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An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility

Tyler Durden's picture


"Although the main interests of the Federal Reserve are macroeconomic in nature, well-functioning financial markets are ancillary to good economic performance. Conversely, financial instability can compromise economic growth and price stability. Because of this intimate connection with economic performance, the Federal Reserve has a clear interest in promoting the stability of financial markets."

 - Former Fed Governor Fred Mishkin, 2007


/ k'lat'r'l; k'latr'l/

something pledged as security for repayment of a loan.

Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

Readers who have been concerned with the moral hazard provided by the Fed's monetization of Treasury and Mortgage debt, should be doubly concerned by this Fed action which sent three key messages to Wall Street: i) it made sure that Primary Dealers would generate massive profits on risky assets as the Fed would provide the funding to acquire any and all stocks (keep in mind the cost of funding of the PDCF to primary dealers was negligible); ii) it tipped its hand as to the existence and modus operandi of the rumored "plunge protection team," iii) and it made clear that the much maligned, by none other than Chairman Bernanke, concept of "moral hazard" is the one and only systemically relevant doctrine as long as the Fed's Chairman is in control, and not subject to any auditing auspices. The fact that PDs used over $140 billion of taxpayer money within a few weeks of the program's expansion in September to fund what one can assume were exclusively equity purchases, demonstrates that the American financial system got the message.

The (Triparty) Repo System

Before we get into the details of the Fed's Primary Dealer Credit Facility, it is prudent to present the beating heart of the American financial system, more so than securitizations or money markets, all of which went into cardiac arrest on several occasions in 2008: the Triparty Repo system.

As the name implies, a triparty repo transaction involves three parties: a cash lender (the investor), a borrower that will provide collateral against the loan, and a triparty clearing bank. The triparty clearing bank provides cash and collateral custody accounts for parties to the repo deal and collateral management services. These services include ensuring that pledged collateral meets the cash lenders’ requirements, pricing collateral, ensuring collateral sufficiency, and moving cash and collateral between the parties’ accounts.

Both the investor and the borrower must have accounts at the clearing bank, and all three parties are bound by legal documentation called the triparty repo agreement. In the United States, there are two triparty clearing banks: the Bank of New York and J.P. Morgan Chase. One of the operational benefits of triparty repos is that, regardless of the term of the loan, the clearing bank unwinds the transaction each morning, returning the cash to the investor’s account and the collateral to the borrower’s account. Then at the end of the day, the borrower pledges qualifying collateral back to the deal, which once priced, determined as eligible, and deemed sufficient to meet the terms of the deal by the clearing bank, is moved to the investor’s account while the cash is placed in the borrower’s account. In this way, no specific collateral is committed for more than overnight. This arrangement allows borrowers to pledge whatever eligible collateral they have on hand each day, thus enabling them to manage their securities portfolios more effectively.

An important implication of this daily unwinding, however, is that the counterparty risk for the investor shifts from its repo counterparty to the triparty clearing bank, and the clearing bank becomes exposed to the borrower. Overnight, the cash investor has the borrower’s collateral in its account and the borrower has the cash. If the borrower defaults overnight— say, by filing for bankruptcy—the lender has the collateral in its account and thus is covered and the clearing bank is not affected. Once the collateral and cash are returned in the morning, however, the clearing bank, which has extended credit to the borrower to finance the original collateral purchase, becomes exposed to the borrower. Consequently, the clearing bank needs to determine each morning if it is comfortable accepting the exposure to the borrower that the reversal of the transaction will create.

As readers will recall, the reason why Jamie Dimon blew up in his letter to Barclay's John Varley and in fact threatened with litigation, is that the latter attempted to stuff JPMorgan, as the Lehman triparty clearing house, with about $7 billion in collateral for which Barclays had suddenly gotten buyers remorse and decided it had no desire for, after prices plunged in the days after the Lehman bankruptcy.

Triparty repos are a subset of the broader repo market. As the name implies, a repo is a simple transaction where the holder of a security obtains funds by selling that security to another market participant with the understanding that the security will be repurchased at a fixed price on some future date. Very much like a simple mortgage transaction, the seller is borrowing funds against the security, usually as a means of financing the original purchase of the security. The buyer is traditionally a pension fund, a money market mutual fund, or a bank, which makes what it assumes is a safe collateralized investment (using haircuts, more on that shortly), and in exchange it is paid a spread on the money forwarded. In today's economy most repos occur as triparty contracts, in which the clearing bank assesses the value of the collateral and imposes a haircut, or the difference between the estimated market value and a downside case for how much a lender can borrow. Logically, the size of the haircut reflects the collateral's riskiness. The following table which we presented previously discloses that haircuts determined by JPMorgan in the JPM/Lehman/Fed triparty repo. As one can see, the amount of haircut wiggle room is huge, and even when the taxpayer's money is on the hook for the full repo amount, the haircuts are still relatively tame. Yet if the fair value of the collateral is not properly determined for in a downside case, it pressures accelerated unwinds as banks are fully aware that what they have marked their securities making up their repos for an above FV. What results is a scramble for the exits as everyone attempts to unwind their repos first thereby causing a feedback loop where selling begets more selling, and the entire repo market grinds to a halt.

Why are haircuts an issue?

The repo market is huge. At its peak it was bigger than the Money Market. At the Bear Stearns collapse in March 2008, there was over $4.5 trillion in repos (contrast that to Money Markets which peaked at around $3.8 trillion), of which the bulk is in overnight repos (we will get into the maturity variation on repos in a second). The chart below indicates the phenomenal growth of the repo system, as the banking system glutted itself on free and excessive credit over the past decade. From 1997, through its peak just over ten years later, the amount of outstanding repos at Primary Dealers increased by over 400%!

A critical observation is that beginning in about 2005, the amount of overnight repos quickly overtook the term repo outstandings. Why is this relevant? As the share of overnight repos increased and hit nearly 75% in 2008, it created a significant duration funding risk.

The urgent shift to shorter term financing meant that much more of the Primary Dealers' funding had to be rolled each day, at terms satisfactory to the clearing bank. With loans coming due quickly, in a downward asset price spiral, dealers have to scramble to raise capital necessary to pay back creditors. Coupled with lenders tightening credit standards and suddenly imposing larger haircuts on loans (compare the Lehman to Fed haircuts above), and it become immediately obvious how the vicious cycle of deleveraging can accelerate without any natural breaking mechanism. In fact, a staggering $2 trillion worth of repos were extinguished in just over a year between the repo peak of $4.5 trillion in March 2008 and the latest reading of $2.5 trillion in July 2009.

A last side-effect of the credit bubble, was the increasing use of subpar and illiquid securities to make up the collateral of repo transactions. With only so many quality securities outstanding, banks found themselves scratching their heads how to legally continue the providing cheap credit against worse and worse assets. What resulted was an explosion in toxic junk backing repo agreements. In fact, according to estimates, "less liquid" collateral hit almost 60% of all repos at the peak in early 2009.

The deterioration in underlying collateral quality made the subsequent repo implosion a virtual certainty. Originally focused on the highest quality collateral - Treasurys and Agency debt (ironically, Agencies and MBS are not more shunned by the entire investing community than CCC-rated HY paper, compliments of the Fed's market intervention efforts), by 2008 repos were using junk bonds, whole loans, trust receipts and even equities for collateral purposes. A side effect of more distressed collateral is less liquidity, and of course, when one most needs access to liquidity, i.e., unwinds of distressed positions, is when the liquidity is gone: in the event of the guaranteed crisis which the Federal Reserve completely failed to anticipate, the selling of illiquid securities would take time and occur and major losses to lenders.

The crisis

The repo market hit an all time high days before Bear Stearns was expected to file for bankruptcy, and then froze. In the first week of March 2008, liquidity in the repo market became strained. Creditors were worried not just about extended counterparty risk, but also about the actual creditworthiness of the collateral posted in repos: for the first time ever the banking system was forced to look at not just its own balance sheet, but those of competitors, and recoiled at what it saw. An immediate escalation saw repo haircuts increase dramatically, with the one security impacted the most being mortgage-backed securities for obvious reasons, but even traditionally safe securities such as Treasurys saw their haircuts grow substantially.

As the spike in haircuts forced dealers to shun the repo market entirely, they turned to other sources of short-term funding, namely the Eurodollar market (LIBOR). While the LIBOR market did not become the go to conduit for short-term arrangements during the Bear debacle, following the bankruptcy of Lehman Brothers all repo bets were off and dealers scrambled to satisfy their near-terms funding needs using LIBOR. The Resulting spike in the LIBOR rate can be seen in the chart below. Once 3M LIBOR was at about 5%, even the Eurodollar market was no longer attractive, leaving the only other option: massive asset firesales.

And here is the liquidity crunch in its full flow-chart glory:

  1. If can not obtain short-term (overnight or term) funding in repo market, go to Eurodollar market
  2. If can not obtain short-term funding in Eurodollar market (LIBOR), go to asset sales
  3. If asset sales are impossible due to lack bids, illiquid markets, and collateral consists of toxic MBS and CCC-rated junk bonds, yet margin calls are streaming and repo counterparties are demanding their cash back, go to bankruptcy
  4. File for bankruptcy

This would be natural chain of events in a normal capitalist country. However, America in times of stress is anything but - which is why enter 3.5 (after 3 and before 4): the Federal Reserve. What the Fed did was to basically extend credit, first to Bear Stearns (through JP Morgan which ended up acquiring Bear's toxic asset mess, now better known as Maiden Lane as it continues to reside on the Fed's balance sheet), and second to Lehman Brothers (here JPMorgan was not the ultimate beneficiary of the "good bank," and instead it was merely the clearing agent of the triparty repo which had a very nervous Fed on one side, stuck with nearly $70 billion in worthless securities consisting of anything from defaulted CRE whole loans, to stock in hundreds of bankrupt companies.

Keep in mind this is not the first time the Fed has found itself in this situation: in 1998, when LTCM blew up, it was a dress rehearsal to the dot, along with the same feedback-loop driven evaporation of liquidity, as haircuts collapsed and nobody wanted to be on contingent to anyone else making rash decision. Yet there was one notable difference between 1998 and 2008: roughly $3.5 trillion (or 350% more) in outstanding repos: a number equally to about 30% of the US GDP, and a number sufficient to bring down the entire financial ponzi house of cards. Enter the Federal Reserve and the doctrine of encouraged moral hazard.

The Primary Dealer Credit Facility

On March 16, 2008, finding itself in a quandary as to how to unclog frozen repo markets, the Federal Reserve Board announced the Primary Dealer Credit Facility. Most notably from the press release is the disclosure on collateral: "Credit extended to primary dealers under this facility may be
collateralized by a broad range of investment-grade debt securities." Note: not junk bonds, equities or any other toxic trash. At least at this point the Fed, while acting to preserve liquidity, still retained some semblance of fiduciary responsibility to the U.S. taxpayer.

A formulaic definition of the PDCF is provided below:

The PDCF program is based on the triparty repo legal and operational infrastructure that the Federal Reserve uses to conduct its repo operations. To access the PDCF, primary dealers communicate a demand for overnight funding to their clearing banks, typically by 5 p.m. ET on business days. The clearing bank verifies that a sufficient amount of eligible collateral has been pledged to the loan by the primary dealer and notifies the Federal Reserve Bank of New York accordingly. Once the New York Fed receives notice that a sufficient amount of margin-adjusted eligible collateral has been assigned to its account, it transfers the amount of the loan to the clearing bank for credit to the primary dealer.

The pledged collateral is valued by the clearing banks using vendor pricing services. Loans are limited to the amount of margin-adjusted eligible collateral pledged by the dealer and assigned to the New York Fed’s account at the clearing bank. While loans under the PDCF are collateralized, they are loans made under recourse; thus, the primary dealer is responsible for repayment even if the collateral loses value overnight.

PDCF loans made to primary dealers increase the total supply of reserves in the banking system, in the same way that discount window loans do. When the Federal Reserve’s Open Market Trading Desk was targeting a non-zero federal funds rate, the reserve impact of PDCF loans was offset using a number of tools, including, but not necessarily limited to, reverse repurchase agreements, outright sales or redemptions of Treasury securities, a reduction in the size of conventional repo transactions, and use of the authority to pay interest on reserves. However, when the FOMC reduced the target fed funds rate to a range from zero to 25 basis points, there was no longer any need to offset or “sterilize” these loans.

As it does for loans made to depository institutions through the discount window, the Federal Reserve makes information on PDCF borrowing available each Thursday, generally at 4:30 p.m. ET, through its Statistical Release H.4.1, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” The H.4.1 release reports the total amount of PDCF credit outstanding at the close of business on the previous business day as well as the average daily amount of credit outstanding for each week.

The legal authority to establish the PDCF is based on Section 13(3) of the Federal Reserve Act of 1913. Section 13(3), passed in 1932, allows the Federal Reserve to provide credit to individuals, partnerships, or corporations on an emergency basis. The central bank applied it to primary dealers for the purpose of establishing the PDCF.

So far so good: the Fed was concerned about maintaining liquidity and while one could find fault with some of its proposed haircuts on various security classes (see table above), overall due to the exclusion of risky assets, the Fed was mortgaging purchases of IG-rated collateral and above.

The twist

All through the spring and summer of 2008, the Fed was confident it had managed to glue the pieces together, and retain some semblance of stability. Then came that fateful weekend of September 13th about which so much has been written. In advance of the Lehman collapse, and what the Fed knew would quickly become a lock-up of not just money markets (which nearly occurred), but of the entire repo system, bringing practically all leveraged institutions to a halt and prompt liquidation, the Federal Reserve announced this little discussed amendment to the Primary Dealer Credit Facility:

For immediate release

The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities.

"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."

"We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Chairman Bernanke said.

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.

Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion, from a total of $125 billion. Amounts offered in Schedule 1 auctions will remain at a total of $50 billion. Thus, the total amount offered in the TSLF program will rise to $200 billion from $175 billion.

The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.

The bolded text is all you need to know to find the smoking gun for any and all allegations of "plunge protection" or however one wishes to frame the invisible market bid. On September 14th, 2008 the gloves cames off, when the Fed, stated in a press release no less, that it would provide virtually free taxpayer capital to banks so that they could go to the market and purchase equities! 

What was the response? In a word: astounding, as bank after bank rushed to purchase however many equities they needed, funded by the Federal Reserve, as PDCF lending skyrocketed from $0 to $150 in a matter of days (and $59.7 billion overnight on Wednesday, September 17th, a day before the Reserve Fund's breaking the buck caused a near-run on money market accounts). The demand for Fed backstopped equity purchasing was so large that borrowings under the costless PDCF promptly surpassed those of the Fed's actual Discount Window which did not go much higher than $100 billion in the days after the Lehman bankruptcy.


Gradually the use of the Primary Dealer Credit Facility moderated and around April of 2009 there were no additional borrowings on the program. However, by this time, none more were needed, as banks did not need to use the PDCF-intermediated mechanism for the Fed to purchase stocks. Beginning in March 2009, the Fed was now running the capital markets directly, by pushing prices of "riskless" assets ever higher through its $1.7 trillion Quantitative Easing program, thereby making it all too clear to PDs and other financial institutions that moral hazard was once again tolerated and encouraged, as the Fed in essence announced that banks should be acquiring risky assets, as it was the "purchaser of last resort" of riskless ones. Furthermore, by being a self-professed "lender of last resort" as well, providing a perpetual backstop for an indirect way to bid up equities at a 50 bps funding cost, the Federal Reserve has now managed to singlehandedly take over the entire capital market.

With regards to moral hazard, the Fed had this to say with respect to whether it was encouraging this phenomenon by the promotion of the PDCF:

"Concerns have been raised that the PDCF, by offering primary dealers a liquidity backstop, encourages risky behavior. In this view, the facility effectively invites primary dealers to delay raising equity because they can instead borrow from the Federal Reserve. These “moral hazard” issues are similar to those that arise in the context of emergency lending to banks. The countervailing view, however, is that the PDCF functions to protect prudently managed institutions from the damaging consequences of the risks taken by highly leveraged firms. In the period following the Bear Stearns crisis and again after the collapse of Lehman Brothers, the liquidity provided by the PDCF helped reduce the spillover of distress to more conservatively managed firms by enabling these firms to maintain their securities inventories and to fulfill their obligations to creditors and clients."

Alas, Mr. Bernanke, that has to be the weakest non-explanation explanation ever proffered by the Federal Reserve. Far from answering the question, it avoids it entirely by stating that the PDCF makes lives tolerable for those who, when the next credit implosion comes around, were not as greedy as the new Bears and the Lehmans of Credit Crunch v2. Yet in the meantime, PDs and banks should take full advantage of the Fed's market manipulating generosity courtesy of such middle-class devaluing constructs as Quantititve Easing, which all it does is kick the can down so the consequences of dealing with Wall Street's near collapse can be the next administration's problem, and the PDCF. We ask when, along with such other financial system crutches as TARP and TLGP, will the Fed finally eliminate the PDCF. After all the Fed has repeated many times that its sole purpose is to strengthen the US dollar and to work on behalf of America's hundreds of millions of taxpayers, not the thousands of kleptocrats working on Wall Street. It would be nice once in our lifetime to see the Fed actually put its (ironically, that would be our) money where its mouth is.

Lastly, the bigger question is when will Gramm-Leach-Bliley finally be repealed. As long as commercial banks and dealers are allowed to commingle their balance sheets, and as long as firms like Goldman which have yet to open even one deposit branch exist and have a riskless balance sheet courtesy of the American taxpayer, nothing will ever change. The Gramm-Leach-Bliley act from 1999 was the precursor for the current symptom of Too Big To Fail. And the administration's response to date has been to make the firms at the top, even more systematically critical, when it should be focusing only on how to disintermediate them from the very fabric of America's capital markets.

The CPDF provides a glimpse into the Fed's, up to now speculative, and hereby confirmed, willingness to (in)directly manipulate equity markets via its Primary Dealer network. If there is no risk associated with borrowing practically free taxpayer money, it is obvious that banks will manipulate stock prices to the point where nobody but other Primary Dealers who enjoy the same Fed backstop benefits will remain in the market. As more and more American retail and institutional investors realize the magnitude of the scam, the risk that equity markets will remain an isolated bubble in perpetuity where Primary Dealers simply play around with the Fed's excess capital, becomes tangible. And as long as there is no regulatory reform to commence the split of TBTF institutions, as long as financial system crutches persist and as long as the opportunity cost of being wrong is zero (and borne only by US taxpayers), US equity markets will continue to be a scam. Therefore, Zero Hedge advises all readers to immediately remove all their capital from the stock market, until such time as proactive steps are taken to remedy these numerous concerns, or alternatively suffer the consequences of not only another Fed inflated market bubble, but the even sadder consequences of its unwind.

h/t Richard

Primary data courtesy of the NY Fed


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Sun, 10/25/2009 - 17:12 | 110148 rhinotrader
rhinotrader's picture

I wish I could pledge my expired put options. That would be sweet.

Sun, 10/25/2009 - 23:55 | 110396 Anonymous
Anonymous's picture

you probably can and even earn interest on them....

Mon, 10/26/2009 - 00:02 | 110402 ZeroPower
ZeroPower's picture

Oct09 AIG?


Mon, 10/26/2009 - 00:58 | 110426 Anonymous
Anonymous's picture

Proof positive that there is no more duplicitous, dangerous counterparty that the Federal Reserve and its minions in Treasury and Primary Dealership.

As has been suspicioned throughout this false rally (as all fundamentals fell apart), it is only a prop job. This is not mom-n-pop investors making independent decisions to allocate securities to a portfolio in order to participate in America's wealth creation, but rather the desperate attempt by a failing government to KEEP UP APPEARANCES.

Morally bankrupt, and now financially bankrupt in everything but the numbers.

If ever one should hold IOUs of every form with suspicion it is now. They are all tainted, and none are free from the rampant manipulation of money masters.

They have destroyed the confidence of the people in their notes of conveyance, and in the institutions which should uphold systemic integrity.

It is gold now, and only gold. It is the only thing mostly removed from their predations.

If every man and woman were to read and comprehend this article, and understand its discovery of proof on PONZI USA, all the markets and the currency would collapse overnight.

Its prima fascia facts demand nothing else. Your promissory notes are only what the government condescends to allow them to be. They have no independent discoverable value of their own. It is all arbitrary. Your wealth, savings, estate depend upon the vagary of a capricious government for their day-to-day worth.

DUMP THEM ALL. GO TO GOLD. It only is defensible in a world wrapped in tentacles of intrigue.

Mon, 10/26/2009 - 21:29 | 111161 john bougerel
john bougerel's picture

To Ben Bernanke,

You could hardly be more disingenous calling primary dealers "prudently managed institutions" or "conservatively managed firms."


Ben, you are flat out becoming a liar.


Sun, 11/22/2009 - 06:59 | 138622 Anonymous
Anonymous's picture

Oh don't be so hard on old Bernanke. In fact if i were american, i'd be at least partially grateful to him. Personally i think he's trying to pull off a difficult hat-trick; ie, killing 3 birds with 1 stone:

Reduction of debt, a nasty one especially for China and japan. President Obama's bowing down to the jap emperor was probly his artful way of apologising. They deserve it, i think, that's a US$225 bil bow.

Providing liquidity to avert bank failures, that they succeeded, altho at a hefty price. Might be 2 yrs - or 10 - before the real estate markets recover enough for those sick institutions to relieve themselves of their overpriced assets. And until then, the FED has more or less committed itself to keeping them on life support. For a trader, that's the equivalent of holding a losing position on borrowed margin. Ouch!

Promoting public confidence, which i personally believe is the gist of it. The stock market rally, which improves public sentiments, could serve as catalyst for the economy at large. Whether this was an unintended consequence, or the FED's goal all along (like the article above suggests), is anyone's guess.

Last but not least, i wouldn't say the stock markets are in danger of crashing anytime soon. There's no need for mass liquidations when the cost of borrowing is negligible. And lest we forget, the yen carry trade lasted ~10 yrs. Yes the good times won't last indefinitely, but 10 yrs is a long time to twiddle one's thumbs.

And meanwhile, who is to say the hardy americans won't finally get their houses (pun unintended) in order and start producing wealth again?

Jsun, SG

Mon, 10/26/2009 - 01:30 | 110430 Spartacus
Spartacus's picture

I cann't believe that BERNANKE, just one man can take the whole of US of A for a ride to feed the Bank PIGS and, tell you what, all of you are just watching. Just watching, mate. Well, no wonder ,the public ,in general ,are morons.

Thank you Tyler. Great Piece of work. I always wondered without a huge guaranteee who is buying these craps.

NOW, is it possible that the general public KNOWS about the "BERNANKE PUT"? The retail investors  are already buying it seems.

Sun, 10/25/2009 - 17:21 | 110152 pooplagrande
pooplagrande's picture

Is this why Obama came out and advised the general public that "this was a good time to buy stocks!" in the spring time? Was this essentially the biggest insider trading scandal of all time? Man...wish I was more in the know there...should've listened to Obama when he tried to tell me that the game was fixed.

We live in an illusionary world with a little Wizard of Oz sitting behind a curtain at the Fed manipulating the markets.

This is #*&#&ing bull#&$&...

Mon, 10/26/2009 - 21:34 | 111168 john bougerel
john bougerel's picture

I remember that remark for how illegal it was for the President to recommend buyint stocks. He is not licensed to authorize or dispense finacial advise. And he didn't even put in the required disclaimer for doing so. He could be litigated on those grounds you know.


Just a thought if any lawyers want to take him to task.

Sun, 10/25/2009 - 20:58 | 110153 AN0NYM0US
AN0NYM0US's picture

PCDF was  modified Sept 14 2008 (Lehman) here are average daily figures for the PCDF during that period (note for the two months prior to that period the number was zero)

July-Sept 2008                  $0

w/e Sept 17, 2008             $20b

w/e Sept 24                      $88b

w/e Oct 1                         $147b

w/e Oct 8                         $134b

w/e Oct 29                        $87b

w/e Nov 5                         $77b

and from there it tailed off to less than $20b by March 2009 down to $12b in April 2009

w/e May 17 2009 to present $0

I haven't done a calc of the average daily figures for the one year period from September 2008 - 2009 but I suspect it would be in <$20b range and of course since the spring it has been zero.Moreover the Fed does not appear to be carrying any assets, worthless or otherwise in relation to the PCDF program; not to say that they aren't somewhere else on/off balance sheet.

In terms of the PCDF, except for the five or six month blip up to the (interim) March market bottom, dare I suggest the program seems to have done its job -- any takers?



Sun, 10/25/2009 - 18:04 | 110181 Anonymous
Anonymous's picture

Its essentially a shell game. But a shell came that allowed the sun to rise every morning. Its been my view that route taken has been in all of our own best interests. Even as my performance has suffered of the past months as I was stuck in Bear mode.

Kudos to Bernanke and Tim.

Yea so the banks made off like bandits whats new.

Sun, 10/25/2009 - 22:19 | 110344 Anonymous
Anonymous's picture

I must really be stupid. We are getting our panties in a wad over the fact that the FED is using the primary dealers to purchase stocks. It looks like the only purchases were made during the crash months from October to March 08. That trade would be a loser, no?

Someone please help me, what am I missing here?


Mon, 10/26/2009 - 00:03 | 110406 Anonymous
Anonymous's picture

pay your clue phone bill...

Mon, 10/26/2009 - 00:38 | 110419 Anonymous
Anonymous's picture


Thanks for the intelligent answer. I ask a valid question and you come up with "pay your clue phone bill". What is that supposed to mean? I only have a Masters in Business Economics and have been investing for 40 years. Unfortunately I am not one of the perfumed princes of Wall Street, so I don't get it. Is that too hard to understand?


Mon, 10/26/2009 - 09:18 | 110517 Fish Gone Bad
Fish Gone Bad's picture

I came across this graph a while ago: .  It does not look like the purchases are anywhere close to stopping.  I emailed the Fed months ago, and got a "These are high grade securities" answer.  Now we know they are not (as I suspected).  Now add that picture to the apparent capital flight: and that should give you a nightmare.

Hope this helps.

Mon, 10/26/2009 - 10:45 | 110554 jbeyer
jbeyer's picture

Turbo, you have to understand the TD fanboy mentality here.  One does not question the all-mighty Tyler Durden!  Everytime I ask a reasonable question like you do, I get a complete BS response, often from Tyler himself.

The other huge fault in Tyler's logic is that he is suggesting that these equities purchases are being backstopped by the Fed.  They aren't.  If collateral loses value overnight, the borrower loses the money, not the lender.  So they are giving a loan for next to nothing, but there is huge risk in levering up with equities.

Mon, 10/26/2009 - 11:45 | 110598 CD
CD's picture


Yes, most readers generally agree with TD on most points - it's a self-selecting bias of readership observed in all media, not just ZH. Regarding the backstop -- the backstop is the provision of nearly unlimited liquidity itself. The provision of the "cash" (and presumably tacit or concrete understanding between the players mentioned that this will continue) is the "guarantee" as those with access to the capital are racing each other to produce the maximum results possible. Not an actual guarantee, but a self-reinforcing feedback loop. Wasn't the point that shares of companies were previously not considered secure enough to qualify as collateral for preferential Fed loans, but became so as a response to the liquidity crisis? As to risk - well, what happened when these banks last over-leveraged with hugely risky investments and stood liable to lose unthinkable sums of shareholder money?


Mon, 10/26/2009 - 12:09 | 110616 jbeyer
jbeyer's picture

CD, I agree that the backstop is a liquidity backstop. But the way I read parts of the piece, TD implies to those who don't understand the true mechanics that the backstop was a backstop against losses. And there is an enermous difference between the two.

Another bone of contention: TD says, "In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent." How is that the case? The Fed provides liquidity and should the PDs purchase equities, they do so. But the fact that the Fed provides liquidity will not induce the PDs to purchase equities.

But TD never lets reason stand in the way of a good conspiracy theory...

Mon, 10/26/2009 - 12:16 | 110622 jbeyer
jbeyer's picture

TD also conflates the idea of the Fed loosening collateral requires to the pluge protection team.  Loosening collateral requirements for repos is a world away from direct equity market purchases.


Boo to Tyler duping his fanboys...


Give them the truth Tyler

Sun, 10/25/2009 - 17:27 | 110157 buzzsaw99
buzzsaw99's picture

Whatever, the fed is illegitimate. Let them play their games, I'm out.

Sun, 10/25/2009 - 17:28 | 110159 Gubbmint Cheese
Gubbmint Cheese's picture

this is a green shoot right? Markets up700 tomorrow?

Sun, 10/25/2009 - 17:33 | 110161 PD Quig
PD Quig's picture

You mean, there are still people who have money "invested" in equities? Everyone I know is either (very) short-term trading, in gold, in cash or some mix of the three.

Sun, 10/25/2009 - 17:41 | 110164 FischerBlack
FischerBlack's picture

Just plain awesome work. Great piece.

Sun, 10/25/2009 - 17:55 | 110165 agrotera
agrotera's picture

OK, this is GREAT, (thank you Tyler!), I hope that all good US citizens reading this article will print it, and send a letter to each of your senators telling them that this criminality can go on no longer.  Either they support S604 or they we will find younger and better candidates who are not afraid to go against the privately held monopoly Fed and all their agents who have successfully bought all candidates, and thereby enabled legislating their criminality--their gig is over.

Sun, 10/25/2009 - 18:05 | 110180 jortex
jortex's picture

You must be forgetting that our senators don't read.

Sun, 10/25/2009 - 19:26 | 110237 agrotera
agrotera's picture

Really! It is a terrible waste of time...any who aren't totally supporting S604 are OBVIOUSLY agents of the Fed cartel--that is why their whole mantra to "keep the fed independent" is such a terrible lie!  it is their positions and a symbiotic relationship that are completely dependent on the support of the Fed cartel in exchange for legislation to legalize the criminality that is sucking the life out of all Americans except the owners and members of the cartel.

Sun, 10/25/2009 - 21:52 | 110323 geopol
geopol's picture

Senators,,did you say senators?


The criminality you speak of is hived in the senate..... /Representatives.....


535 Commiditized temple monkeys scouring the ruins of America looking for bribes,, the whorehouse on on the hill where you can slide in a quarter and out comes the desired legislation.  When will we wake up?????

My high school civics teacher is a charlatan..


Mon, 10/26/2009 - 06:37 | 110484 ToNYC
ToNYC's picture

When the policy ends of turning out economic illiterates from ELEMENTARY School, perhaps we will have a prayer. The question, "What do you do when someone offers you something too good to be true?" is not asked and graded as a requirement to graduate to High School and or GED.

Sun, 10/25/2009 - 17:45 | 110167 Anonymous
Anonymous's picture

Thanks for a well written article. Either my vocabulary is improving or this article relied less on jargon than earlier one.

I really appreciate the efforts of those who post and comment on ZH.

Sun, 10/25/2009 - 17:49 | 110170 deadhead
deadhead's picture

This one is a masterpiece ZH.

Thank you for putting this together. 


Sun, 10/25/2009 - 17:50 | 110171 OrganicGeorge
OrganicGeorge's picture

does anyone have an update on this story from last year?

"WASHINGTON — The federal agency charged with backstopping pension benefits for 44 million Americans lost almost $5 billion from investments in stocks in the budget year that ended Sept. 30, the agency head acknowledged Friday.

The Pension Benefit Guarantee Corp. will lose 6 percent to 7 percent on its entire investment portfolio, PBGC Director Charles Millard told the House Education and Labor Committee. It lost a significantly higher percentage of its investments in equities."

How far until the PBGC breaks even?


Read more at:

Sun, 10/25/2009 - 19:21 | 110234 Rollerball
Rollerball's picture

Why do you think they nationalized GM and Chrysler?

Sun, 10/25/2009 - 17:54 | 110172 deadhead
deadhead's picture

For those that have never read the Executive Order creating the Working Group, here it is in its entirety:

Executive Order 12631--Working Group on Financial Markets

Source: The provisions of Executive Order 12631 of Mar. 18, 1988, appear at 53 FR 9421, 3 CFR, 1988 Comp., p. 559, unless otherwise noted.

By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee;
(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
(3) the Chairman of the Securities and Exchange Commission, or his designee; and
(4) the Chairman of the Commodity Futures Trading Commission, or her designee.
(b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.
Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and
(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.
(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes.

Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.
(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.
(c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.

Top of Page

Sun, 10/25/2009 - 17:59 | 110178 Anonymous
Anonymous's picture

Outstanding ZH. How anyone can have faith in this market is beyond me. This market run up is letting all the idiots get back in before they pull the rug out. Game over.

Sun, 10/25/2009 - 18:10 | 110192 Anonymous
Anonymous's picture

Its essentially a shell game. But a shell came that allowed the sun to rise every morning. Its been my view that route taken has been in all of our own best interests. Even as my performance has suffered of the past months as I was stuck in Bear mode.

Kudos to Bernanke and Tim.

Yea so the banks made off like bandits whats new.

Sun, 10/25/2009 - 18:11 | 110194 deadhead
deadhead's picture

capmark filed today.

Sun, 10/25/2009 - 18:15 | 110199 Anonymous
Anonymous's picture

Sun, 10/25/2009 - 18:12 | 110195 Anonymous
Anonymous's picture

ZH keeps knocking it out of the park.

Sun, 10/25/2009 - 18:17 | 110202 Anonymous
Anonymous's picture

I hope this gets a wider release beyond ZH. Excellent work Tyler.

Sun, 10/25/2009 - 18:21 | 110204 vicelord
vicelord's picture

I remember the joke being, all through January and February, that there were only two trades being made - shorting and covering your short.  What I want to know is, can you come up with any evidence to prove that, with the Government's full backing, the big boys (GS, JPM, STT, BLK et al) were allowed to collude and short the market to the brink of oblivion?  I'm sorry, but looking back on it now, it all seemed a little too orchestrated for my tastes.  


And, if you COULD provide some evidence, would that be illegal?  Would it have been lawful for these banks to have said to Bernanke and Geithner that, "We have to short the market down to 666 on the S&P in order to bring it back up, and we're gonna use taxpayer money to do it"?  


And then use taxpayer money to burn every short position out there up to a specific date?  (In this case it would've been May 8th - 2 months almost to the day.)  Maybe my tinfoil hat is on a little too tight, but I swear it all came off a little too perfect.  

Sun, 10/25/2009 - 19:35 | 110245 deadhead
deadhead's picture

there are those that say it started when cox okayed blowing out the uptick rule.

also, denninger has written that the slosh was yanked hard last fall.

Sun, 10/25/2009 - 21:33 | 110311 Anonymous
Anonymous's picture

Gents, DH,

Can somebody explain the sloshing to me ?

I understood decreasing slosh to be decreasing lquidity and therefore decreasing doesn't seem to add up though when I run the 2009 report in the link below...450bn to 150bn, from march to october.

Reports can be found here :

Tnx, Bas.

Sun, 10/25/2009 - 21:15 | 110299 agrotera
agrotera's picture

AIG's counterparty list came out in February or March, but to really get a picture, it would be necessary to know every party that held CDS's on Lehman--if Paulson/Bernake's decision not to give Lehman a 6 billion bridge loan could ever be layered over the CDS's looming on the death of Lehman, it would be clear that this refusal to help Lehman was based on a wish to rid the market of GS's biggest competitor, while giving all those betting on the Lehman death a win--they damn well knew that that was the biggest bet out there and that AIG was the biggest writer of the CDS's--and the immediate free cash that went to AIG is more evidence of this coup d'etat....although i didn't vote for Obama, i was hoping i was wrong and that he would come in and ask for an investigation of paulson and bernake's decisions--instead the whole administration nominates the two for men of the year--this is like al capone days or like we live in "gotham city" as a nation, and batman hasn't yet taken any of the criminals down--and who will batman be, tyler mayber? I think batman will be all the good watchdogs out there coming together and asking the public to join in doing something to put in jail and take out of power, our corrupt legislators that legalize the criminality of the privately held federal reserve cartel.

Sun, 10/25/2009 - 23:15 | 110381 Anonymous
Anonymous's picture

I think we just have to put in non-financial jargon for people to understand how egregious this behavior is.

So here's my example.

Let's say a local business man owns a concrete plant, and he has two other competitors in town...they are pretty much it because nobody else outside the metro area can practically ship wet concrete into his market. Building a whole new plant that will take years to compete, and is risky, high buck play, so big barriers of entry.

So greedy concrete man decides to go for broke in 2007, and targets his weakest compitetor. He knows they are pretty leveraged up having just upgraded their plant with state of the art equipment while the construction business is clearly on the decline and it appears to be worsening. The fact that his business is also way in debt does not bother him as he is friends with the Governor and he has a plan.

First he takes out a huge life insurance policy on the sole owner of his targeted competitor concrete plant (I know this is illegal in real world but can't make analogy to financial markets without being allowed to do this.)

The thing is, he knows that the life insurance he's buying isn't really worth much if this competitor really dies, because the premiums he is paying on term life insurance on a 75 yr old guy that smokes are about $2/month and he knows this insurance company is selling insurance way to cheap to others also and that they are simply pocketing the premiums as more or less pure profits setting aside almost no reserves.

In fact, its worse. This insurance company lets anyone take out life insurance on anyone, including complete strangers. and they let different people take out insurance on the same person multiple times! So they really, really do not have the reserves to cover the death of one prominent person, because there would be so many people to pay besides the widow. Why this insurance company is allowed to do this in violation to all normal insurance regulations has something to do with the past several Governors feeling that the free market will police this type of stuff. And why, in a free market would the greedy concrete guy pay premiums to an insurer that obviously does not have the reserves to pay out? This is where the friend, the Governor comes in. Greedy concrete guy knows the markets are not so "free" of corruption and he likely can get the Gov to get the State to bail out this insurance company when his competitor dies, by saying something about teacher pensions being insured by same people or some such scary thing.

And then greedy concrete guy starts spreading rumor that his competitor is using inferior cement in his concrete and that is likely the reason a local school collapsed. He drops a libelous anonymous tip to a hot-headed, drunk, guilt-ridden general contractor that was put out of business by the school failure. And the general contractor goes and shoots the owner of the competitor concrete company.

So competitor is gone, that'll be a really good thing down the road for greedy concrete guy, but there's a wrinke because for some strange reason people have lost faith in concrete business in the town altogether because they find out that all the concrete companies were using the same, inferior cement. No one want to build a thing any more, or least not to whole new plants are built and new cement testing and regulations are brought in. So his cash flow goes to shit, has tons of debt, and he can't even sell his assets, as no one buy such tainted "goods", the concrete plant, and certainly not when it looks like no one will be buying concrete in the near future, even if they can be confident in cement, no one is freaking building anyway as construction economy keeps worsening.

So greedy concrete guy is thinking pay back is a bitch and he has some shady, Mafia type muscle coming after him for his debts, so he goes to Gov for help, explains he needs the life insurance payout for his dead competitor. Gov says you have talk to State legislature but I'll help. The go to state legislator and decided to go after the Dems, as they care about teacher pensions. They say all teachers will starve and worse yet, the Hells Angels pensions were dependent on this insurer also, and we have secret reports from the police they are armed and ready to kill state politicians for not regulating insurance company properly, they want their money or they want heads. The Gov, (who has also had a few threatening visits from concrete guys loan sharks) is so scared for his life, he even gets down on his knees and begs the Dem leader to bailout the insurance company. This, and the scare tactics, work on the spineless, rubes, the Dems. They even get Gov and Dems to come out and say cement is safe, the problem was at the dead guys plant that contaminated the cement, and to prove it to the publci, they put other plants concrete thru some crush tests, and state D.O.T. lab says it survived, all is cool.

When the local police chief starts sniffing around the about the reason other concrete guy was murdered, the Gov appoints fires him because he failed to protect concret guys life and he gives Chief job to an ambitious young detective who knows he is to kill homicide investigation.

The greedy concrete guy rejoices, he gets the whole insurance pay out, he has way less competition and there is way less "capacity" because the competitor plant is destroyed, not sold to another competitor. Also, the concrete business is back. To top it off, the home builders and commercial builders push for the govt to get building going again and insist they give money to concrete guys to buy new cement, which is real cheap right now.

Seems liek FBI does a fairly good job of catching behavior like this in "real" world as every 10-15 years most states have some building material supplier arrested for price fixing, or bribes to state officials or some such and afew of these guys in the Fed clinker keeps things honest for another 15 or so years.

Why is Wall Street so different?

Mon, 10/26/2009 - 06:42 | 110486 ToNYC
ToNYC's picture

Let Elliot Spitzer have his choice of mistresses and let him go back to work. I miss him coming to work in our building with the black car plates "NYC 4". A man's got to do what a man's got to do.


Sun, 10/25/2009 - 18:29 | 110207 jippie
jippie's picture

Great article.

Sun, 10/25/2009 - 18:29 | 110208 Anonymous
Anonymous's picture

Bernie Madoff attorney and accountant took a dive into the deep end of his pool...and did'nt come back up.
Did'nt he know chlorine is lethal to bacteria?

Sun, 10/25/2009 - 22:05 | 110329 geopol
geopol's picture

Will this never cease?,, And all along I thought shit floated. My high school physics teacher is a charlatan..

Sun, 10/25/2009 - 22:18 | 110343 CD
CD's picture

A terminal attack of conscience, or that of a truly desperately pissed-off ponzee...?

Sun, 10/25/2009 - 23:06 | 110377 FischerBlack
FischerBlack's picture

LOL, anon. Well said.

Sun, 10/25/2009 - 18:29 | 110209 Ruth
Ruth's picture

So this is why they didn't want to touch the credit agencies in the beginning, which is one problem, and the H.4.1. coming out on Thurs calculated Wed. night tells us why all emergencies were happening on  Wed. and blowing up by Friday, and the best reason to AUDIT THE FED!

(my meager misunderstandings of the situation are many, but this is truly telling of why the majority of markets are being manipulated.)

Thank you Tyler and Richard, excellent work as always!

PS. Rating agencies should earn their business on their reputation as any other business, and the only one I would trust at this point is Egan-Jones.

Sun, 10/25/2009 - 18:33 | 110212 time123
time123's picture

The going is good while they are purchasing. But the question is really for how long will they be able to do it? And what happens once they stop purchasing? Unless one can figure out the answers, it will be difficult to make money in the market.

One way to figure it out is just watch what the smart money is doing. You can do that by examining daily market timing signals. When they start flashing Sell signs, you know they are selling it. And when they start flashing Buy signals, you know they are buying it again.

I believe this is the only way to make money in the market. The Dow Jones Industrial Average being back to 10000 (where it started 10 years ago) is the prooof that stocks are t be traded, never to be owned for life. The timing signals is what guide me as to when to get in and when to get out.


P.S. I get my timing signals at


Sun, 10/25/2009 - 18:39 | 110214 dnarby
dnarby's picture

Anybody else see a problem with this?

If you're a retiree and you've got your money in stocks, you now *have to sell them for income*.  Because they sure aren't going to be paying dividends!

To pay out those you need profits, which come from earnings, which means you need sales..!  And if people aren't working, they aren't spending!!!


This is so fucked...  It's like it's the ultimate "Trickle Down Economics"!  These idiots really do believe the tail wags the dog.

Sun, 10/25/2009 - 21:53 | 110324 TumblingDice
TumblingDice's picture

a rhetorical question, I hope.

But yes, it is as if they decided to make dividents payable exclusively to bankrupt banks. I think their logic is that after the banks have recapitalized their reserves the dividends will again be payable to everyone because the banks will be able to lend out money to produce them.

I think it all goes back to the theory that "the banks support the economy" and not the other way around. But then again, if we were to try the wicked bottom up approach, with focus on the dividends for everyone, so that the banks recapitalize through a rising tide...that would bring about rampant inflation, and Ben Bernanke certainly doesn't want that.

Mon, 10/26/2009 - 01:54 | 110441 dnarby
dnarby's picture

There's going to be inflation any way you slice it anway.

And the bottom up approach would have easily worked.  Here's how:

Give everybody their portion of the bailout/stimulus to do with as they please as a cash payout, with one condition:  If you have DEBT, you must use your portion to PAY OFF that debt.

Banks get their money, responsible people are rewarded, problem solved...  At least until the bill comes due.  But then everyone is in better shape to pay that bill, as opposed to how we are now.

We are so fucked!  Unless we hit the reset button, which I don't think is avoidable at this point.

Sun, 10/25/2009 - 18:43 | 110217 Fritz
Fritz's picture



Sun, 10/25/2009 - 18:44 | 110218 Cistercian
Cistercian's picture

 Superb work Tyler.This article is further proof of the relevance and critical importance of Zero Hedge.You totally rock!

  Thank you so much...and props to Marla for her great articles of late!

Sun, 10/25/2009 - 18:46 | 110219 Unscarred
Unscarred's picture

Great post Tyler.  Thank you.

Sun, 10/25/2009 - 18:47 | 110220 vicelord
vicelord's picture

I think the Government is will to do anything, incur any moral hazard, break any law, in order to keep the market afloat.  The can't afford to let an entire generation's 401K's go to 0.  They just can't.  They can barely keep S.S. solvent - you really think they can risk letting the boomer's retirement vehicles get crushed any more than they already have?  I think that was the justification for whatever it was they did leading up to March and then the Great Short Squeeze of 2009 that's still going on to this very day.


But as for some "pulling of the rug" that a lot of guys on this forum have been calling for nearly every week since late April... it ain't gonna happen.  Unless there's some catastrophic global calamity beyond anyone's control - like another 9/11-type deal - they're going to continue to sink every taxpayer dollar they have into the market for as long as they have to in order to keep this bullshit going.  They've made a believer out of me.


Everyone keeps going back to the Great Depression, and lining up the charts and showing how similar they are and saying that it's just a matter of time and we're going back down UNDER 666 on the S&P next time.  Nonsense.  There's so much different now, so many things we didn't have back then in '32 that we have now (like HFT and Dark Pools and the Supplemental Liquidity Provider program, etc. etc.)


And then there's the little fact Tyler pointed out the other week when we hit 10K again on the DOW - it's not really 10K.  The 1st time we hit it, back in '99 - oil was @ $20 a barrel; gold was @ $300 an Oz.  So do you really think they're going to let the market crash all over again with commodities at the levels they're at?  I don't.  The most you'd be lucky to get at this point is DOW 9000.  I think a lot of people would feel a lot better about the whole rally if we DID go back t0 9000 on the DOW, and they know that.  So they may just give it to us.  Make the whole thing look a lot more believable.  

Sun, 10/25/2009 - 19:11 | 110229 RichardP
RichardP's picture

Serious question:  How long do you think the Fed can keep the market up through buying equities while no one is buying the products of the companies whose stock the Fed is trying to keep up?

Sun, 10/25/2009 - 19:30 | 110239 buzzsaw99
buzzsaw99's picture

Until the next election, and the next...

Sun, 10/25/2009 - 20:03 | 110257 Anonymous
Anonymous's picture

The only products the Fed is interested in are paper and ink. As long as they can get those 2 products, the Fed can print all the money it wants. I personally look forward to the Bernanke Million dollar note, I hope they put a smiley face on it.

Sun, 10/25/2009 - 20:20 | 110264 Rusty_Shackleford
Rusty_Shackleford's picture

With the power to create and disburse UNLIMITED frn's?


I say they can keep doing it until they are forced to stop.


Just think what can be done with the ability to purchase ANYTHING at ANY PRICE.


What hath FED wrought?

Mon, 10/26/2009 - 04:48 | 110470 Pondmaster
Pondmaster's picture

Vicelord -


Your market history needs a little tweak . 1929 Direct phone line to NYSE trading floors , by the VERY WEALTHY . Less Stock liquidity so pools then could pump and dump at will . There were hundreds of darker pools then . One man could corner a specific commodity . Read - "Reminiscences of a Stock Operator " -Edwin Lefevre - aka Jesse Livermore- Its an excellent primer on the wayback machine - and it works same way today !!

Mon, 10/26/2009 - 06:47 | 110489 ToNYC
ToNYC's picture

Just keep Jesse out of our bucket shop and things will get back to normal!!

Sun, 10/25/2009 - 18:55 | 110223 Hansel
Hansel's picture

Good work Tyler.  I doubt anything will change though and the Fed can continue on its path of dollar destruction to the detriment of the law abiding citizens of this nation.

Sun, 10/25/2009 - 22:56 | 110370 Pedro
Pedro's picture

Settle down, don't get so mad.  Remember, GS and JPM will still be wealthy as ever, and that is why the market exists in the first place.  Ahhh, I feel much better, don't you?

Sun, 10/25/2009 - 19:09 | 110228 Anonymous
Anonymous's picture

Although everyone on the "inside" knows all this, a writeup of this stuff in an understandable manner is very useful.

More of this kind of reporting is what ZH should be about.

Sun, 10/25/2009 - 19:13 | 110230 Lionhead
Lionhead's picture

Amazing story in the history of the USA. It took 1 year to piece together all the pieces of the puzzle. Well, it's just seen the light of day. Thanks to all that prepared this report. Perhaps the NYSE should remove that US flag in front of the Stock Exchange. What a joke........... Free markets??

Sun, 10/25/2009 - 19:31 | 110241 agrotera
agrotera's picture


Sun, 10/25/2009 - 20:21 | 110266 Rusty_Shackleford
Rusty_Shackleford's picture


Sun, 10/25/2009 - 20:49 | 110283 FischerBlack
FischerBlack's picture

If they won't take it down, maybe there's a patriot out there who will...

Mon, 10/26/2009 - 00:03 | 110407 Jim in MN
Jim in MN's picture

Where's that vampire squid coat of arms flag...that's the one they should fly

Sun, 10/25/2009 - 19:18 | 110231 Fritz
Fritz's picture


It is Japan v2.0

The Fed cannot unilaterally repeal the business cycle. The bad debt ultimately has to be destroyed and they know it.

But they can interfere just enough to slow down the deflationary process - which is where I think we are today.


Sun, 10/25/2009 - 19:19 | 110232 Jay
Jay's picture

Thanks TD and ZH for giving us more of the nuts and bolts of the process that we already knew was happening just by the signature of the stock moves.

Sun, 10/25/2009 - 19:20 | 110233 GoldmanSux
GoldmanSux's picture

I thought I had seen everything. My jaw has just hit the floor. Outstanding work!

Sun, 10/25/2009 - 19:22 | 110235 Careless Whisper
Careless Whisper's picture


Yes the repeal of Gramm-Leach is needed, but unfortunately our elected officials are not on that page. Here is a comment from the bizzaro world of Larry Summers.

"Just as in war, there are unintended victims so, too, in economic rescues, there are unintended beneficiaries," Mr. Summers said last week.




Sun, 10/25/2009 - 19:33 | 110242 agrotera
agrotera's picture

Larry sucks scum for scumsuckers.

Sun, 10/25/2009 - 19:38 | 110247 deadhead
deadhead's picture

I saw that Summers quote as well. 

The big lie is "unintended"....this was completely intended for the banks to make money.

call it stealth recapitalization (after the tarp candy was gone)

Sun, 10/25/2009 - 22:42 | 110358 JR
JR's picture

Larry Summers is a gift that just keeps on giving.

Mon, 10/26/2009 - 06:49 | 110490 ToNYC
ToNYC's picture

Summers is too clever by half, and rocks a World of his own making only he should be required to live in.

Sun, 10/25/2009 - 19:25 | 110236 Zombie Investor
Zombie Investor's picture

A remake of what is considered one of the best rock songs ever:

Bohemian Bankruptcy


Sun, 10/25/2009 - 21:25 | 110303 Careless Whisper
Careless Whisper's picture

Hard core. Loved it.

Sun, 10/25/2009 - 22:31 | 110349 Anonymous
Anonymous's picture

That was pure priceless. :)

Sun, 10/25/2009 - 19:31 | 110240 Racer
Racer's picture

Even Mervyn King is warning of moral hazard...

 "the Bank of England Governor warned that the support handed out by the Government had "created possibly the biggest moral hazard in history""

Sun, 10/25/2009 - 19:34 | 110243 Racer
Racer's picture

Great article and ZH keep up the excellent work to expose the scandal that has been created and is continuing with Fed and government support

Sun, 10/25/2009 - 19:36 | 110246 agrotera
agrotera's picture

Moral hazard was a very convenient manipulation tool to sway the masses into believing that paulson and bernake were working on behalf of the US Citizens to let Lehman go down, to put the owners of Lehman CDS's and LEH shorts in a little better spot while they got quick bankholding status and waited on their serving of the TARP legalized criminally obtained feast.

Sun, 10/25/2009 - 19:48 | 110253 whoopsing
whoopsing's picture

Thank's Tyler

Sun, 10/25/2009 - 20:17 | 110261 Anonymous
Anonymous's picture

Thanks for extracting the truth from the tangle!

Sun, 10/25/2009 - 20:27 | 110269 PolishHammer
PolishHammer's picture

Where to move out of the U/S?  Let's say you have a stash of gold, where do you go with it?

Mon, 10/26/2009 - 00:46 | 110422 Pizza Delivery Man
Pizza Delivery Man's picture

Wherever you want.

Australia has my vote.

Sun, 10/25/2009 - 20:36 | 110277 Anonymous
Anonymous's picture

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

Not that anyone here needs further convincing, but this video will make you want to vomit. Truly remarkable.

Sun, 10/25/2009 - 20:41 | 110279 Anonymous
Anonymous's picture

Not that anyone here needs further convincing, but this video may cause you to vomit. Truly remarkable, remarkably true.

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

Sun, 10/25/2009 - 20:41 | 110280 Anonymous
Anonymous's picture

For my feelings on the Federal Reserve, let me quote a young lady I heard (decades ago now) on a city bus in downtown Minneapolis: "motherfuckers 'round here make a motherfucker wanna hit a motherfucker in the motherfuckin' jaw"

Sun, 10/25/2009 - 20:46 | 110281 Anonymous
Anonymous's picture

I think you guys should try to publish this in a peer-reviewed journal.

Sun, 10/25/2009 - 20:49 | 110284 Agent Orange
Agent Orange's picture

This piece explains why the worst groups have led the rally in the US market. Dealers bought retailers, REITS, and banks and gave the sludge to the Fed as collateral. So, the bigger the POS, the more you bought to give to the Fed.


Sun, 10/25/2009 - 21:00 | 110287 AN0NYM0US
AN0NYM0US's picture

PCDF has been virtually  dormant (@ zero) since the market rally took hold.

Sun, 10/25/2009 - 21:02 | 110289 Dantzler
Dantzler's picture

Tyler - how much of a pain would it be to provide a .pdf version of critical posts like this one so that they can be virally archived and distibuted (with appropriate cite(s) of course) ?

Or is there a facile way to convert the original post?

Cheers and thank you for the content!

Sun, 10/25/2009 - 21:04 | 110291 jules from aus
jules from aus's picture

excellent - brilliant - and simply told...


as is so often the case with the seemingly chaotically complex, once the dust is allowed to settle and after a deep breath is taken, the explanation can typically be reduced to one or two simple reasons or causes

in this case very simply -- collateral


it just goes to show that finace can be made as incredibly complex as you wish to make it appear, but at the end of the day even the most complex structures rely upon the simplest building blocks - like collateral



Tyler, how do they award prizes to a pseudonym?


good luck


Sun, 10/25/2009 - 21:06 | 110293 deadhead
deadhead's picture

click ads now. thx.

Sun, 10/25/2009 - 21:08 | 110295 GetShorty
GetShorty's picture

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

<script type="text/javascript" src=""></script>

Not that anyone here needs further convincing, but this video may cause you to vomit.  Truly remarkable, and remarkably, true.


Sun, 10/25/2009 - 21:10 | 110296 GetShorty
GetShorty's picture


Sorry, here is the address.



Sun, 10/25/2009 - 22:51 | 110364 Careless Whisper
Careless Whisper's picture

dewd, that show was awesome. thanks. i was watching that and the yankee game at the same time. wow. derivitives are now 700 trillion and still no regulations, and fat larry is in the white house. tick tock tick tock

Sun, 10/25/2009 - 21:13 | 110297 Anonymous
Anonymous's picture

Thanks for this in depth analysis.

Point taken on the Fed trying to extend credit to primary dealers during 2008. But if you look at the H.4.1 at the end of February 2008 the Fed held $725B of Treasury securities and at the end of August 2008 they held $475B, so they SOLD about $250B of Treasuries over this same time (reduces reserve balances!). So while the one hand of the Fed was trying to increase liquidity at the PDs via the PDCF the other hand of the Fed was making them buy $250B of Treasuries? No wonder it didnt work and led to the Lehman failure in September. It would be like you going to your bank because you need a critical short term loan and instead the bank FORCES you to buy a CD.

BTW the Fed can lend against used cars if it wants to.

Thanks again, this is some of the best detailed analysis Ive seen on this topic!

Sun, 10/25/2009 - 21:27 | 110305 AN0NYM0US
AN0NYM0US's picture

so are you saying the program did not work until they changed the rules on September 14, 2008? 

Sun, 10/25/2009 - 21:42 | 110316 Anonymous
Anonymous's picture

I'm sort of saying it looks like an accident waiting to have the same entities (Bear and Lehman) that are both PDs (that have to buy when the Fed says 'buy' to support interest rate policy) and they are also major IBs that 'came up short' and needed a loan.
When the crisis hit everyone runs to Treasuries and drives the rates down and the Fed needs the PDs to step up and buy (from the Fed) to support the policy rate, sounds like this is exactly what Bear and Lehman didnt need and may have contributed.
Now the Fed has the ablilty to set policy rates directly by paying interest on excess reserve balances at the Fed and this will be avoided in the future, too bad for Bear and Lehman that they didnt have that capability all along.

Sun, 10/25/2009 - 23:44 | 110391 SWRichmond
SWRichmond's picture

I think this is the period where the Fed was swapping Treasuries for "other" securities in an effort to enhance the "quality" of banks' balance sheets.  I don't believe the Fed was actually selling Treauries.

Mon, 10/26/2009 - 08:08 | 110503 Anonymous
Anonymous's picture

At the time the Fed was above 0% interest rate and to support that policy they probably had to sell Treasuries as excess reserve balances were being created due to the special liquidity programs (puts downward pressure on interest rates). The method for the Fed to sell Treasuries is thru PDs.

You can see how this wouldnt work as the same banks that needed excess liquidity were the same ones the Fed needed to rely upon to buy Treasuries. I think they saw how this wasnt working and eventually went to Congress and got the ability to pay interest at a fiat rate directly on excess reserve balances and now do not rely upon PDs and open market operations to set the overnight policy rate.

Now that the Fed doesnt need the Treasury market to operate in to conduct open market operations in rate setting, does anyone else think they and Treasury may propose legislation to end Treasury issuance by the Govt as Treasuries are no longer needed for this their main purpose for existence?

Sun, 10/25/2009 - 21:14 | 110298 Bubby BankenStein
Bubby BankenStein's picture

Analysis like this is what is needed to shine the light on these "Operations".

I'm confident that this work, or some derivative of it, will be injected into the body politik.

It is a disgrace to America that these reckless greedy bastards running this country have pushed the envelope to the point of "screwing the pooch".  That they can eject for a soft landing while the rest burn is outrageous.

Anyone who thinks knows this will end badly.

Thank you for the outstanding work.  I sincerely hope that this report will result in more pressure for HR 1207, although I suspect anything with bite will be vetoed.

The fact remains that our liberty and standard of living will continue to decline unless this circle is broken. 

Sun, 10/25/2009 - 21:26 | 110301 deadhead
deadhead's picture

A preview of the new collateral requirements of the Fed:


Russian Banks Count Pigs, Lingerie as Collateral From Debtors
Sun, 10/25/2009 - 23:59 | 110399 Jim in MN
Jim in MN's picture

Bacon and boobs, they're doing a lot better than we are.  We get empty shopping malls.  Boring.

Sun, 10/25/2009 - 21:29 | 110306 max2205
max2205's picture

This is all great but why aren't GS JPM ect filing with the SEC on >5%,ownership. Are they exempt? Imagine JPM owns 85% of IBM now till eternity

TD, quit calling the market. It's not why you are doing this.

Sun, 10/25/2009 - 22:00 | 110326 agrotera
agrotera's picture

I don't think he is really calling the market, he is just letting the record state that we don't have a free market--and all who want to play in it, just know it ain't a free picking up pennies in front of a gargantuan bulldozer or something like that?

Sun, 10/25/2009 - 23:27 | 110386 Anonymous
Anonymous's picture

I think you meant nickels.

Sun, 10/25/2009 - 21:39 | 110315 Cursive
Cursive's picture

The Federal Reserve Notes in my pocket are now backed by the equity of bankrupt companies.  Excellent work, ZH, but don't expect any Nobels or Pulitzers.

Sun, 10/25/2009 - 21:46 | 110317 Lothar the Rott...
Lothar the Rottweiler's picture

My disbursement date is Nov. 1... I hope like hell I make it after not pulling everything out the spring/summer of 07... half is already gone and half will go to the jokers who orchestrated this but please please get me my check before the computer reads 0.

Sun, 10/25/2009 - 21:50 | 110318 AN0NYM0US
AN0NYM0US's picture

Since the market bottom in March what do you think the average daily figure has been for the PCDF that has been propping up the equity markets?





e)none of the above


answer (e) none of the above -


less than $3.5 billion from the PCDF has been propping up the equity markers since the March lows and since late May the answer would be Zero from the PCDF - the program has been essentially dormant for more than five months


Sun, 10/25/2009 - 22:15 | 110340 CD
CD's picture

AN0N, I think we get your point, but did you skip over the last section of the piece? The aim of the article seemed to be to illustrate the principle of the Fed's willingness, ability and decision to directly intervene in capital markets -- the "flavor" of intervention has shifted from PCDF to Treasury repurchase to MBS purchases (as far as I can tell) -- and may shift to other vehicles yet. The specific manner of the prop is perhaps less significant than the fact that it exists in the first place.

Mon, 10/26/2009 - 06:15 | 110479 Anonymous
Anonymous's picture

the indirect prop has been around for decades (see Heller 1989) that's not news nor is the Fed purchasing MBS.

Sun, 10/25/2009 - 22:09 | 110332 hardball22
hardball22's picture


Well expressed, well researched, commendable piece as always.

My only reservation with the whole scam is this: the cash loans extended for these triparty repos were settled/unwound every night by returning the collateral to the borrower and returning the cash to the lender.  As you said, these loans were recourse, and the total cash value had to be repaid, regardless of the intraday collateral fluctuation.

So, what picks the market off the mat and gets PDs participating?  Collusion btwn the Fed & PDs?  because when things were at the worst, I'm not sure if ailing banks would've been willing to risk equity exposure with a recourse kicker.


Sun, 10/25/2009 - 22:13 | 110338 Robb
Robb's picture

Speechless here. Amazing research.

Sun, 10/25/2009 - 22:45 | 110359 trillion_dollar...
trillion_dollar_deficit's picture

Tyler et al, I hope you're going to invest in some body guards tomorrow. Fantastic work.

Sun, 10/25/2009 - 22:45 | 110360 Oxytan
Oxytan's picture

This outstanding article is why I joined ZeroHedge!  But I have at least one question from the concluding sentence ...  I'm puzzled by the last part "until such time as proactive steps are taken to remedy these numerous concerns, or alternatively suffer the consequences of not only another Fed inflated market bubble, but the even sadder consequences of its unwind."

I bring this up because 1) I doubt that they will EVER endevour to remedy the situation 2) They can keep inflating without practical limit.  3) In the meantime what do I do with the stuff they give me in exchange for my hedges & equities?  As a few of you know the stuff they give us when we get out of the markets are either ones and zeroes in a bank somewhere, or pieces of paper with ink on them if we elect to convert the ones and zeroes to paper certificates of ones and zeroes. (Really frowned upon by banks these days) If I keep my stock certificates and hedges at least I own part of a business, don't I?

Now of course if the "club's" plan is to rinse again in the near future then you are right the stock certs will come out of the cycle "nationalised", and be worthless.  But then the game ends and I don't think they want the music to stop.  I'm obviously not a paperbug but I do see the certificate of a bona-fide corporation as being worth more than something that requires FIAT to work.  You know Tony, my mechanic;-)

Someone may point to gold and silver but again playing bad guy advocate could not the happy club members simply make it even more difficult to transact in anything but their currencies, even implementing the death penalty as was done in 1794 in France?  Interesting how that didn't work either BTW!

On my #2 point I think that this is perhaps the most intersting to dicusss.  How long can they keep this charade up?  Ha ha Charade we are!  (Credit to Pink Floyd)


Mon, 10/26/2009 - 02:41 | 110456 RichardP
RichardP's picture

Is your question similar to the one I asked above, paraphrased here:  "How long can the Fed keep the market up through buying equities while no one is buying the products of the companies whose stock the Fed is trying to keep up?"  That is, will the Fed be able to keep stock prices "better than expected" when the underlying companies start reporting sales approaching zero in their earnings reports?  Won't people see the discrepancy and start demanding answers at some point?



Mon, 10/26/2009 - 10:28 | 110541 Oxytan
Oxytan's picture

Yes Richard I didn't see an in depth analysis of the point you ask also, one worthy of Ty's article. 

I looked for an answer in historical precedent.  John Law's disaster is possibly the closest but this would only be appropriate if somehow the entire western way of life could be compared to the Mississippi Company bubble.  So when does the public at large or foreign flee the tent?

It seems to me that people keep playing the game even when it becomes absurd.  Why does the waiter tell the patron that he should have ordered two cups of coffee when he first sat down to avoid paying more for the 2nd cup later  (Hyperinflation - Germany 1922)

Sun, 10/25/2009 - 22:54 | 110366 FischerBlack
FischerBlack's picture

Mish just posted this vid of the California Treasurer unable to hide his frustration in front of the California legislature:

Mon, 10/26/2009 - 00:39 | 110420 Lux Fiat
Lux Fiat's picture

Fascinating video.  Wonder if any one in the legislature actually got it.  My new motto for the federal government (and most states) - "Do less, with less".

Mon, 10/26/2009 - 01:47 | 110436 CD
CD's picture

While I agree with many of the points expressed, that video seemed to be REALLY heavily edited, I mean to sub-sentence soundbite level. I am tempted to wonder about the broader context of what exactly was said.

Mon, 10/26/2009 - 10:34 | 110546 Lux Fiat
Lux Fiat's picture

Agreed.  It would be interesting to see the entire presentation, given the skewing (intentional or otherwise) that can come from editing. 

Didn't readily find a link to the entire talk online -if anyone does have one, please share. 

There is an article where he is soft-peddling his comments, somewhat -  He can't flat-out burn his political bridges, but I think that the youtube snippet, while focusing on the more dramatic moments, was probably pretty consistent with the underlying message.

I used to think that the phrase "So goes California, so goes the nation" was a curse.  This little tempest gives me a glimmer of hope.  I look forward to the day, hopefully much sooner than later, where the word "unsustainable" is regularly coupled with  "government benefits", "Medicare", and "Social Security" in the MSM as the prelude to starting a long-overdue, open national discussion.  A potentially career ending discussion for many politicians.  Hmm, it was a good dream while it lasted.

Sun, 10/25/2009 - 22:55 | 110369 Anonymous
Anonymous's picture

This is the Tony Danza of blog posts. Thanks!

Sun, 10/25/2009 - 23:00 | 110373 Anonymous
Anonymous's picture

How much of the market could the fed own without causing WW3? 100%? 50%? I mean, at what point would the bear side of the market come up and take it down?

Sun, 10/25/2009 - 23:01 | 110374 Anonymous
Anonymous's picture

(Awesome work!)

Sun, 10/25/2009 - 23:16 | 110382 Pedro
Pedro's picture

I feel the need to act.  I, however, am a very small time investor compared to most of you and I don't have the background knowledge to explain my position (I read the whole article and don't really understand the process clearly, but, from bits and pieces I just know it is not good).  All I know, is that this is reprehensible, and we aren't even close to understanding the magnitude to which the taxpayers are being robbed, the banks are getting wealthier with no risk attached to earning that wealth, and the free markets aren't free which is the most worrisome of all. 

If there is a low level job I can do let me know.

I am at least going to donate some money to this fabulous website.

Sun, 10/25/2009 - 23:52 | 110395 SWRichmond
SWRichmond's picture

Thank you for writing the obituary for U.S. capital markets.

Sun, 10/25/2009 - 23:56 | 110398 Jim in MN
Jim in MN's picture

Out-1929ing 1929.  Big Ben is a historian--of fraud. 

Well played.

Mon, 10/26/2009 - 00:01 | 110401 Anonymous
Anonymous's picture

this article wins the oscar.....not since the smoking gun gold manipulation articles has zh soared to such heights of coruscating glory....

although there is nothing new here to astute observers in terms of thesis, i was delightfully enlightened regarding the mechanics of the equities manipulation and the origins in the repo market....

give this article a pulitzer prize....

Mon, 10/26/2009 - 00:02 | 110405 Bolweevil
Bolweevil's picture


Mon, 10/26/2009 - 00:13 | 110414 Jim in MN
Jim in MN's picture

To be more our new research proves that the heist was in fact a while ago, most likely (based on timing) to be planned in earnest ahead of the last election but the trigger pulled with the elites of both factions in the know or at least neutralized by scary stories. 

Now the game is to manage the blowback.  I bet they lose this game and spin out.  After all, there are a lot of other countries involved, not just our Jolly Portly Middle Class.  Plus, the meta-point is that hubris and stupid-smarts always get their karmic comeuppance via system feedbacks and/or simple slaps in the face from angry people.  The fascination is in the details....and the hazard of collatoral damage (like the entire 'real' economy and my children's future...already badly damaged by these criminal lunatics).


Mon, 10/26/2009 - 00:41 | 110417 Pizza Delivery Man
Pizza Delivery Man's picture

Stunning, epic, inspiring; a piece of literature that should be read by every single American.

This should be mandatory reading for every economics class in every university around the country.

Thank you for the effort in bringing this topic to a publicly viewable venue.

Mon, 10/26/2009 - 01:01 | 110425 Brett in Manhattan
Brett in Manhattan's picture

Submitted by Tyler Durden on 10/25/2009 17:01 -0400 "the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding." "In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent."




Do I get a Gold Star for pointing this out in the previous thread?

by Brett in Manhattan on Sun, 10/25/2009 - 13:54 #110053 "I don't see why the fed would have to do this (buy stocks). By accepting equities as collateral, the Fed has already granted its member banks the ability to buy unlimited amounts of stock. JPM can buy stock, use it as collateral for a loan from the Fed, which can be used to buy more stock...rinse, repeat. Of course, the entire financial system is at the mercy of stock price fluctuations, but why sweat the small stuff?"



This is basically a variation of what the banks were doing with MBSs, except, now, the Fed is filling in for the money market funds and the banks are buying stocks instead of mortgages and MBSs.

Mon, 10/26/2009 - 02:15 | 110448 JR
JR's picture

You do, you do.  And as surely, this sharply focused writing by Tyler Durden, without peer, represents a milestone in the annals of U.S. financial history —a shot heard round the world putting to final rest the most blatant financial scam in all of history: the Federal Reserve System.

Mon, 10/26/2009 - 02:15 | 110449 bulldung
bulldung's picture

OK, I'll give you a gold star, especially for the summary JPM buys stocks that are collateral for more money to buy more stocks.

Mon, 10/26/2009 - 01:13 | 110429 Anonymous
Anonymous's picture

After enduring all the incursions on our liberties, on our future earnings, on the principles guiding our development of wealth, this article may equate to the shot heard round the world.

We have endured enough. We have witnessed enough abuse. If the banks, the Federal Reserve, the Federal Government defy liberty, defy propriety, and deny the future because of incompetence, corruption, and inability to bear consequence for their frequent errors over time, then the citizens must begin to rise up.

Put all liquid assets into Gold. Deny any lending institution complicit in this whole nefarious debacle your deposits and use of funds. Stand ready for greater acts of resistance if your governors cannot make remedy.

There is nothing more unfair than to execute the innocent for crimes of another party. Citizens' wealth will be destroyed attempting to make whole the premeditating malefactors whose risks gone wrong we are made to bear.

Mon, 10/26/2009 - 14:25 | 110737 JR
JR's picture

I’m sorry I stole your line accidentally above because I hadn’t yet read your post.  But I can never steal your writing.  In brevity and impact and eloquence, it takes its place amongst the finest wisdom in the annals of America’s recorded history.

Mon, 10/26/2009 - 01:57 | 110442 Apocalypse Now
Apocalypse Now's picture

Of course, the fed and TBTF banks (one in the same) taking over all assets with free money despite being insolvent was the hypothesis, we had many correct premises, but we lacked the mechanism.  The curtain has been pulled aside on the wizard of oz fed, the emperor has been found to be wearing no clothes, and you have solved the riddle wrapped in an enigma.

The banks and friends of the printing press have been gifted with inside information, who is going to write a check to all those that shorted the market based on fundamentals and the idea that the government and markets have promoted that the equity and bond markets are free?  We are not calling for the rug to be pulled out now, we are only asking to know the rules of the game and not have them change in the middle like the African countries rule of law or similar banana republics (solid law is what attracts capital, the opposite repels it and that is what is happening today).  If the markets do change, let us know (beyond "this might be a good time to invest for the long term") and protect citizens instead of helping Goldman loot our pockets.  This article basically states the fed can do anything it wants to do, and can change the markets direction whenever it wants - the conclusion is accurate that we should not invest in BB's whims and should focus business on small banks (let's hope the TBTF's don't bankrupt them).

Cheers, Bravo, I am literally standing and applauding right now - take a bow, and I'm looking forward to the encore!

Mon, 10/26/2009 - 02:47 | 110457 Anonymous
Anonymous's picture

awesome work, you cant find this stuff on Fox

Mon, 10/26/2009 - 03:04 | 110462 RichardP
RichardP's picture

Would any of what TD outlined in his well-written article have happened if the primary dealer banks had been allowed to fail at the outset?  How could the Fed have done what it has done without them?  And as was pointed out above, these actions by the Fed have allowed the sun to continue to rise daily for the last year.  I don't claim to be wise enough to know if this outcome is worse than what we would have ended up with by allowing the primary dealer banks to fail at the outset.  But I do think this is a wake-up call to get capitalism back to the community level where it belongs.  An old quote from college days comes to mind.  I don't remember the author's name:  "When the boats are built by the uncles of those who are to sail them, the boats will be seaworthy."


Mon, 10/26/2009 - 04:27 | 110468 nicholsong
nicholsong's picture

Thanks for the excellent encapsulation. It will be most helpful to spread this one around to my peers.

By the way, Chris Martenson wrote about this change to 23a back when it occurred in response to a comment from a reader who wrote:

On Sunday the Federal Reserve announced a number of modifications to its lending policies. Two changes are particularly disturbing.

First, the Fed will now allow investment banks to post equities as collateral in the Primary Dealer Credit Facility.

Now the purpose of collateral is to give the lender something to hold which is of known and reasonably stable value. Equities do not fit that definition. Ben Bernanke knows this full well but obviously doesn't care.

The second Fed action is more alarming: banks are now allowed to use depositor's [sic] money to fund the operations of their non-bank affiliates.

Your savings account is being used to prop up the trading operations of your bank's parent company, which not coincidentally is the source of the huge losses the industry has racked up this year.

And what happens when that deposit money goes up in smoke? Ah, yes, FDIC steps in and protects depositors. And who protects FDIC? Good question. Look in the mirror and you'll see the answer.

Look in the mirror, indeed.  You've got to hand it to them; they wave sockpuppets around on one hand to distract you while they pocket your child's piggybank with the other.

And how's that FDIC looking lately?  Haha!

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