding of the stench of the garbage than many of the current owners who bought all these debt instruments issued about 2004.

    Is the US Government taking some of this garbage on its balance sheet as collateral for Federal Reserve loans? The AAA rating means absolutely nothing. Garbage is garbage even in a fancy wrapper that the ratings agencies love.

    I do not pretend to know how the Fed is collateralizing loans. Perhaps I am naive in underestimating the insightfulness of the Feb, but many intelligent people were caught up in complacent decisions involving these assets. I know nothing more than what I read in the media about collateral for these Fed loans, but it sure sounds troubling.

   

Thu, 07/01/2010 - 21:32 | 448100 Monkey Craig
Monkey Craig's picture

Comrades - Andy Beal wrote this letter in March 08. I don't know what garbage is on the Fed's balance sheet. Chances are they don't either.

 

 

 

Thu, 07/01/2010 - 23:11 | 448264 Village Idiot
Village Idiot's picture

Amazing.  I have been on the front end of mortgage origination for 25 years - I thought those on the back end were the smart ones.  They're just coming around to what's stipulated in the provisions?"  They don't understand?

Thu, 07/01/2010 - 21:47 | 448125 Misean
Misean's picture

"Chances are they don't either."

Chances are, they don't care.  Specifically, B.S. Bernutty doesn't care.  He's running these assets to align with his discertation on preventing the next great depression.  He's willingly let a wooden horse full of angry Greeks into the Feral's vaults, because Hubris has him in her deadly grip.

My two cents. 

Thu, 07/01/2010 - 23:03 | 448301 RichardP
RichardP's picture

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.  - Bernanke

Quote is from my first post at the top.  If the Fed buys stuff at the original full value, when the actual value is zero, isn't that the same as printing money per the quote above?  And, per the quote above, doesn't doing this in effect restore the value of the asset to 100%?  At least in the minds of the Fed?

Thu, 07/01/2010 - 21:53 | 448139 wawawiwaa
wawawiwaa's picture

UMMMM they are taking the hedges off cause its the FED and I think they might know when rates are going to do something... Call me crazy. 

 

Fri, 07/02/2010 - 02:52 | 448563 iPood
iPood's picture

OMG thank you for the refreshing wisp of sanity. Can you imagine the  Zero IQ vitriol if the Fed actually went into the derivatives market and hedged oscillations in short term rates. If they profited, they'd be accused of the greatest insider trade since Hillary cornered the cattle futures market; if they expired worthless, they'd be accused of pissing away even more taxpayer money, hedging the notional value of nationalized assets against nationally known notional risk. What we really should be investigating is how the Fed funneled money to the solar panel industry, so they could engineer the BP spill, thereby diverting attention from the mortgage crisis.

Fri, 07/02/2010 - 05:23 | 448613 Cheeky Bastard
Cheeky Bastard's picture

I hope to Krishna this is a joke

Thu, 07/01/2010 - 21:58 | 448156 Overpowered By Funk
Overpowered By Funk's picture

The Fed. Fucking with our money since 1913. I know I've just about had enough, what say you?

Thu, 07/01/2010 - 22:48 | 448269 williambanzai7
williambanzai7's picture

Someonevhas organized a vuvuzela protest at BP headquarters in London.
Perhaps ZH should organize a Vuvuzela blowout at the NY Fed.

Thu, 07/01/2010 - 23:53 | 448395 Haywood Yablomi
Haywood Yablomi's picture

Great idea !  I'd fly across the country and blow the vuvuzela out of my ass.

Thu, 07/01/2010 - 23:28 | 448351 AccreditedEYE
AccreditedEYE's picture

It is all to protect the massive "leach" banking system. They push money out the door, give it to the banks and instruct them NOT to lend while they tell the public that they "care very much about small/medium biz getting loans to fix unemployment". They need rates low for the massive debt rolls...and so the banks can try to repair their balance sheets. They must know the market is going to roll over. F, they are probably engineering it. Despite all their rhetoric of wanting to inflate the economy, with all of the crap on their balance sheet and the Massive Roll, they have to want deflation, no?

Of course, all bets are off when the country finally gets its debt rating cut...

Fri, 07/02/2010 - 00:56 | 448488 Assetman
Assetman's picture

I find the lack of interest rate hedges with Maiden Lane I very facinating as well, and I'm glad Tyler and others are thinking through this.

Endless money printing, if anything, raises the spectre of future rate increases. The Fed may well money print, but only if similar behavior is going on just about everywhere else.

I think the Fed is confident in letting go of these hedges because they see (and can partially control) the conditions of a global flight to quality into Treasuries.  With Europe teetering daily into financial crisis and massive funding needs at the U.S. Treasury still not fulfilled-- the Fed doesn't need to do too much to attract global assets at a 2% 10-year yield.  It takes a whole lot more work to create inflation when everything globally (debt) is deflating around you.

Of course, that means deflationary forces will take centerstage again and global stock markets will tank (were looking over the edge right now).  But all this will be temporary... for the huddled masses in the US will be begging for more reflation before Ben comes in to save the world with $5 trillion of QE 2.0 by 2011.  

But, for now, I think the Fed sees an opportunity at hand and will force a lot of shellacked equity holders into Timmy's Brand Stinking New Notes and Bills. 

As an advance, Timmy thanks you for your business.

Sat, 08/21/2010 - 11:04 | 534682 herry
herry's picture

Certainly a lot of details like that to take into consideration. Thanks windows vps | cheap vps | cheap hosting | forex vps

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