Federal Reserve Loses $2.4 Billion In Taxpayer Money In Most Recent QE2 POMO Interval

Tyler Durden's picture

With the Federal Reserve now actively participating in capital markets, it should be noted that just like every other asset manager, the Fed has to be held accountable for its trading efficacy. After all, the Treasury takes every opportunity to remind the US public how courtesy of record amounts of new government debt, it has managed to make "profits" on its assorted investments, which are merely transfers of risk from one entity to another, and the "another" being the US taxpayer, although not directly, but indirectly via the now ludicrous amount of US debt which will never be repaid. Which is why the US taxpayer may want to know that in just the most recent POMO schedule - that from early November to December - the Federal Reserve has lost $2.4 billion in taxpayer capital by its mistimed market operations, primarily due to the recent rise in interest rates. This is $2.4 billion that has not evaporated, but instead has been transferred to Primary Dealers under the "profit on trade" category. This is also money that will be used to determine, and fund, banker bonuses.

John Lohman breaks down the specifics of the P&L calculation:

Announced par purchases: $106,300,000,000

Actual Market Value Paid:   $116,457,219,800

Market Value 12/10/10 :    $114,032,149,219

Taxpayer Profit/(Loss):  ($2,425,070,661)

The money transfer continues, but much more concerning, the Fed continues to assume ridiculous amounts of interest rate risk on behalf of taxpayers with absolutely no Plan B should it lose control of the situation.

As Zero Hedge readers known by know, the DV01 on the Fed's total rate holdings was recently estimated at about $1 billion. This number refers to a Fed balance sheet as of April 2010: extending the calculation for the Fed's current ballooning holdings, means that the DV01, or the P&L impact from every basis point move up or down, is now about $1.5 billion. In simple terms, a 1% move in rates will result in a $150 billion loss to taxpayers! And so on: 2% - $300 billion, 3% - $450, although technically not in a linear fashion, as by then the convexity impact will make losses progressively larger. And that's not all - by the time QE2 is over, and the Fed's balance sheet is about $3.5 trillion, DV01 will be just under $3 billion!

Basically what this confirms is that should the Fed lose control of interest rates, the losses to Americans will be in the hundreds of billions, if not trillions, wiping out any imaginary profit from TARP repayments and other marginal optical illusions.

And two more thoughts: strike any thoughts that QE2 is just $900 billion of fund transfers to Primary Dealers. As we have said before, this is the notional amount of debt bought back. Adjusting for market values, means that the Fed will actually transfer well over $1 trillion in actual cash to Primary Dealers.

Second: the Fed is blasting headlong into a potential inflationary situation with absolutely no rate hedes. When will the Fed actually start managing the downside risk on its SOMA portfolio? When will Ben Bernanke or Brian Sack finally direct BlackRock to buy some upside rates protection. Of course, should the Fed do that, the move in the market predicated by the need to hedge a $2.5 trillion rate portfolio would itself start a massive sell off in rates instruments due to the feedback loop nature of modern "efficient" and volumeless markets.

h/t John Lohman

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jahbless's picture

No.  Fucking.  Way.

mule65's picture

Way.  TD says avoid stocks.  SPY up 80% from low.

chopper read's picture

i have never once heard TD suggest anyone 'avoid stocks'.  However, fraud and lies are revealed and reported upon daily.

traderjoe's picture

Yes. And gold and silver up nicely. TD did recommend EU CDS' when they dipped earlier this year. Probably a 2-3x+ bagger, but I can't/don't trade those...

Tyler Durden's picture

Also, before they rose by 80%, stocks dropped by 50%. To be sure though, a centrally planned economy will never allow a disconnected market to trade down.

traderjoe's picture

TD, I applaud you for NOT recommending investments. It would be a trap. Occasionally, you do mention some ideas, including your arbs. 

You should include in your occasional rebuttal on this very point that PIIG's CDS 'recommendation'. It was a very timely, on point call and also fit with the meme of the site (counter-FinMin-bullshit-spewing trade). 


p.s. you should perhaps have a symbol next to readers that have donated to the site? Also, send a receipt when a contribution is made to the e-mail address on record? My PayPal deducted the money, but my shopping cart on ZH never was cleared and no confirmation that the donation was received was sent. Just some minor thoughts...thanks for the site. 

iDealMeat's picture

I donate by clicking on the Cramer ads once in a while..  Screw paypal..

G-R-U-N-T's picture

"p.s. you should perhaps have a symbol next to readers that have donated to the site? Also, send a receipt when a contribution is made to the e-mail address on record?"


-Anonymity is a valued tradition here at ZH, ever reminding ourselves to place principles before psychopaths.


traderjoe's picture

Huh? What part of that violates anonymity? I had to give am email address to join ZH, so it is on file. It's standard business practice to acknowledge the receipt of a payment - in order to inform the sender that it has been received. I am curious because my shopping cart was never emptied. It would be nice to know that it was properly received and not lost in cyber-space.

Ghostbusters's picture

the whole thing is quite laughable.  washington and their rulers in manhattan(co-conspirator) sure have the world preaching recovery.  it is difficult to fight the Fed but that doesnt mean you have to believe in it.  people believed in madoff, petters, greece, ireland, europe, china, and [insert ponzi scheme here] until they didn't. all these analysts, experts, pundits have a vested interest in being bullish.  Ty's chart and simple math dont lie.  When are we going to learn between the dot com bust, the credit crisis, and QE-infinity that we are getting hosed and the flogging is getting worse, not better.  go ahead and buy stocks but the real investments are things with tangible value.  we can sit back and watch as rome burns as no real improvement in the housing market will be seen until unemployment improves, which may never happen, consumer spending resumes its drunken ways, never happen as evidenced by main street's distrust of everything govt, and all this while the govt/banks/corp's get more desperate to "increase household wealth" by propping up the stock market?  Improvement in wages is the only way to increase household wealth and that is only happening in Federal jobs aka banks.  some a$$hole once said, that if you cant beat em, join em; thankfully Americans arent quite so stupid.  we'll get what we deserve, a multi-decade contraction in real terms and our overlords will get theirs too.  The desperation and confusion increases every day and if that makes you want to buy stocks, on infinite optimism based on govt intervention(transfer payments) that we'll all pay for, for the rest of the foreseeable future than so be it but dont tell us with a straight face that things in real terms are improving/recovering.  Income disparity has never been greater in the land of the free and the home of the brave.  the life blood, middle class is more pinched than ever with no help in sight.  people internationally get it, ireland gets it, we know who are rulers are.  the central banking cartels and their cronies at big banks, they all get it.  It is so funny to watch as wankin-bankers think they are helping the real economy as the continue to suck the productivity out of the world economy.  banks are taxing the public in collusion with the central banks and we are ok with this.  each year we pay more and get less.  each year fiscal situations get tighter, we cut more and pay more but these clowns would tell you things are getting better.  like an American Funds wholesaler is going to tell you to be bearish on stocks in 2011?  the government is going to tell you the truth, like a spanish banker told me last week.  estamos jodidos - we're fu%#ed.  up the smelly creek without a paddle and no hope except to buy what the king is telling you or else.  assange is a clown but his efforts are welcomed and jus go to show you the extent of the cover-up.  do we in the US have a budget yet, who is the number 1 holder of US Treasuries(someone explain how we can finance ourselves, in our insolvent state?), if we are in an economic expansion then why can't we raise rates as inflation, buying power, fees, and taxes continue to erode our collective productivity.  It is quite laughable and the emperor continues to undress.  the question is when and the zerohedge crew will be there if they don't get Assanged first.  the whole system is about control over your productivity, taxing rights, birth certificates, passports, TSA, Homeland Security, WTF? We lose freedom more and more everyday and we are ok with this?  the rant is over. we dont need Obama/DC/or someone to tell us how to change, we create change, but we must first be willing. the general attitude is changing slowly but surely. How vain it is to sit down to write when you have not stood up to live.” ~Thoreau

whatsinaname's picture

well atleast the bankers can have a Merry Christmas.


SheepDog-One's picture

I hope interest rates sky and blow the FED to tiny bits. Im not buying anything with interest payments anyway, they can kiss my ass...I pray all the time the worst happens to this govt and this FED. I hope China applies more pressure and not only raises rates but doubles their advertised rate hike tonite.

PC Load Letter's picture

The FED is playing russian roulette and holding the gun at the taxpayers head

chopper read's picture

no worries.  when it all goes tits up we'll have a 'Nuremberg Trial' and execute them all for High Treason according to the U.S. Constitution. 

kentfinance's picture

doesn't matter. the Fed is mark-to-fantasy/accrual and the banks are mark-to-market (with some notable  MBS exceptions). that is always a great way to manufacture profit.

RSDallas's picture

Dog, You really should seek counseling and medication.y

SheepDog-One's picture

You want the Ponzi to go on, and Im the one who should seek counseling? LOL, too funny.

chopper read's picture

agreed.  why do we want a system that continues siphoning wealth upwards to oligarchial fascists at the expense of little old ladies scrubbing toilets for milk and bread money?

Biggus Dickus Jr.'s picture

I don't want or expect anything.  I'm just here to trade and make money.  I can't change the world.  Grumbling about it will get me nowhere.  I lost a job and went into the depths of depression.  I made two years turn into hell because of my negativity, but I had the key to unlock my chains and go into business for myself and now I'm doing twice as well.  I would have found it sooner if I weren't so negative.  Negativity only hurts you.

Biggus Dickus Jr.'s picture

why are you so alienated sheepdog?  I'm curious.

Malcolm Tucker's picture

The bankers have been busy catching up to the Pentagon:

Defense v.s. Wall Street: A Cost Comparison



Hedge Jobs's picture

i think you mean happy hanukah. check out the menorahs on wall street and the whitehouse.

HelluvaEngineer's picture

Ben's got that much in his sock drawer.

traderjoe's picture

Given what the Fed paid for all that MBS and other crap it still holds from 2008, there cannot be a question that the Fed is insolvent. Of course, since they can create money out of thin air, I'm not sure how that matters. 

End the Fed. 

p.s. Sanders still filibustering old school style. 

Biggus Dickus Jr.'s picture

the fed is of course insolvent, but it is the fed, hence it's balance sheet is mostly irrelevant.  In fact we may go to zero reserves held in banks at some point.  The fed thinking on this is that reserve level never stopped a good old fashioned bank run, only liquidity injections. It's all mark to magic anyway.  Reserve levels have never really been all that accurate, and once in a fit of conscience we tried mark to market it went blooey!

SheepDog-One's picture

Yep they can keep creating more worthless money.

MarketTruth's picture

Agreed, but the real point is this ZH'ers.

This is $2.4 billion that has not evaporated, but instead has been transferred to Primary Dealers under the "profit on trade" category.

The private member owned Fed basically found a way to give free money to their owners/members legally. Of course you the taxpayer is on the hook to pay this money.

EscapeKey's picture

I have it on in the background for comedy effect.

SheepDog-One's picture

$2.4 billion lost? Pffffft...pocket change. American taxpayer, chop chop pay it back quick or its the gulag for ya!

faustian bargain's picture

This is just making me angry all over again. I thought I had "progressed" to acceptance, but maybe not.

Biggus Dickus Jr.'s picture

Don't get upset about it.  When Ben hands the taxpayers a lemon try to find a way to make lemonaide.  The money falling out of one pocket is going into another.  Yeah I don't like it either.  None of us are directly positioned in front of the fire hose, but we can at least drink from the mudpuddle.  I'm not too proud.  I'm here to make money not to complain.  Durden can help you make money if you follow him!  All praise to Durden!

Robslob's picture

I asked Santa for my very own money printer for Christmas...can't wait to see what is under the tree in 14 short days!

G-R-U-N-T's picture

Why wait for Santa when you can go to Kinko's.

tony bonn's picture

speaking of fed losses does anyone know how much its 2.5t usd face value portfolio is really worth....it's understandable if you don't know since there doesn't seem to much of a market for the crap it bought from insolvent banks but i am curious to know what a conservative best guestimate of what's balance sheet is worth mark to market....i have believed since 2008 that it is insolvent but it would be interested in quantifying it. and how is the treasury's portfolio of failed dinasaurs such as aig and gm?

Biggus Dickus Jr.'s picture

I can't remember where I read this, but there are estimates between 150 billion and about 400 billion.  That's a small price to pay to save the world.  None of us really want to live in a deflationary depression.  You think you have it hard now, have any of you talked to working class who lived through the depression?  Do you really want to live on beans and cornbread?  IN fact you are so hungry you love it?  All praise to Ben Bernanke too! 

kato's picture

"Deflation" is a sucker word. THEY did not call it "Inflation" when housing prices were going up. It is NOT "Deflation" if housing prices go down. HOWEVER, the banks portolios get killed so they use the "D" word to sucker in the government and masses that the economy is going to go off of the cliff. Which it will not. We will have a good and necessary hosuing correction after which housing will be much more affordabel for the masses and things will be better. THE REAL ISSUE is TOO BIG TO FAIL, which has not been fixed.

FatFingered's picture

"to sucker in the government and masses that the economy is going to go off of the cliff. Which it will not."

Not sure where you live but might I suggest you get out of the house and take a walk down Main St.?

SheepDog-One's picture

Are they calling the FED indiced stock market rise 'inflation'? Of course not. Inflation and deflation only get talked about when banks portfolios are suffering.

SheepDog-One's picture

Anything, stocks bonds or whatever is only as valuable as someone else is willing to buy it for...lets see what its all worth in a sudden war or major terror attack.

youngman's picture

Its like asking a gambler after they just got back from a week long trip in Vegas...they will tell you they made lots of money....never lost a penny....

kato's picture

all they have to do is wait it out until they mature and they do not lose. the 'losing' now part does not bother me; the POMO program itself is deeply disturbing.

Mr Lennon Hendrix's picture

Basically what this confirms is that should the Fed lose control of interest rates, the losses to Americans will be in the hundreds of billions, if not trillions, wiping out any imaginary profit from TARP repayments and other marginal optical illusions.

And this is why Bernanke MUST keep rates at zero.  Any increase in the rate would shelve the US governments ability to repay the debt.

MyKillK's picture

Wouldn't increasing Treasury rates have the same effect tho? Keep the rates at zero, watch yields skyrocket, or be forced to raise rates and watch the Fed's portfolio crumble.

At this point I don't see any chance of a happy resolution to this all. I'm preparing myself for the new Great Depression.

Mr Lennon Hendrix's picture

The Greatest Depression....

An increase in rate does not only decrease the price (which ruins Bernanke's cash cow) but means yeilds for the buyer skyrockets, yes.  Bernanke does not want yield's up, too expensive for him and his worthless banksheet.  The Fed's banksheet is what backs the dollar.  The dollar is dead.

Die, die, die my dollar!  Don't utter a single word.....

Raising Required Reserve Ratios Matter Little:


B9K9's picture

Yep - the Fed cannot allow interest rates to rise or governments implode. However, on the other hand, Ben can't let inflation get out of control, otherwise he has some serious unrest on his hands.

The A&P BK filing, to be followed soon after Xmas by who knows how many companies, is only a harbinger. The trap is government needs free money, but the elderly, women & children (aka "society's most vulnerable") need to heat their homes & feed their families.

Oh what a tangled web we weave,
When first we practise to deceive!

Ben is trapped, yet I have always said he foresaw this trap years ago. The game was always to buy 2-3 years, max. Well, time is up, and it's time to get our reward.