The Fed's UST-POMO Pyramid Scheme Exposed

Tyler Durden's picture

In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace. As Martenson points out:

"A more honest and open approach would have been for the Fed to simply
buy them outright at the auction but this way, using "primary dealers"
and "POMOs" and all these other extra steps the basic fact that the Fed
is openly monetizing US government debt is effectively hidden from a
not-too-terribly inquisitive US press and public."

The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed's immediate prompt monetization of a large part of the directs' balance.

It is truly a sad state of affairs when the Fed has to manipulate public and media perception in this way, and has to cover up for the complete lack of interest in US Treasuries.

Here is the evidence Martenson dug up:

Martenson's conclusion needs no elaboration:

"The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us
that demand for these bonds is not nearly as high as advertised, and
that things are not quite as strong as represented.

And oh, by the way, don't expect any stock market weakness while so
many billions are being shoveled out the Fed and into the pockets of
the primary dealers.  They'll have to do something with all that freshly minted  cash....."

Zero Hedge salutes CM for this brilliant piece of sleuthing: now if only the MSM would have the guts to demonstrate the pyramid scheme that the US Bond and Equity markets have become.

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Tyler Durden's picture

Fair point. Although Treasury -> Fed = Monetization...  that's the bottom line.

molecool's picture

The inherent intent is obfuscation Andy.

Project Mayhem's picture

Let me quote on the definitive text on this subject -- from the book "Worldwide Evil and Misery" --



'In his speech before the Senate, on December 15, 1987, Senator Jesse Helms said: "The principle instrument of the control over the American economy and money is the Federal Reserve System."  The Federal Reserve has a monopoly over the expenditure of the dollar as a world currency and determining the interest rate, and it disposes of a lot more monopolies.   How does the Federal Reserve Bank operate?



Suppose the United States government needs a couple of billion dollars for its expenses that cannot be paid with taxes income.  At that moment it addresses the Federal Reserve Board.  The government bonds for the needed billion dollars are printed in the Bureau of Printing and Engraving.  After these bonds are handed over to the bankers of the Federal Reserve, the board grants a loan to the government in the amount of the bond issue.  The Federal Reserve draws interest from the government from the day the bonds are delivered.  From that day on the government is allowed to draw checks against the Federal Reserve for the amount of the bonds. 


What are the consequences of this incredible transaction?  The government simply saddles the people with a billion dollar debt to the Federal Reserve Bank, apart from the interest on interest that also has to be paid by "ordinary people".


When the Federal Reserve needs new, or more, currency to transact its business, it takes the bonds over to the United States Treasury for safekeeping and asks the Treasury Department for the billions of dollars of new currency it needs.  The bank is accomodated on the condition that it will pay the printing bill.  It only pays for the expenditure costs of the banknotes, which are no more than a mere 500 dollars for ink and paper!  It is understood that the Bank need not relinquish the bonds it holds, but will continue to collect interest on them.  The Bank then loans the newly printed currency into circulation to anyone who can provide it with satisfactory collateral.'


"Worldwide Evil and Misery" by Robin de Ruiter

Chapter 8 : One World Financial System




I typed that up from scratch Tyler -- I have up printed one 'beer IOU', which will be deposited at ZH central clearing.  In exchange I will kite a check in the amount of the beer outstanding and loan the new beer into circulation.... and away we go....


TumblingDice's picture

It boggles the mind how the "United States Note", issued directly from the Treasury, conceived by arguably the greatest US President in history, having track record of capability to handle debt and promote growth at the same time and not based on ever expanding debt was tossed aside in favor of the "Federal Reserve Note", the most leverage based currency ever created.

Project Mayhem's picture


I just made some suitably creepy Treasury Dept artwork



Bob's picture

Is that cotton, roses or what??

Project Mayhem's picture

its the reverse side of the treasury building.  roses i think.  but i sucked all the color out -- just like the US Treasury and Federal Reserve have sucked the lifeblood out of the economy

Anonymous's picture

Ouch . That's a stupid statement to make in this case unless you meant to say INCREASEs in Fed BS through purchase of Treas = Monetizaion. I'm not sure that's the case here.

Lay off the Red Bull for a minute and research a bit before hitting the post button.

agrotera's picture

Andy, Andy, Andy, what you say is true, BUT, we all know who TELLS the US Treasury what to do -- task master and big brother puppetmaster of all elected officials, the privately held Federal Reserve Corp.,  Monopoly,Cartel.

Anonymous's picture

Hey that's a green shoot! The green shoot of monetization and hyper destruction

molecool's picture

FYI - this schedule is updated every Wednesday afternoon. If you short on those days just hedge yourself around 2:00pm after the obligatory faux drop and you'll do fine.

Project Mayhem's picture

wow, this was a nice catch.

janchup's picture

Nice catch but the fish carries an ugly message.

Anonymous's picture

One thing I'm not clear on is how this helps the stock market. The transfer of money is effectively from the Fed to Treasury. Goldman starts with a billion, gives the billion to treasury, then the Fed gives Goldman it's billion back. Goldman doesn't wind up with any more money than they started with -- Treasury does. Or am I missing something?

Anonymous's picture

GS gets a cut for their trouble, which they then use to pump the market

phaesed's picture

They've also purchased a few of the 30 years, but at least they waited a full month for those.

Danz Gambit's picture

We, the citizens of the United States must demand, not ask, that the Federal Reserve be immediately and honestly audited.

Whatever it takes.


Anonymous's picture

I'd settle for citizens demanding that the FED be utterly and entirely abolished.

Anonymous's picture

One shall beget the other.

waterdog's picture

I hate to read about stuff like this. I do not scare easily but, this type of lying by our government is beyond the call of duty and it scares the bejeeses out of me.

Anonymous's picture

It should.

2009 will be the fist fuck Christmas. Don't shop early unless you are buying storable provisions and ammo.

Anonymous's picture

Head for the hills! God you people are fucking bat-shit crazy on this site.

Anonymous's picture

Considering that I've been called bat-shit crazy for two decades talking about all these things by people like you who then crawl back five years later for an I TOLD YOU SO, I must say that your advice for heading for the hills--while hyperbolic--is more sage than you can possibly know until it is too late.

Anonymous's picture

look, if you dont like what you read here do not do so. get back to buying more crap.

robbonds's picture

not sure why this is a big deal..everyone knew the auction and the buy backs were coming..public info...the fed announces the maturities they will buy ahead of time and ofcourse its always from the primaries - who are obligated to bid in the auctions...the market could have been pushed either way resulting in either gains or losses..did the primarys hedge their auction buys by selling similar maturities?

not convinced this means much....

waterdog's picture

Do you mean that primaries are required to bid on junk that no one in their right mind would own to save the government?

Anonymous's picture

Yes they have to. Part of being a primary dealer.

RatherBFlying's picture

No, they don't have to, and they wouldn't if they thought they would have trouble unloading the junk. Ask Jimmy Carter about this.

Anonymous's picture

Yes. The only way out is to stop being a primary dealer. As long as the Treasury = Goldman it doesn't much matter anyway, the Treasury IS a primary dealer.

waterdog's picture

Ok, entry to diary,

Another reason today to kill women.....

Anonymous's picture

"Primary dealers do business directly with the Fed and are required to bid at Treasury auctions."

Anonymous's picture

they are required to bid. the bids aren't required to be any good.

Anonymous's picture

I would like to hear the other side to this also.

Anonymous's picture

The other side of this is that "it isn't happening, HEY LOOK there's another story about Michael Jackson."

agrotera's picture

this isn't the other side that you were looking for, but here is another side of this story:

The fed has backed 23TRILLION as a result of the meltdown in the financial markets.  Of this 23TRILLION, 9 TRILLION is flat out missing, watch:

In the fall of 2008, Lehman Brothers, Goldman Sachs, Morgan Stanley, Merrill Lynch, and Citi were all going down.  Lehman asked for a 6BILLION bridge loan, and bank holding status, and got neither--they went down, the other firms and many affiliated firms of the others that didn't do down "won" the Lehman bet, and two days later, AIG got 85Billion in a bridge loan (now 185BILLION) and that money went in the front door of AIG, and out the back to many of the other parties that were left to live, namely 13Billion to receivership for AIG, just flat out GIVEN the money.

That week, Paulson and Bernake told the world that if the US didn't pass the TARP bill, the world would end as we know took three weeks of lobbying for this to happen, and the weekend after it passed, paulson took the money and passed it out in a secret meeting at the treasury to 9 "sacred" "toobigtofail" banks.

Paulson and Bernake DIDNT ask for authority to unwind the above listed "toobigtofail" firms--if they had been honest with our country, they would have asked for this authority--instead of three weeks of lobbying, this would have taken ONE DAY OF HONESTY in front of Congress.  Then they should have asked to close down the markets for a week or three while they worked to unwind these failed entities, and allow the system to absorb the pieces of these companies the way that could have allowed growth and renewal--instead these corrupt entities are protected "as if" they are sacred, and indeed we the people are brainwashed to believe they are "sacred", instead of evil and failed for having committed unbridled fraud.

Now, back to the Treasury and the Fed, because the above agenda (that these entities are sacred) has mortgaged our future because we have poured money into failed entities, just to feed the monster in charge, that is, the FED.

The world is our creditor. We saw a pause in the rhetoric of the rest of the world talking about the dangers of the money printing by the US and how this may cause devaluation of the dollar, when Obama came into office--but that ended the week that Obama and Geithner declared their allegiance to the Paulson/Bernake plan. 

Now that the world knows that our country is supporting a FAILED, and corrupt system, by printing money which was borrowed from the world, to pour into these failed corrupted entities, the world has now decided to move away from the dollar.

This scheme of monetizing the debt is just a perpetuation of the same scheme that we were subject to last fall--a bank heist, ponzi scheme, and it cannot succeed. I am very sad for my country, but, as long as i have a breath, i won't give up hope that this crime will be exposed so we can have our country back, and we can rebuild our country's integrity which will then be reflected in confidence in our country's currency.

But, aside from the fact that our county has been ROBBED by these banks led by the Fed, the most horrible part of all of this is the real and present danger our country is in for having used up our credit to enact a bankheist.

The financial crisis is causing havok in people's lives, and I truly believe that the money printing would have been tolerated somehow, by our creditors, if it had been for a "righteous" reason--but, no way is a bankheist righteous.

By the way, all the money printed and put into the system hasn't gone to do anything but keep alive these corrupted entites--like throwing money into a black hole--and the idea of the Fed looking for an exit strategy is just another joke on all of us.

Anonymous's picture

Exactly - this doesn't mean anything and there was really no catch here!

All of this information is publicly available and it is no secret that the Fed is using quantitative easing.

Sensationalism at its worst is what is going on here...

In every transaction, you need to analyze the stake holders and Zero Hedge is just trying to create traffic through sensationalism so it can pay its bills.

Sorry but that is the truth!

ghostfaceinvestah's picture

i totally disagree.  i work in the bond market, and knew the anxiety last week over that 7 year auction.  and then it went sooo well, what a relief.

what a joke.

Anonymous's picture

is the FED being honest? did you you catch that? does not mean anything. right!

agrotera's picture

Hey Marla and Tyler--the Fed's x-enron lobbyist has sent out shills in full force to your site to try to prevent new readers from coming back--too bad their scumbag agenda is crumbling and that their lies are as clear as a bell!!!

hbjork1's picture

Anonymous: /328327

What .."is going on here..." is a collection of individual people posting  "Anonymous"ly on an internet blog.  If someone lies or defames another, thereby doing damage, they can be sued. 

If you find a statement that is not true, challenge it with references or at least a true assertion.  No one here is suggesting action that would be a violation of law.  What they are asserting is that irresponsible actions are being taken by members of the Treasury and the Fed.  We know from history that govenrments do make mistakes, sometimes disasterous.

Get a grip man.  "Only your friends tell you when you have BO." 

Dr. Kenneth Noisewater's picture

When the buyback comes so close to issue, isn't that just basically a direct injection of money into the system (aka monetization)?  It's as if the issue was for the express purpose of doing that...


rD2.0's picture

Bernanke has lost his mind.

Charlie Gasparino has Zero Intelligence, so he won't do any investigative reporting. He is too busy taking lap dances in strip clubs paid by his Goldman Sachs pals

Alexander Supertramp's picture

"Wall Street banks and lawyers could collect nearly $1 billion in fees from the New York Fed and AIG to help manage and break apart the troubled insurer, according to a Wall Street Journal analysis."

PragmaticIdealist's picture

We all knew this had to happen. Decades of profligance, over-leverage, consumption, financed consumption from China, wasteful investments leading to asset bubbles, a massive overgrowth of a financial sector, a vanishing manufacturing base and hedge funds, traders and other fraudulent market players extracting profits has to take its toll some time.

It's either sneaky debt monetization attempts or debt default from here on in.