Geithner Vs Gross Round 2: Is The Latest "Market Normalization" Proposal By The Treasury A Warning Shot Fired Straight At Alarmist PIMCO?

Tyler Durden's picture

For months Bill Gross has been very vocally antagonizing the US Treasury by telling anyone who cared to listen that US debt is nothing short of the world's biggest ponzi and that Ben Bernanke is satan. For the longest time Tim Geithner took this effrontery peacefully, always willing to offer the other cheek. Until last night. In what is quite possibly a direct warning shot fired straight at Pimco's primary revenue driver, the Treasury has made it clear Bill may want to focus on unicorns and rainbows in his next monthly letter.

What happened?

Earlier this week, The Treasury Borrowing Advisory Committee ("TBAC"), a advisory group chaired by JP Morgan's Matt Zames and Goldman Sachs, which also counts PIMCO among its members, basically made it clear that the hedge fund crew is firmly behind the debt ceiling hike, as an alternative would result in fire and brimstone falling from the sky - in other words the end of the Ponzi would mean the end of the world. And they should know: after all it is the same Matt Zames of whom JPM's John Hogan said back in 2007: “For whatever it[’]s worth, I am sitting at lunch with Matt Zames who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme.” Considering how right Zames was about Madoff, perhaps we should take his word for that far, far bigger ponzi scheme, the United States. In other words, the TBAC made a mortal enemy out of living within one's means (let alone austerity): surely such a mindboggling concept would be the end of Wall Street (which urgently needs to double world GDP to $200 trillion by 2020 to keep record bonuses flowing). Oddly enough the TBAC's sister organization at the New York Fed: the Treasury Market Practices Group ("TMPG"), which has most of the same member firms (except for PIMCO, relevant in a second, and also "curiously: has Matt Zames presiding on that particular group) may have made a comparable, though far more powerful enemy, out of PIMCO, after it proposed the introduction of fails charges for MBS trades, an action that is a direct affront to none other than Bill Gross' PIMCO, one of the world's most active managers of MBS/Agency securities. Should the proposal by TMPG, which as Bloomberg's Jody Shenn summarizes would affect traders in agency debt and mortgage bonds, forcing them to pay as
much as 3 percent in penalties in the case of trade fails, be enacted, PIMCO will not be happy. In fact, PIMCO has already said this fee "would damage the market." In other words, we now have the group that has perfected MAD to an artform, seeing splinters within it, which are warning of itheir own version of MAD. In yet other words, PIMCO is now threatening with MAD if the debt ceiling is hiked and if MBS traders are forced to actually pay for delivery failures. How long before one actually runs out of MAD cards? And did the Treasury just directly take on the $1.4 trillion bond manager which has made its feelings about US debt all too clear over the past few months.

So just what has gotten PIMCO's panties in a bunch? Bloomberg explains:

The U.S. central bank’s decision to hold benchmark interest rates at record lows has encouraged failures by reducing the cost of uncompleted trades, while its purchase of $1.25 trillion of mortgage bonds through March 2010 has made it more difficult to find bonds to settle contracts in a timely manner.

Uncompleted trades in agency mortgage securities remain elevated after rising to a record of almost $2.4 trillion during a week in November, according to Fed data.

Failures to receive or deliver the securities, which totaled $1.5 trillion in the week ended April 20, averaged about $330 billion weekly over the past 10 years, according to Fed data. The tallies are inflated by incomplete trades that continue over multiple days and are increased by strings of failures that can occur when a single party doesn’t settle a contract.

So, as a result, in order to "normalize" the market suddenly even though this has been happening for a long, long time...

The Treasury Market Practices Group, which the Federal Reserve Bank of New York helped form in 2007 to offer advice on debt markets, today proposed [that] Dealers and investors that fail to complete trades in agency debt and mortgage bonds may pay as much as 3 percent in penalties. That followed the introduction of a similar practice for U.S. government bonds that the organization backed in 2009...[This is] a fee Pacific Investment Management Co. says would damage the market.

More on a proposal that is so overdue, one can't help but wonder "why now."

The new charges could be as much as 3 percent of the trade size, with the formula based on a similar system for U.S. government debt, said Wipf, also a Morgan Stanley banker, in a telephone interview. The daily charge would be reduced by the Federal Open Market Committee’s lowest current target for the federal funds rate and divided by 360.

The answer to the above question comes when reading PIMCO's response:

The fail charge is too high and will be counter- productive,” Scott Simon, Newport Beach, California-based Pimco’s mortgage-bond head, said in an e-mail. “While it will reduce intentional fails, we believe it will sharply reduce liquidity and incent accounts to attempt short squeezes.”

A 1 percent fee “would be a much better level,” said Simon, whose firm manages the world’s largest bond fund.

Well, it may not lead to "market wide" short squeezes. But it will certainly lead to pain for the biggest private market participant in the space.

As for "why now" the TMPG has this laughable reason:

Reducing uncompleted trades is necessary because for individual companies, “fails can increase operational costs and counterparty credit risk, absorb scarce capital through regulatory charges, and damage customer relations,” the TMPG said in a paper released today.

“More generally,” the group added, “the prospect of persistent settlement fails at a high level can cause market participants to temporarily withdraw from the market, or even exit the market, adversely affecting market liquidity and stability.”

Uh, we have had record fails for an unprecedented amount of time, but yes, "customer relations" could be impaired. Especially if these are the same customers who listen to PIMCO and dump their securities.

And the most ironic thing is that at its core, this "customer relations" problem  again the fault of none other than the Fed.

The Fed’s decision to hold its target for the federal funds rate in a range of 0 percent to 0.25 percent since 2008 has helped encourage fails because it lowers the cost of not receiving cash in exchange for the promised securities. In a higher-rate environment, dealers would lose more because that cash could be invested at higher yields.

Lower rates boost the incentives for investors or dealers that want to “short,” or bet against, mortgage-bond prices to delay delivering bonds into sales contracts, according to the group’s paper.

Most transactions in the mortgage-bond market are conducted through so-called To Be Announced trading, which also adds incentives to fail on those contracts. TBA contracts can be filled through delivery of securities with a range of characteristics, rather than specific bonds

So while it is somewhat amusing that now according to the Fed's two way sock puppets, the market which is now beyond manipulated by the Fed, needs to promptly eradicate this one side effect of its endless meddling, a far more exciting possibility is that the Treasury has now taken a direct jab at PIMCO, which is certainly Tim Geithner's way of telling Gross to shut up with his endless Ponzi scheme references about the US economy, and satanic comparisons for Ben Bernanke. We expect to have the leaked data of PIMCO's April TRF holdings within the week. We will inform readers then if this tactic of unprecedented bullying by Tiny Tim has worked. But far more importantly, if this action was indeed taken with PIMCO (and an appropriate warning) in mind, it means that things are really starting to unravel.

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Silver Bug's picture

Bill Gross has become the only vocal bond vigilantes, in a time when we desperately need them. Now Gross does have a tendency and a history to talk his books. Now that is much better than Tiny Tim's history, which consist of blatant lies, and nothing else.

Rikki-Tikki-Tavi's picture

Perhaps the issue of mistrust can be addressed by changing the comp package of Timmy, Bernankrupt and all the regional FED presidents to 90% of salary paid in long dated US treasuries vested for 5 years?

Anonymouse's picture

This is a new issue to me.  Is this a penalty above the make-whole amount?  There is a make-whole provision for a broken trade, isn't there?  There should be

michigan independant's picture

So the Guy is walking the turf smacking heads. Better deal than the ruble or renminbi or a news paper wrapping a fish sent to the loved ones.

to promptly eradicate this one side effect of its endless meddling, a far more exciting possibility is that the Treasury has now taken a direct jab at PIMCO, which is certainly Tim Geithner's way of telling Gross to shut up

In the long run there is no unpopular Government but they can be nasty along the way. The SWF Inc. will print it appears.

lolmao500's picture

In other news, this is the week they have to raise the debt ceiling.

Fail2Deliver's picture

The .gov did the same thing when the banks were getting hammeredd by short sellers a few years ago; they outlawed naked short selling. Only for the banks mind you. Game was still on for the poor other companys not so well connected.

Fed needs BUYERS of these bonds. China must have told them to go to hell. Japan surely isn't interested. The Fed will now outlaw all short-selling of .gov bonds. Thus eliminating the Fed competition of selling.

Ned Zeppelin's picture

I would like to hear a layman's version of this story. 

Seer's picture

Too many holes in the dyke, not enough fingers...

The big fish are starting to realize that their feeding habits are colliding.

Buffett/Sokol skirmish small potatoes...

PIMCO merges with Fed (or Fed merges with PIMCO- no idea which way it'll go, but since there is now only consolidation possible [growth is dead], consolidation WILL happen).

ebworthen's picture


Turf war between punks who beat up seniors for their SS checks and shake kids down for their lunch money.


Piranhanoia's picture

After the fact guess?

"You mean in the old days there were places people could, what did you call it, shop?, at different places.  what was that like gramps?

Ura Bonehead's picture

I’ll play along….  The layman’s version is:


Omega Theta Pi House (TMPG) has had the run of campus with impunity and with (unofficial) endorsement of Dean Vernon Wormer (Geithner).  But, for his own reasons the elitist and smooth talking Omega member, Gregg Marmalard (Gross), develops a hint of morals (we assume) and, over a few beers, goes pubic and rats out the Dean and his ruinous ways to the press.


Well, this does not please Dead Wormer or the Omega order.  To seek order, the Dean orders Omega member and campus ROTC commander, Doug Neidermeyer, to shave Gregg’s head and cover his balls in hot sauce.  [Frats do this kind of stuff’]


The (unwritten) Epilogue:


But does this public act to silence dissidences deter the likes of Delta man, John “Bluto” Blutarsky (Tyler D)?  Heavens no!  He steps forward and gives an impassioned speech to rally his fellow Deltas (ZH-ers) to save the day.  Fellow Delta outcasts like Otter, Boon, Pinto, D-Day and Flounder build a rogue parade float into a fighting machine to wreak havoc on Dean Wormer’s annual homecoming parade.


But Gregg survives his ordeal with the help of the Delta boys, Katy and Boob live happily ever after, and Bluto runs off with the stuck-up Mandy Pepperidge (played by Meredith Whitney).


Hope this helps.  :)


“Seven years of college down the drain.”

Miles Kendig's picture


Here it is.  The major players in the servicing and formulation of MBS are busy conducting in depth and belated QC of the each underlying mortgage in each pool.  This process is to determine which mortgages are total junk, partial junk and those that can actually pass court muster.  With $$$ chasing yield these primary TBTF's are reworking pools of mortgages into severely junktified - newly spectacular super senior.  A side effect of this process, besides offloading all the junktified to yeild chasing suckers (echoes of 2005-2008 anyone?) is that there are quality golden opportunities presenting to both long & short the MBS space with heretofore drill down data unavailable to even the road kill known as the PMI's.  Since the former securities have yet to be fully stripped, reworked , pooled et al for proper due diligence by the buy side we have the "like structured" securities gaping hole just waiting for the butt plug of the "Big Boy Letter".  Since PIMCO is "managing" the feds holdings, but BAC, JPM et al are riding the crew to work extra hours on the Déjà Vu road show ( aka the contract strip joints adding a layer of deniability to the TBTF's while providing the ability to say "we don't rightly know for sure at present, but are looking at a variety of alternatives" yadda  yadda  yadda.  So the FRBNY and the TBAC decided to try and get PIMCO to not only suck up the longs on the newly made junktification, but pony up a 3% fee when the TBTF's fail to deliver the reworked crap, sprinkled with just enough Mezz +1 to keep it juicy for PIMCO to margin on speculation the fed will be forced to do another round of MBS QEX. 

THIS is the barrel of the action Ned.


michigan independant's picture

Thanks for the steering wheel on the topic. I assume some buckets will produce and I assume what we will get as the producing class. Again thank you.

The weighted-average maturity (WAM) of a passthrough MBS is the average of the maturities of the mortgages in the pool.

The weighted average coupon (WAC) of a passthrough MBS is the average of the coupons of the mortgages in the pool, weighted by their original balances at the issuance of the MBS.

I assume no (WAC) for the short list.

Convexity is a risk management figure, used similarly to the way 'gamma' is used in derivatives risks management; it is a number used to manage the market risk a bond portfolio is exposed to. If the combined convexity and duration of a trading book is high, so is the risk. However, if the combined convexity and duration are low, the book is hedged, and little money will be lost even if fairly substantial interest movements occur. (Parallel in the yield curve.)

I need help on that Elapsed Coupons old buddy ; )

Minsky broke down the process from stability to instability into three types of debt phases: hedge, speculative, Ponzi.

 The hedge phase describes that buyer’s cash flows cover interest and principal payments for borrowers who obtain a debt to buy an asset. This way, the debt is self-liquidating, fully hedged, so it is a stabilizing factor in this economic phase. The speculative phase is a step further on the risk side. In this phase, cash flows cover only interest payments, but not enough to amortize the principal.

In order to take over failing banks some good banks said they did NOT want to but behind closed doors you know how that goes as weighted. I guess a few hookers will be set on fire.

Theme song as they screw us again.

Who is that in the rear view mirror?

Seer's picture

Climbing aboard UFOs?

Hansel's picture

Is this any different than any other week for the last couple years?  OM

FunkyMonkeyBoy's picture

Who gives a s**t about about this theater.

America is coming to end, it's only a matter of when and how many are going to suffer and whether the perpetrators will get away with it again as history shows they always do. 

tickhound's picture

All right on schedule and by design.

RockyRacoon's picture

It appears to be the jockeying of prime positions on the first few lifeboats off the Titanic.   They could care less about the steerage passengers.   Women and children be damned.

Vlad Tepid's picture

The children in this analogy are being lashed together by TPTB and used as flotation devices.

NOTaREALmerican's picture

HA!   Good one.   The cynism level is unusually good today! 

kumquatsunite's picture

This really fries me; it is irresponsible and a disgrace to this country to say, "America is coming to an end." By your writing here, one can presume you are of a certain age...let's say above 35? If you have children, grandchildren, sisters, brothers, friends, and/or a spouse, to your spouting of prognostications that "America is coming to an end" belies every breath you take. If you actually think so, then saddle up and head for Mexico or wherever. As to me, I didn't participate in any of the ponzi/fraud/scwew our children, take for today like we are third worlders, live in a house that I can't afford, schemes.

The "perpetrators" of this are every single American: the liberals who decided that their self-aggrandizing munificence would drive every company that had to pay taxes offshore where they could offset their stolen, excessive, and redistributed to the mouth-breather, taxes via third world labor. Then there are the conservatives who failed to "conserve" anything, especially a sense of propriety and decency that would have kept this country's "pants" up (moral sense and fiscal sense go hand in hand). Instead, the liberals and the conservatives combined to serve up to our children a miasmic trough of financial calamity, sexual waste (both figuratively and literally...really...oh it's Sunday, no need to be explicit, even the animals haven't performed the kind of acts your children have been told are "normal" in the last decade) and overt acts of indecency that, by all accounts, should have ended careers: really: are women so stupid that flashing their bits is just another way to obtain publicity? Must men go on in the 21st century about "obtaining" a woman? Seriously? That sexual freedom has so worked. Not.

We will revert to the mean, meaning time to learn how to do things for yourself again. My brother always mowed the lawn with a push mower. My mother stood in a hot kitchen cooking Sunday fried chicken (no air conditioning!), and my sister worked as a dishwasher, and none of them complained about doing these things. We are being told we are too lazy to mow our own lawns and too stupid for our children to be given the slots in colleges and universities that we pay for as taxpayers, so engineers, doctors, and educated must be "inshored". Really, funny thought WE went to the moon. Thought WE created computers. Thought WE were the best medical system in the world (at least until affirmative action got ahold of the American Medical Association, and by the way, just who is it letting all those foreign docs practice at our hospitals? More than one-half the doctors at hospitals are now foreign; you can pull up the list of doctors on any hospital website and see who they are and where they are from. What is that about? Can you say foreign docs are more likely to pull the plug on the over-fifty crowd? Hmmmmm...

So, the mess is here and now it is time to clean it up. Here's the rules to start: Erase every tattoo...ohh painful. Too bad so sad. Eat with your mouth closed. STand up straight and sit up straighter. Children should be polite and say "Yes,mam and No, Sir." And above all, if you are an employee, do your job or get out. I don't need you wasting my time with sand bagging me while you are clicking the clock. America will be great again. So kiss China's cheap stuff goodbye and let's save this country! God Bless America and God Bless Donald Trump who is the ONLY guy who has said let's tell China to shove it! Tariffs! Tariffs! Tariffs! That'll bring the cost of gas down real fast.

i-dog's picture

That rant is nothing but a series of regurgitated propaganda ... ending with "Trump is the solution"? WTF?!!

Someone has laced your Geritol with serious mind-altering substances, or it is sending you blind.

unclebigs's picture

So far Gross is Losing His Ass shorting treasuries.  LMFAO!!!!!!!

buzzsaw99's picture

+1 suck it long tbt junkers.

Orly's picture

He never said he was short.  He said he sold them long.  In cash.

Boilermaker's picture

This two assholes are sitting together at Bernak's back yard deck having a top-shelf martini and laughing their asses off together.

abc123's picture

That's definitely "next-level" cynicism.  I like it.

dark pools of soros's picture

remember, PIMCO isn't risking any of Bill's cash - they could be the next Lehman to be sacrificed

DavidC's picture

I'd sooner trust Gross, who has his and his clients' money on the line, even if he does talk his own book, than an intellectual half-wit who won't even pay his taxes despite his high income.

Unravel? Good, let it, it might return the system to some semblance of reality and not hammer people who rely on interest/annuity income, and don't rely on inflation (in other words 90% of the population), to survive this almighty mess.


Gold 36000's picture

Very few people rely on interest income or any form of capital returns.  Most people are always in debt.  Hence inflation and soft money help the high end and the low  end.  It is always the preferred solution.  The small number of people who have self discipline and leave beneath their means are the ones punished.

Majority rule, eh?   Skittle?

Seer's picture

You think that Timmy doesn't have clients?  Sorry, but Timmy's clients are more substantial than Gross's.

As far as "relying" on interest/annuity income, you might want to look long and hard as to what this really means (making money w/o being productive, which, in essence, is the very thing that you're accusing the govt of doing).

DavidC's picture

So you're suggesting that responsible pensioners, who have saved into pension schemes so that they can live in retirement are making money without being productive, despite having been so (in most cases) for the majority of their working lives? I'm not talking of public sector, index linked pensions.


Seer's picture

So, you're suggesting that our children have to pay for this, even if it means their enslavement?

Listen, because I say things that aren't favorable (coated in skittles) doesn't mean that's the way that I want them to be.  It's the way things ARE!

Reality check: 2/3 of the world's population lives on $3/day or less.  These people aren't likely going to retire.  And, That's how it's been for the overwhelming majority of people throughout human history.  This entire notion of "retiring" was perpetuated by TPTB (and abetted by cheap energy) as one big Ponzi.

I've paid into the System.  And I do NOT expect to get anything out.  I recognize that I'm really only paying those who were in the Ponzi first, and that my energy is better spent concentrating on making my own future than in fighting the "injustices" that will be wrought by the failing Ponzi.

If you can explain how interest isn't a Ponzi then you might have a leg to stand on...

robobbob's picture


savings used to fund activities that actually produce a surplus are what built civilization. the problem is that favorable conditions tend to draw the swarms of parasitic locusts who are now eating several generations worth of stocks.

It is not interest per se that is bad, it is maladjusted investment whos end goal is obtaining interest at the expense of creating genuine surplus.

returns chasing returns for the sake of ever higher returns beyond what real productivity can support is the root cause of destruction.

retiring is theoretically possible when surpluses are incrementally stored to provide for future use. The problem is when inflation outstrips those provisions. Its even worse when the those provisions are intentionally being looted. For decades the people have been told to sacriface to fill to government graineries. Now the time is coming when they will be needed, and we're finding out the warehouses are empty.

That said, if tried to warn people for years. few listened.

Harlequin001's picture

The choice is stark. Do I pay into the state pension system and sacrifice my own future or do I walk and look after my myself in the future. This is the consequence if paying into a system that has no assets but is funded by taxation. 'How do I know that when I come to rely on it it will be able to pay?'

Welfare doesn't work, and more so when it is paid for by debt.

We can argue that pensioners provided something or nothing if you will, but the fact is they did not provide the benefits they need to provide this level of benefits now, which is where the fraud is perpetrated. This is a helluva time to find out you have no real retirement fund, but there it is...

You have no adequate retirement fund.

ebworthen's picture


Get the guillotines out of mothballs.

Versailles needs to be handed over to the people.

Rome needs to be sacked.

The heads of the elites need to roll.


Gold 36000's picture

It is time ebworthen.  Don't forget.  fifty percent gasoline.  Fifty percent styrofoam.  It is so sticky it will not come off of anything.  You now have cheap flame thrower material.  Use a three man sling shot.  Remember.

dark pools of soros's picture

can i use that to help start my pellet stove??  not too toxic?

Dr. Impossible's picture ..thats just wrong...anyhow there's 1 more household ingredient(and a lil dab will do ya) you could add to ensure that the fire couldn't even be approached to put it out, muchless extinguished....think about it...if your intent is to do area-of-effect damage....why would you limit it to the splash zone..anyhow, your mix just doesn't burn hot enough/long enough to be fun if your older then 14...AND IF IT AIN'T FUN...DON"T DO IT!!! your just gonna get yourself hurt before you even get out of your garage....shit..i'm gonna say it again DON'T DO IT..and again DON'T DO IT.

..remember Pattons' words... Sun Tsu...Yoda's

a better ploy..just stay nimble on your feet,and keep moving, DON'T WASTE RESOURCES...yet(you'll need them for when the dictators begin arriving in a few years) they'll scramble and neutralize themselves, as you can see, their leaderships confusion has already has left them in a position where they couldn't fight their way outa a wet paper bag...

Racer's picture

Please don't call them elites because they are the opposite of that...

they are leeches

treemagnet's picture

not yet - my greenhouse is just going up and the genset won't be hooked up for another month.....then let 'er rip!

Seer's picture

So much to do, so little time...

treemagnet's picture

you got that right - I've been spending alot of time at and learning loads of shit.  great place with alot more civility and courtesy....of course, this is fight club....

Seer's picture

Good that you're digging in the right places :-)  I didn't get exposed to Martenson until a long time after I'd seen the light: but, he's really good at presenting it all.

I'd offer that the best bit of wisdom is that one should look more to BE than at what others are or are not: spend energies on being what's right and let what's wrong take itself out of the game.

Yeah, I'm not a bit fan of fight club.  As I've noted on many occasions, I come here to see if people are getting "it."  And some of it is an attempt at conditioning (educating) folks in the hopes that they watch out for being programmed to scapegoat others (I've got a wife whose skin isn't white, and who is, at this time, only a "resident" to the US [though she hauls in income from outside the US]).

Have land... have water... have tractor... have financial position reasonably hedged (thanks to years of frugality [no inheritance, no lottery, no social-climber income)... garden is underway... animals coming.  Friends welcome.  Help and get fed, all else get lead...

Dr. Impossible's picture

"spend energies on being what's right and let what's wrong take itself out of the game"


your whole post isn't just wisdom...but genius in words...thats exactly how these battles will be won.

"And some of it is an attempt at conditioning (educating) folks in the hopes that they watch out for being programmed" 

KNOWLEDGE IS Seer...may be the biggest, badest fighter here, if you understand employing what you have spread in this post.