Is QE2 A Stealthy $90 Billion Gifting Scheme To The Primary Dealers?

Tyler Durden's picture

We have previously discussed how due to the inability to know at what price (par or market) the Fed is buying back bonds from the Primary Dealers, there is a distinct possibility that due to the par-market difference, especially with many CUSIPs trading near record prices over par, the Fed may be implicitly letting PDs pocket the market-to-notional difference. The total, as shown below, could amount to over $40 billion. Furthermore, by avoiding the tight spread of on the run bonds, the Fed is effectively allowing PDs to pocket a huge bid/offer spread, which assuming a total size of ~$800 billion (low estimate) of all USTs bought over the (initial) life of QE2, aka QE2.5 and higher pre-extensions, amounts to $50 billion over the next 8 months. Since the money paid out is certainly not that of Brian Sack, but of the US taxpayers, to which the FRBNY has repeatedly demonstrated it has no fiduciary obligation, one can see why it is prudent to ask just how much leakage is occurring as the Fed is monetizing. Surely the Chairman can see why at a time when Wall Street is about to pocket $150 billion in bonuses, America can be a little concerned with the possibility that QE2 in addition to being a blatant debt monetization scheme, is also a direct taxpayer funding mechanism to the Primary Dealers. We hope Congressman Paul will demand an answer to the these questions at first opportunity.

John Lohman explains in detail.

When the Fed is finished playing 68 with the primary dealers (where the Fed blows the PDs and the PDs “owe ‘em one”), perhaps they can answer two quick questions.

According to the FRBNY’s website, prices for the securities purchased in today’s POMO will be released at 2:00 PM on December 10th.  In the meantime, an approximation of what was actually spent can be found by taking an average (using one minute intervals) of prices from 10:42 until 11:30.  As shown in the table below, almost a half billion dollars more was pumped into the market than was revealed in the par amount.  So, query number one: does the “$600 billion” refer to par or market value?  Since it’s not clear on their website, one is left to assume that they consider $40 billion  to be chump change.

Query number two:  why was the on-the-run 5 year (1 ¼ Oct 15) only 2% of the total operation?  It trades with a 1/64th bid/ask versus every other security purchased which is quoted with a 2/32nd bid/ask (per Bloomberg).  The result, when applied to the total operation of $800 billion, amounts to a transfer of roughly $50 billion dollars in commissions directly to the primary dealers (final table).  So, perhaps question two should be rephrased:  Why not just drop the pretense and absorb every Treasury auction directly for the next 8 months?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
jeff montanye's picture

lovely video.  particularly like their pronunciation of bernanke (rhymes with th'r bank, whirr clank, sure crank, fur dank, fer hank, sir lank, cl'r mank, cur rank, dlr tank and pure wank.

Money Squid's picture

Ahhh ha ha ha ha ha. I laughed at how funny it was, then almost cried while I was laughing because it is so sad that this is really the way it is.

Captain Obviousness's picture

Thanks for that video - hilarious.  The deadpan voices are perfect.

sgt_doom's picture

Yes.....the answer is Yes.

Oligarchs Gone Wild's picture

Introducing:  "The Ben Bernake" and "The Goman Sachs" in an episode of the twilight zone.  Yep.  Bring the change. Some kind of nightmare.


traderjoe's picture

Excellent video. "Last vestiges of failed economic empires and banana republics." Funny, and sad at the same time. 

themosmitsos's picture

Because the pyramid is intended to liquify [ie enrich] the PDs & Banks back into solvency. Fat fucking chance w/RE about to take another 20% nosedive

unum mountaineer's picture

thought there was an earlier comment whilst pomo bs was going down. ..gotta take care of the bonuses first and foremost..oh well, preaching to the choir..what a farce! fuck a PD!

doolittlegeorge's picture

This is a very interesting thought actually.  If we are to believe the WSJ reporting (and by and large i do) the Fed has earned a 200 plus billion dollar profit for the taxpayers this year on its bond purchases this year.  as an "uber Fed bear" going into the Spring I did the proverbial "praise be the Man" that they didn't in fact blow up the bond market with this "QE and ZIRP scheme" and watched gladly as yields tumbled and prices rallied in our debt markets.  The thought that the Fed could "do a 2-fer" is simply too rich...even for this market.  As such if "the bankers are collecting some of this cabbage" is true--and i have more than few doubts that it is--it would seem to me "they're taking big losses not gains" with the current iteration of POMO. Indeed "if it were so easy to wheel around and fight the Fed now to make money" as the "follow the man" crowd may think they need to do now these same folks are in for a rude suprise on that score, too.  In short "the age of binary investing ended this week."  Now "you need to read a book or somethin'" if you want to make money--good starting point at least.  and that means the "words" not just "the pictures."

Ned Zeppelin's picture

By a $200 billion profit, you mean a paper profit, right? As in, not realized. 

sgt_doom's picture

Exactly and to:

 "This is a very interesting thought actually. If we are to believe the WSJ reporting (and by and large i do) the Fed has earned a 200 plus billion dollar profit for the taxpayers this year on its bond purchases this year."


If you mean securitized notes based on the worth of a worthless company, and stock assumed to have future value as today it might be considered little to zero, and to those bonds if they are mark-to-myth/model, as opposed to mark-to-market, well.....yes.

And my organ measures at 16 inches, when I use a very large magnifying glass to observe it.

dholliday's picture

That's if you consider the Fed being paid back in U.S. tax dollars a profit. It's a giant ponzi scheme and the sucker is the U.S. taxpayer.

Clampit's picture

If taxpayers are the suckers in all this, what do we call the taxnonpayers?

Hidetora's picture

...ahead of the curve...

johngaltfla's picture

Sounds to me like Payola to PIMPCO but then again, I just look at what they hold, the POMO and snicker. Because PIMPCO is in trouble when you start sniffing munis....

RockyRacoon's picture

Speaking of munis.... take a look at these eye-watering charts!

California Muni Bond Fund Shellacking

johngaltfla's picture

It is not just California. The Bond Buyer index was roasted as were several Florida based funds along with NY, CT, MA, NC, Az, etc.. Here ya go:

The Municide Slaughter Begins in the Municipal Bond Market
Bob's picture

The reality is that this was not contained in 2008 as I had hoped and instead the adoption of the “extend and pretend” strategy guaranteed that when it did finally impact the markets, the results wold be far worse. This week we finally witnessed the carnage of Municide at the whorehouse level known as Wall Street and that portends a tremendous amount of pain for those dependent on the alleged “safety” of municipal securities for income.

Very nice work, John!

johngaltfla's picture

Thanks Bob. I've been following this ticking time bomb for years. A wave of municipal defaults triggers the pension fund time bomb which triggers the next wave of bank derivative implosions which triggers the Fed coming out and saying "we're monetizing everything that is printed on paper" and we all wake up in Zimbabwe.

kato's picture

IF that is true, that is TREASON. Someone needs to GO TO JAIL.

101 years and counting's picture

that's a good one.  send the bankers to prison.  hilarious.  not while obama is the teleprompter in chief.

jeff montanye's picture

it's good they got him in just in time to save them from w's wrathful sword of justice.  watch b.o. try to get them off during the lame duck.  probably sign it christmas day while he almost bombs iran.  

Popo's picture

Unfortunately, the practice of stealing from the taxpayer and the direct gifting of friends is a well established game in Washington. We even give such practices incredibly obvious names, like "no bid contracts" - where no effort is made to conceal the direct gift-like nature of the payment. What is sad about Bernanke, is that he truly believes that the way to stimulate an economy is to gift banks. His very bizarre, and not widely held theory is that once banks are returned to solvency (ie: given billions of taxpayer dollars for free) these private, self-interested institutions will somehow perform a positive economic function, and the animal spirits of healthy growh will once again descend from the heavens onto American soil. The question of whether or not it will work does not have to be asked. The nature of banks and bankers is well established - and already we can easily see that the billions pumped into the free market are racing offshore in search of yield.

lolmaster's picture

is this even a question?

Ned Zeppelin's picture

Is QE2 A Stealthy $90 Billion Gifting Scheme To The Primary Dealers?


Bob's picture

I missed the stealth.  It seemed obvious on its face.  It's nice to start getting the details, however. 

Assetman's picture

I'm glad you are that observant, Bob. 

Because a good portion of the MSM has convinced a lot of us that QE2 was designed to solely fund the Treasury coffers-- and hence the budget deficit. 

In that sense, it's very good to have someone like Tyler consistently highlighting that the scam is ongoing.  And again, it's the biggest and most connected banks that receive the largest Fed-induced windalls.  They don't even need to be American banks to get the loot-- they just need to be a member of the Chosen Few.

The Fed needs to stop all this QE crap-- it's a very high risk, marginal reward sort of bet on the economy.  If you think it's bad that their actions are making external (foreign) enemies-- just wait until the breaking point is breached domestically.  If they are wrong and the U.S. gets sucked back into the vortex, there won't be any safe place to hide.

Bob's picture

It's just a "vision" or my intuition, but I expect that if we don't clean up our criminal mess the international community will effectively quarantine the US.  I cannot conceive of the rest of the world swallowing trillions of dollars of fraudulantly imposed losses.  It would suck to see our nation become in essence a prison colony where we would suffer an astronomically worse fate than the criminals our government now promotes and protects, but that would be (to the extent that we continue to pose as a democracy) our own fault. 

I know there are a million loose variables to be accounted for, but ultimately this is how I expect it to play out if we don't get our house in order.  Like I said, it's just a "vision." 

trav7777's picture

You act as if the world is not full of their own fraudulent losses.

Everyone around here acts as if China is this utopia of freemarket and profit and that Europe is somehow prudent and conservative.  It's all bullshit...all of them have blood all over their hands.

The SYSTEM requires private credit origination growth to fund industrial growth in the ROW.  The dollars flow through oil and back into bonds.

The notion by the EMs and Europe that a PERPETUAL trade surplus can be run is as wrong as the notion that deficits don't matter.  We could always point to growth in the future as making today's obligations not seem so onerous.  The future now, as I continue to repeat, holds CONTRACTION, not growth.

The entire SYSTEM of money is obsolete and a dangerous anachronism now.  But there is NO OTHER WAY for bankers and the banking clans to make free money unless they can parasite off the backs of growth.

I have no clue why people are surprised by what is occurring; Jefferson knew this system in the 1700s.  It is old.  Banks have PLENARY control over our money.  We cannot get it or use it without PAYING THEM INTEREST on it.

The reason why "credit" is called the lifeblood is because our system makes credit=money.

Gold and other real assets have an important future as this credit system collapses.  People will not be able to get credit which is essentially a promise of future production because nobody will respect promises of a growth future.  If credit continues to decline, in-existence assets with moneyness will end up the only "spendable" capital out there.

sgt_doom's picture

"It's just a "vision" or my intuition, but I expect that if we don't clean up our criminal mess the international community will effectively quarantine the US."

Dood, you by any chance ever heard of the IMF?

The Egmont Group?  And offshore finance centers and the Financial Intelligence Units established at them?

The Group of 30?  The Bretton Woods Committee?  The Trilateral Commission?  The Peterson Institute?  The Council on Foreign Relations?

And that National Bureau of Economic Research?

What do these all have in common?

International-frigging-membership, dood!

When China began purchasing American debt, what exactly did they purchase it with????

If they had bundles of money, why would Korporate AmeriKa ship all those jobs to the world's cheapest labor market for?

Ya gotta think these things through, dood!

Bob's picture

Yeah, I know about all of those things.  Really do.  But when all is said and done, I expect it to play out as much as possible along those abiguous national lines, multi-national interests of all types notwithstanding.   

But the "system" is so complex that there's no point in making the arguments, which is why it really is just an intuitive "vision." 

Mentaliusanything's picture

Is QE2 A Stealthy $90 Billion Gifting Scheme To The Primary Dealers?

Is a one legged duck going to swim in circles

Is a fishes ass watertight

TD really,.... it is criminally redundant. .... Don't ya  know Bonuses will flow and the poor will get a trickle down effect.You know like when you piss off a bridge onto the sheeple below.

merehuman's picture

you have a way with few words. Funny stuff. one legged duck. Haha

Cdad's picture

The question the FED giving money to bail out banks...again?  I'm going to go ahead with the answer yes.

After all, the walls around the enclaves these banksters will soon slip into will need to be very high in order to keep them safe from the torches and pitch forks.  And those walls ain't cheap.


slaughterer's picture

The modern American has far more advanced incendiary devices and weaponry than torches and pitchforks these days.  At least, lets hope. 

Cdad's picture

Somehow, I think you missed my point.  I'm not sure...but somehow....

merehuman's picture

what nice words, pitch forks. No one is lifting a finger to the banks except those buying silver and gold and pulling their money out.

Fools still trade the monkey market, keeping the beast alive. 

slaughterer's picture

I get the feeling that the run-up in NFLX, AAPL, CME, FFIV, etc. was just a trick to lure the public to think that QE2 would pump their 401ks,  Reality is, it was a teaser for a rally that will not take place in the NYSE this winter.    As usual, mom and pop are left in a dark cinema: no "Rally Part 2" starring the leading stocks in their portfolio this winter.  QE2 funds diverted to other, less spectacular (and, if it all succeeds as planned, invisible) productions. 

LeftCoastRefugee's picture

Agreed. Since most of the PDs have squat for loan loss reserves the great foreclosure purge may be coming in 2011 or less likely principal write downs.