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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?


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Fri, 11/12/2010 - 21:47 | 723942 Duuude
Fri, 11/12/2010 - 23:28 | 724138 jeff montanye
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.

Sat, 11/13/2010 - 02:27 | 724333 Money Squid
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.

Sat, 11/13/2010 - 13:35 | 724847 Captain Obviousness
Captain Obviousness's picture

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

Sat, 11/13/2010 - 16:34 | 725151 sgt_doom
sgt_doom's picture

Yes.....the answer is Yes.

Fri, 11/12/2010 - 21:59 | 723966 Oligarchs Gone Wild
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.


Sat, 11/13/2010 - 00:11 | 724210 traderjoe
traderjoe's picture

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

Fri, 11/12/2010 - 21:58 | 723978 themosmitsos
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

Fri, 11/12/2010 - 21:58 | 723979 Misean
Misean's picture

Sacre Bleu!

Fri, 11/12/2010 - 22:01 | 723984 unum mountaineer
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!

Fri, 11/12/2010 - 22:01 | 723986 doolittlegeorge
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."

Fri, 11/12/2010 - 22:11 | 724007 Ned Zeppelin
Ned Zeppelin's picture

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

Sat, 11/13/2010 - 16:39 | 725155 sgt_doom
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.

Sat, 11/13/2010 - 11:19 | 724663 dholliday
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.

Sat, 11/13/2010 - 12:10 | 724724 Clampit
Clampit's picture

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

Sat, 11/13/2010 - 14:51 | 724954 Hidetora
Hidetora's picture

...ahead of the curve...

Fri, 11/12/2010 - 22:05 | 723997 johngaltfla
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....

Sat, 11/13/2010 - 01:09 | 724268 RockyRacoon
RockyRacoon's picture

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

California Muni Bond Fund Shellacking

Sat, 11/13/2010 - 11:31 | 724675 Bob
Sat, 11/13/2010 - 11:44 | 724688 johngaltfla
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
Sat, 11/13/2010 - 11:52 | 724695 Bob
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!

Sat, 11/13/2010 - 12:17 | 724737 johngaltfla
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.

Sat, 11/13/2010 - 14:46 | 724948 RockyRacoon
RockyRacoon's picture

The fun is just starting!  Take a look at Gordon T. Long's latest:

Fri, 11/12/2010 - 22:05 | 723998 kato
kato's picture

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

Fri, 11/12/2010 - 22:10 | 724006 101 years and c...
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.

Fri, 11/12/2010 - 23:35 | 724151 jeff montanye
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.  

Sat, 11/13/2010 - 01:12 | 724274 RockyRacoon
RockyRacoon's picture

W would probably have given them all Medals of Freedom.

Fri, 11/12/2010 - 23:50 | 724178 Popo
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.

Sat, 11/13/2010 - 01:21 | 724282 Chuck Bone
Chuck Bone's picture


Fri, 11/12/2010 - 22:09 | 724002 lolmaster
lolmaster's picture

is this even a question?

Fri, 11/12/2010 - 22:10 | 724005 Ned Zeppelin
Ned Zeppelin's picture

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


Fri, 11/12/2010 - 22:17 | 724014 Bob
Bob's picture

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

Sat, 11/13/2010 - 02:18 | 724327 Assetman
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.

Sat, 11/13/2010 - 10:56 | 724645 Bob
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." 

Sat, 11/13/2010 - 12:07 | 724721 trav7777
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.

Sun, 11/14/2010 - 01:06 | 725745 AccreditedEYE
AccreditedEYE's picture

+100 Fantastic post.

Sat, 11/13/2010 - 16:53 | 725180 sgt_doom
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!

Sat, 11/13/2010 - 17:27 | 725221 Bob
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." 

Fri, 11/12/2010 - 22:46 | 724046 Mentaliusanything
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.

Sat, 11/13/2010 - 05:03 | 724395 merehuman
merehuman's picture

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

Sat, 11/13/2010 - 11:06 | 724653 Bob
Bob's picture

Well put!



Fri, 11/12/2010 - 22:37 | 724048 Fraud-Esq
Fri, 11/12/2010 - 22:43 | 724056 Council of Econ...
Fri, 11/12/2010 - 22:43 | 724057 Cdad
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.


Fri, 11/12/2010 - 22:56 | 724084 slaughterer
slaughterer's picture

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

Sat, 11/13/2010 - 01:00 | 724262 Cdad
Cdad's picture

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

Sat, 11/13/2010 - 05:07 | 724397 merehuman
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. 

Fri, 11/12/2010 - 22:45 | 724064 nedwardkelly
nedwardkelly's picture


Fri, 11/12/2010 - 22:47 | 724067 slaughterer
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. 

Fri, 11/12/2010 - 23:55 | 724187 LeftCoastRefugee
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.

Fri, 11/12/2010 - 22:49 | 724072 Gosilvergogo
Gosilvergogo's picture

Doesn't look like QE2 is accomplishing a whole lot as of yet, mortgage rates have popped up about .375 in the past two weeks... There goes the housing recovery, time to double down

Fri, 11/12/2010 - 22:49 | 724073 Shameful
Shameful's picture

Oh course the Fed is gifting money to the PDs. I thought the whole point of the Fed was to enrich the PDs. We all know the max employment and price stabilization is pure bunk.

Fri, 11/12/2010 - 22:50 | 724074 RobotTrader
RobotTrader's picture

Anybody have doubts about why there is a waiting list for the latest model supercars?

Anybody have doubts why the price of real estate out at The Hamptons is skyrocketing again?

Anybody wondering why the price of high end escorts in NYC has now exceeded pre-bubble 2007 levels?


Fri, 11/12/2010 - 23:00 | 724093 slaughterer
slaughterer's picture

Anybody wonder why the price of high end French wine has more than doubled in the last year and cases of Lafitte Rotschchild 2009 sold out at more than $2000/bottle in a few hours on the wine futures market?

Sat, 11/13/2010 - 13:03 | 724796 rocker
rocker's picture

I said it before and again. This is where the "Real" hyperinflation exist.  In pay and bonuses for elite CEO's and Bankers.

Sat, 11/13/2010 - 16:56 | 725185 sgt_doom
sgt_doom's picture

You do realize that the Chinese have been buying this stuff up, don't you?

Or was that rhetorical?

Fri, 11/12/2010 - 23:47 | 724174 jeff montanye
jeff montanye's picture

you may be right about the supercars and the escorts but reuters says the pickup in hamptons activity is because the sellers capitulated and the buyers stopped trying to get something for a dollar (i.e. adjusted to the "new normal").  doesn't sound like skyrocketing prices to me.

Sat, 11/13/2010 - 00:17 | 724222 goldsaver
goldsaver's picture

Are you saying that Jessica Alba is one of the high end escorts? Daddy might have to pull some shinny out of the safe. You think she would work for gold?

Sat, 11/13/2010 - 01:11 | 724273 Implicit simplicit
Implicit simplicit's picture

Yep, the small percentage, the top 5% that have the moula, have it it all.

 The next next 10 % are resorting to handjobs from asian girls in massage parlors.

The rest are getting callouses.

Sat, 11/13/2010 - 12:11 | 724727 trav7777
trav7777's picture

the top 5%?  Listen up...anyone outside the top .001 is struggling to hang onto what they think they have.

Look at it this way, our money IS debt.  Our system makes bank credit our money.  Most of the people outside the mega rich have a lot of CREDIT as their wealth.  How stable you think they are?

The top .001 have a lot of productive shit to go with their credits.

Sat, 11/13/2010 - 01:37 | 724286 plocequ1
plocequ1's picture

Yea Baby, Luca Brasi like. Come to Big Papa. Seriously, This looks like an elite take over of soceity.

Sat, 11/13/2010 - 16:55 | 725184 sgt_doom
sgt_doom's picture

Where'd you get that privileged pix of my mistress, Jessie?

Fri, 11/12/2010 - 22:55 | 724083 Atomizer
Atomizer's picture

When Obama stages another US media presentation. Learn how its presented for the public to juice up great speaking skills.

How to Be a TV News Reporter : How to Write for a Prompter in TV News

Fri, 11/12/2010 - 22:59 | 724089 Clark_Griswold ...
Clark_Griswold Hedge Mnger's picture


I think you (we) are gona need more than Just Mr. Paul asking questions.

We should probably all copy this article and send it to our disfuntional leaders and ask just how much have you received from bankers & the like by the way....

PS: ...Robo, while I rarily agree with your views, I am truely grateful that you back things up with very,... um,.... "Charts", as it were.  God Bless ya!

Fri, 11/12/2010 - 23:05 | 724099 max2205
max2205's picture

I may be wrong, but based on RP's lack of follow through with Ben, I would say there will be no retrobution.

These fuckers can't be thwarted it appears

Fri, 11/12/2010 - 23:09 | 724110 Everybodys All ...
Everybodys All American's picture

Of course that is exactly what is going on ... in addition to monitizing the debt. They know damn well the banks are insolvent and the nation has absolutely no appetite for giving these banks any more money via a new TARP bailout vote. 

Fri, 11/12/2010 - 23:16 | 724123 Problem Is
Problem Is's picture


Email this post to Chairman Ron Paul for his first committee question to special guest Bernank-ster...

Fri, 11/12/2010 - 23:33 | 724147 gwar5
gwar5's picture

Probably is a gift to the dealers. All I know is, it's a stealth gift from me.


Fri, 11/12/2010 - 23:52 | 724183 jeff montanye
jeff montanye's picture

could it be time to .... audit the fed?  and the treasury?  and the tbtf? and chris dodd, et. al.?  or is it "too big for fraud"?

Sat, 11/13/2010 - 00:29 | 724234 westboundnup
westboundnup's picture


Sat, 11/13/2010 - 00:43 | 724231 Fraud-Esq
Fraud-Esq's picture

QE2 could be the biggest bullet ever shot at international banker's heads.

It's the greenback by other means.

I don't think this point of view is being aired fully on ZH.

Like I said before, did you notice how many big guns LOVED QE1 and HATED QE2.

Worth a second look, ZeroHedgers....

My mind isn't made up either, I'm not that smart. But my instincts are tingling with regard to the huge difference between the bailout and the Treasury buys. The Jefferson-Jackson fans have loathed the government paying debt interest to private banks for centuries.

Why is it now that you get a taste of it, you hate it? I think kneejerk anti-Fed emotions are tainting objective analysis. The arguments of inflation are the same ones made AGAINST LINCOLN and the greenback. 

If you favor eliminating the FED, wouldn't debt resemble QE2? Would you still want to pay interest to a private bank cartel? If not, aren't the philosophies behind FED-elimination and QE2 at least cousins if not brothers? If we eliminate the FED for the purpose of not paying public debt interest to private banks, how does the government spend in war or times of need? By printing dollars. Isn't QE2 the closest you get to a specific action which results in not paying interest to private banks for public debt?

Please review. Is it possible that QE2 is the most populist act the Fed, ever, perhaps in desperation and with the wrong motives, but.... you're not paying interest on that debt anymore. Perhaps they didn't intend to give us a taste of debt free public loans, but they did. Not even the "pro-QE2 arguments" seem to discuss this strange greenback-like outcome. Perhaps that's deliberate because private capital wants to get back to earning interest off public debts asap.

Replies welcome! 

Sat, 11/13/2010 - 00:59 | 724261 Implicit simplicit
Implicit simplicit's picture

The fed's policy obviously isn't just to pump money into the system, but to give extra tertiary profits to the PDs with tax payor money.

The unwritten understanding is that the banks PDs will pump this money back into the system to recreate inflation.

This just continues the oligarchial fascist relationship between the goverment and the banks. Of course Gladman Sucks will front run the fed before each POMO and QE to maximze bonuses.

It will continue to devastate the middle and lower classes who will not see any job or income growh from this fiasco.

Quant squueezing will continue to tighten the noose around the bottom of the balloon until the parasites have destroyed the host; that is until the next balloon explodes in default revolution.

Sat, 11/13/2010 - 01:23 | 724284 RockyRacoon
RockyRacoon's picture

Naz bubble, housing bubble, ____ bubble.  You fill in the blank.

We've said that the Fed's job is to blow bubbles.  Here we go again.

Sat, 11/13/2010 - 03:06 | 724346 Fraud-Esq
Fraud-Esq's picture

I agree. EVERYTHING that the Fed has done to this point is dangerous and served the banks. What the banks STOLE between 1982 and 2010 including the 08 bailout could have destroyed this country, but/for perhaps the petrodollar and the threat of US military. Bankers are contemptible and should be in jail.  

But, is the same true for QE2 as 08 Bailout. I see way more delevering than overall filling of that hole with Treasury buys. In fact, I don't think the T buys will do shat except serve the federal government's need for a buyer while China and others leave the scene. Wasn't Lincoln in a similar position with the Confederates at his front and the banks at his rear? Why are the prototypical "Fed independents" speaking ill about the Fed acting as "good citizen"?

Remember, most people around ZH are "end the Fed" types. That means zero independence. Well, we just got LESS independence than at any time since 1913. Shouldn't that group appreciate the half-measure, at least it creates a transition or an argument that "things will work fine without the Fed and private interest paid for public debt."



Sat, 11/13/2010 - 02:45 | 724343 Fraud-Esq
Fraud-Esq's picture

Tertiary profits aside, aren't the taxpayers getting debt interest free? (risk elsewhere, of course)

What is the effective difference between QE2 and Lincoln printing Greenbacks? 

In both cases, don't the taxpayers sidestep private interest charges on their debt? 

I'm also assuming Ben's in the same spot at Lincoln, without willing buyers or prohibitive rates. 

I DO HEAR what you're saying that it's TWO institutions involved and there may be benefits involved for both, but under our current law, the Federal Reserve Act, could you show me a variant of QE2 that is closer to affecting a Greenback?

Thanks for your reply. I may be missing something here and I'm talking it out....

Sat, 11/13/2010 - 13:43 | 724856 tip e. canoe
tip e. canoe's picture

"What is the effective difference between QE2 and Lincoln printing Greenbacks? "

the PDs/FED member banks/other assorted leeches (Blackrock, etc.) sucking on the neck of the ouroboros, draining just enough blood so that it can survive but not have any energy to free itself from said leeches.

big difference.

Sat, 11/13/2010 - 19:57 | 725408 Fraud-Esq
Fraud-Esq's picture

Is that a "big difference"? I wouldn't call that big. I would call that par for moving a product without the legal support to be a pure Greenback.

If you were to design a "Greenback regime" under CURRENT law in 2010, how would you do it? 

Wouldn't it look like QE2? If not, please explain in detail how it would look different.

My point is simply, outside of the usual side deals, frontrunning, and market customs, this looks like a Greenback regime. That's why the big guns who make money for nothing but buying PUBLIC DEBT hate it. 

This is how the rich and debt always get richers.....government debt! We've just eliminated that market, didn't we? 

Sun, 11/14/2010 - 10:23 | 725958 tip e. canoe
tip e. canoe's picture

on one level, you've made an astute observation and your point is well taken.   my point is that under this scenario, you're getting the worst of both worlds.   whatever benefit you're realizing is being passed on under the covers to the sick parasites whose survival is dependent upon getting their vig by any means necessary.

i really doubt that Lincoln, Jackson or Jefferson would see this as a healthy outcome.

Sun, 11/14/2010 - 10:34 | 725966 tip e. canoe
tip e. canoe's picture

shared from another thread:

start around 9:30 for a direct & clear explanation of the plan.

Sat, 11/13/2010 - 16:58 | 725188 sgt_doom
sgt_doom's picture

Exactly, exactly, exactly.

Jolly good show, Implicit simplicit.

Sat, 11/13/2010 - 03:14 | 724369 Assetman
Assetman's picture

Please review. Is it possible that QE2 is the most populist act the Fed, ever, perhaps in desperation and with the wrong motives, but.... you're not paying interest on that debt anymore. Perhaps they didn't intend to give us a taste of debt free public loans, but they did. Not even the "pro-QE2 arguments" seem to discuss this strange greenback-like outcome. Perhaps that's deliberate because private capital wants to get back to earning interest off public debts asap.


Say WHAT?  Just because the Fed monetizes Treasury debt, does NOT mean that the Treasury has no obligation to pay ongoing interest obligations -- the debt still exists on the Fed's balance sheet.  WTF?  Not only is QE 2.0 a stealth tax on the American people though higher inflation (as doelarrs flood everywhere), Americans are STILL on the hook for the Treasury still making interest payments. 

As an investor, if I had private capital, I would want the Fed to get the hell out of the way and let the market decide where Treasury rates go.  As it stands, the massive intervention the Fed is making is keeping private capital away from the Treasury because artifically creating demand and pushing down yields gives investors less return-- yet the risk of default is still there.

In fact, that risk of default is higher than what it may have been before-- because if the Fed freely takes on government debt, there is much less incentive for Congress to move away from the deficit spending heroin.  The debt problem just gets bigger, and the ability to service that debt becomes less and less.

As for times of war, the U.S. printed money-- but it also raised a lot of internal obligtions through War Bonds.  Obviously, there was a cause worth investing (fighting) for.  As we jump to the present, you tell me whether you would like to support and invest in a fraudulent political and financial system at manipulated market rates.  I'll think I'll pass.

As for ending the Fed, that's more difficult in my mind.  I think there is clearly a role for an independent central banking authority in the U.S.-- but that body should be demanded to provide transparency and be wholly accountable for its actions.  The Federal Reserve-- as it exists today-- cannot exist tomorrow.  It's an institution in desparate need of checks and balances, as it has operated in very grey legal areas-- and have done so in a very opaque manner.  At the very least, it's an institution that badly needs restructured radically-- it needs to primarily serve a different master than its own member banks.


Sat, 11/13/2010 - 19:51 | 725406 Fraud-Esq
Fraud-Esq's picture

Say WHAT? Who does the Treasury pay the interest too (the FRB?) and how does it not get paid back, per statute? According to statute, their profits are turned over to the Treasury. They are not a private institution that can turn a profit, by law. (they turn their profits off their power by other means, certainly!)

If I'm wrong on this, can you source it? Thanks for your reply!  

I understand all your points on private free market transactions. I tend to agree. But - many people who oppose the FED, oppose it on cartel power grounds. Transparent or not, credit power is what it's all about. 

Sat, 11/13/2010 - 21:00 | 725492 Assetman
Assetman's picture

You STILL don't get it, do you?

You claim there is no interest payment.  There IS an interest payment.  What the Fed is returning is NOT a profit... not if the liability to make the payment falls to the taxpayer.  What they are getting is a wasted asset that is eroded by inflation.  In the meantime, primary dealers clean up by capturing the spread at a minimum (though we don't know whether the Fed is paying par or above par for the asset).

As for citing sources, I'm going to waste my time. If you don't know how basic fund flows and time value of money work, read a book on the subject and quit wasting my time.


Sat, 11/13/2010 - 00:45 | 724247 tahoebumsmith
tahoebumsmith's picture

Lets see, Tarp was handed over on a silver platter by Skank Paulson, bailouts were handed out like Halloween candy, the stimulus ended up in their hands as well, AIG handed them 180 Billion in taxpayer money, QE 1 was handed to them, toxic MBS was taken off their books for face value, QE Lite was put in their casino, so why would you think they would have to go in stealth mode? I say just give Skankfein the 800 Billion so he can hand it out at the Christmas party. That ought to keep the greedy pigs satisfied long enough until they cut up the 144 Billion in bonuses come January. Heck they should be getting withdrawls by May so they better start preparing for QE3, because come groundhog's day they will be lined up in their high chairs, shaking their rattles and whining for another suck on Mama's breast.

Sat, 11/13/2010 - 01:15 | 724278 pitz
pitz's picture

Stupid motherfuckers.  Burn in hell bitches, financial system going down sooner or later!

Sat, 11/13/2010 - 12:35 | 724291 firstdivision
firstdivision's picture


Why did you not get this posted on this one?!

<edit>I see I was beat to the punch by a couple of others here</edit>

Sat, 11/13/2010 - 01:44 | 724300 anonnn
anonnn's picture

O---MERS and Banksters bailout coming?

from CNBC: [hat tip Emptywheel  at FDL]

When Congress comes back into session next week, it may consider measures intended to bolster the legal status of a controversial bank owned electronic mortgage registration system that contains three out of every five mortgages in the country.

The system is known as MERS, the acronym for a private company called Mortgage Electronic Registry Systems. Set up by banks in the 1997, MERS is a system for tracking ownership of home loans as they move from mortgage originator through the financial pipeline to the trusts set up when mortgage securities are sold.

Sat, 11/13/2010 - 02:22 | 724315 detournement
detournement's picture

MERS = Skynet. This is the waterloo of the robo trader/signer takeover. All our mortgage will belong to them.

Sat, 11/13/2010 - 03:34 | 724381 Fíréan
Fíréan's picture

I read an article on zero hedge just the other day that the "system" is now dependent upon Fraud !

Sun, 11/14/2010 - 08:28 | 725887 fallst
fallst's picture

You Diiid? No Wayaaay!

Now go to

,and type in, without the quotes

" Greenspan tells Brooksley Born to overlook fraud "

if you drag the mouse over the all the above letters, and right click, and hit the copy button, then go to the google and paste the above slogan in the quotes, (then you don't have to type it!) get back to me if you have any problems. goodluck

Sat, 11/13/2010 - 03:53 | 724386 Tic tock
Tic tock's picture

IF the rule of Law is going to fade, in favour of a rule by Banks, then it makes sense to get out of the way- at least until a enforcement of civil liberties is why don't 'we' do this..: open a North Dakota initiative.

We need an accountant, a lawyer, a doctor, four teachers, four scientists, an artist (Banzai!?), two carpenters, eighty fierce men, numerous wimmin, assorted children - build up such population lists -this is an example list for an urban community of a few hundred people, also farming, possibly, light industrial. Send them from other parts of the country to settle in the freest of the Unfrei states. Use a co-operative / mutual funding system with money from (a subsidary of) some of the few regional banks who are seeing their prudence getting value-deflated. Growth as a monetary phenomena is guaranteed for the first few years, at least - and since we're expecting import prices to go skywards, then producing and consuming locally, within a syndicated banking structure - that, while not as obviuosly perfect as global free-trade, does seem like the next best option.

Sat, 11/13/2010 - 10:57 | 724646 DeltaDawn
DeltaDawn's picture

And what assets will you bring to the table?

Sat, 11/13/2010 - 11:07 | 724654 DeltaDawn
DeltaDawn's picture

No offense but I doubt you have the skills to survive in North Dakota because it involves real work in a harsh environment. I have relatives there. If you are gonna get all utopian on us, I hope you are willing to butcher the elk, pluck the chickens and dig the root cellar.

Sat, 11/13/2010 - 06:07 | 724412 tip e. canoe
tip e. canoe's picture

it's all about the vig, as usual.

Sat, 11/13/2010 - 09:14 | 724579 dcb
dcb's picture

you guys have to watch this video. about QE. i will try and post on krugman's blog

Sat, 11/13/2010 - 10:59 | 724635 Downtoolong
Downtoolong's picture

Add to this the sweet structured deals that large banks are getting for taking over failed banks from the FDIC, the fees that large financial firms got for administering TARP, the fees that financial firms are getting for administering Fannie and Freddie foreclosures, and the fees that financial consultants get for studies to back self serving fiscal policies. It all adds up to a new twist on the 50% compensation rule. Half the profits of the financial industry still go to pay salaries and bonuses, but, the other half are now subsidized by small investors and public taxpayers who will get nothing in exchange for it but future price inflation and devaluation of anything and everything they might currently still own.  

Sat, 11/13/2010 - 11:21 | 724666 Bob
Bob's picture


Sat, 11/13/2010 - 11:32 | 724676 Bolweevil
Bolweevil's picture

TD, Marla, Sacrilege, Travis and nameless minions: congratulations, never seen so many comments. Keep pushing :)

Sat, 11/13/2010 - 14:59 | 724978 Tic tock
Tic tock's picture

Huh, North Dakota is what, undeveloped? -as in no sewage mains or electricity? I'm in a farmhouse in the middle of Sweden..I assumed that..there would supermarkets.. I wasn't thinking of starting a hippie commune in the stix. I moved out here because city life doesn't work the body hard enough and governments are doing their level best to make cities rather difficult places to live; I like working outside. And I like the art of construction, so we get builders in, but otherwise we've done plenty of oddjobs. Raising chickens isn't particularly onerous. But building a new town is a different matter..I've seen how that's done too- I suppose, though, I'd be a teacher, history and philosophy. Be nice to grow mushrooms. 

Sat, 11/13/2010 - 15:05 | 724993 Kaaos
Kaaos's picture

So much talk about QE, but there is still one thing unclear for me about this process, so if someone wiser than me could help pls. Thus, what puzzels me is that what happens after FED has bought the bonds (or any other assets), as they are now in their balance sheet as assets? Normally, the bond issuer would be pay the interest and the principal to holder when bond expires. But what happens now when the holder is FED? Will government pay the interest and principal to FED? Or if FED is seeking to sell the bonds back to PD's after economy would be (at least in their theory) better? Or, could it be that FED just leave the bonds without government to have any obligation to pay interest or principal?

Sat, 11/13/2010 - 17:18 | 725210 mark mchugh
mark mchugh's picture

I think technically we're supposed to pay the Fed principal & interest, but the only way the government pays anybody is by selling more debt (yeah, this is gonna end well).

Sat, 11/13/2010 - 16:50 | 725173 mikjall
mikjall's picture

Well . . . not especially stealthy.

Sat, 11/13/2010 - 17:33 | 725232 mark mchugh
mark mchugh's picture

Why not just drop the pretense and absorb every Treasury auction directly for the next 8 months?

That's a really good question and the only answer I can come up with is in the title of the article.  QE, like everything else that's happened in the last two years is not about saving America, it's about saving the bankers.

With Debt totaling more than 7.5 Trillion dollars, the Primary Dealers make the US Government look solvent. 

Mon, 11/15/2010 - 01:33 | 726987 bingocat
bingocat's picture

Tyler, how do you let this crap pass? I am in no way supportive of QE2 but posts which are shamelessly wrong don't deserve a place on your site. Despite the fact that the OP seems to have a bloomie, the "analysis" is non-existent.

PDs don't get to buy off-the-run bonds at par and then sell them to the Fed's SOMA at the offer side of the bid/offer. At best, they get to buy them at the bid, then sell them at the offer. Then again, other people get to buy them at the bid and sell them lower than the purported offer implied by bid+1/16.

Second, the Fed does not put a gun to PDs' heads and tell them what to sell and how much to sell. It buys each security at the lowest price it can to get the effect it can. It is trying to put money into the system. It doesn't really matter which PD it goes through. If on-the-runs can be sold at a lower yield to other investors, PDs would be happy to sell off-the-runs instead, or not. All the PDs who sell are in competition with each other to sell - that's how an auction works.

Mon, 11/15/2010 - 09:12 | 727253 FOC 1183
FOC 1183's picture

"PDs don't get to buy off-the-run bonds at par"

The OP never said they did, he's just asking if the operation is $600 billion or $640 billion.

"It buys each security at the lowest price it can to get"

We won't know this until the December 10th release, but is there really any doubt that on-the-runs are the cheapest and most liquid securities on the curve? Do dealers not make more trading off-the-run Treas, illiquid corps, mbs, etc. than they do on-the-run Treasury securities??? 

Tue, 11/16/2010 - 03:57 | 729833 bingocat
bingocat's picture

The OP suggested in the title that it was a "$90bn gifting scheme" to PDs. The tone of the post suggests a "gift" (transfer of wealth) to PDs of that amount. The $90bn number appears to come from the two numbers he suggested; i.e. the $40bn of par to market, and the $50bn of "bid/offer". 

As regards the $40bn, if the OP is "just asking" then there is no gift. It is simply that they are buying more than the face value because they are buying coupons above the YTM.

As regards the $50bn, I do not have a clue how the off-the-runs would trade an additional 6 points cheap ($50 "gift" out of $800bn suggests a riskless realize-able bid/offer of 6 points, not the stated bid/offer of 2/32. The only way you get to $50bn is if the Fed buys them at a perfectly smooth curve interpolation AND the off-the-runs trade 6 points cheap  to that curve (which for a 4-6yr bond is going to be 100-125bp higher yield. The problem with that argument is that looking at the off-the-runs on the table offered by the OP vs the on-the-run shown is that the 1.25% 8/15 is trading at a lower yield than the 9/15, which is trading at a lower yield than the 9/15.

As to your last paragraph...

We won't know this until the December 10th release, but is there really any doubt that on-the-runs are the cheapest and most liquid securities on the curve? Do dealers not make more trading off-the-run Treas, illiquid corps, mbs, etc. than they do on-the-run Treasury securities???

First point: As to the "cheapest they can get", it is an auction. The Fed cannot go to PDs and deliberately ignore the low offer and pay a higher price for the same bond unless it also sweeps all lower offers. Second point: in my experience, on-the-runs are usually not "cheaper", they are usually "richer" than off-the-runs. Third point: dealers may make more money per notional on the off-the-runs but that doesn't mean they make more money overall trading them. And furthermore, as long as the Fed is the single buyer, and the PDs are conducting a selling auction (lowest price "wins"), the effect of being able to monetize off-the-run 'illiquidity' because of lack of price information and customers' "expectation" that off-the-runs sold as offs are "cheaper" (requiring an illiquidity discount) is limited.

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Mon, 11/15/2010 - 06:23 | 727156 edmondantes
edmondantes's picture

In case ti has not yet been posted on ZH... this clip is brilliant! 

Wed, 01/05/2011 - 17:42 | 850459 LDW
LDW's picture

How confusion for the average person, and yet our ability to keep the lights on depends on the fed. - Mark LeDuc

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