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A Return To Rate Normalcy Will Cost The Fed Hundreds Of Billions; The Fed Will Go "Negative Carry" In 2015: D-Day For America

Tyler Durden's picture


Today, Chris Whalen's Institutional Risk Analytics carries a fantastic piece by Alan Boyce, in which the author picks up where we left off some time ago in deconstructing the DV01 of the Federal Reserve's SOMA. As a reminder, using Jefferies data, we observed that the Fed's DV01 on its balance sheet is about $1 billion (the potential unrealized profit/loss for every basis point move in interest rates, and with ZIRP here, rates can only go up, so make that just loss without the profit) . Alan Boyce, a former Fed member, CFC executive, and Soros portfolio manager, provides a more granular analysis of the Fed's holdings and comes up with an even scarier DV01: one that is 50% higher, or a $1,509 million/bp. This means that the Fed faces a "$75 billion loss for the first 50 bps move in the markets." As before, it is obvious why the Fed will do everything in its power to keep rates as low as possible for as long as possible, as the vicious cycle that will begin with increasing rates will make all future press releases of how much money the US taxpayer has "made" on the US' bailout of the mortgage industry far more problematic. Boyce also discusses how precisely it is that the Fed has managed to maintain rates at current record low levels for so long, what the cost of an appropriate hedging portfolio would be, and, critically, the implications of what will happen when markets realize that we are caught in a state of artificial suspended and Fed-endorsed animation. The primary conclusion: look for interest rate volatility to surge by 50% even as the Fed scrambles to cover hundreds of billions in losses in its portfolio sooner or later. Boyce's summary is basically that the countdown to the end of the Fed QE regime is now on: "If you look at forward fed funds (Eurodollar curve less basis swap),
the FRB will go negative carry in March 2015, where 3 month financing
rates are forecast to be over 5% (just gets worse and worse from
there). The point here is that mark-to-market accounting is an
iron law. You cannot escape the losses just because you do not report
If the FRB loses $200 billion on mark to market,
there will be $200 billion LESS that they remit to the Treasury
Department every year. That will require legislation to either raise
taxes or lower spending by $200 billion (or run up bigger Federal debt
to be paid back by another generation)."
Must read analysis.

First, a summary of the Fed's actions from the perspective of an MBS trader:

Over the last year the administration and the Fed have undertaken several measures, in the form of FPP, that are yielding short term positive benefits. Specifically:

1. Duration - the FRB/Treasury's programs have taken more duration out of the bond market than could be created in 2-3 years. This has kept long term interest rates much lower than they would otherwise have been. The yield curve has been artificially depressed, by at least 75 basis points, due to this reduction in the aggregate duration (price risk of the whole US bond market). This directly impacted credit and increased the price of all credit instruments.

2. Reduced Volatility - The result of the FPP removing a sizable chunk of mortgages out of private market hands is a reduction in the amount of convexity hedging in the near term. This drives down actual volatility in the fixed income markets. The FPP also forced many bond fund managers to replicate mortgages, in part by selling volatility, thereby compressing implied volatility. This became self-reinforcing as lower volatility allows for increased risk in portfolios which in turn reduces volatility as liquidity returns to markets. Volatility compressed across asset classes. And, reduced volatility directly impacted credit spreads, equity valuations, and commodity prices.

As we know, the FRB recently ended its purchase program. And this is where the mortgage trader's perspective may prove useful. A clear and consistent focus on mortgage duration risk shows us that we may face a series of large and as yet underappreciated challenges. The sooner we collectively understand these issues, the better we can address them. The rest of this article will describe my efforts to calculate the duration of the FRB/Treasury purchase programs and give my perspective on what will happen when the purchase programs end and underlying dynamics of mortgage duration assert themselves.

How does one calculate the specific DV01 of the Fed and how much will a hedge cost?

Annex 1 shows the MBS position of the FRB as of 12/30/09, which includes 'reported' settled positions and forward purchases (reported weekly). Essentially, this is the risk position of the Federal Reserve. An MBS trader (or investor) would calculate their risk using such a position sheet, in combination with various estimates of the duration of each underlying security. All of the analysis is done using 12/30/09 prices and durations.

By using OAD calculations from standard prepay models (which are too fast), the FRB had $460 million of price risk per basis point or "mm/bp" as of year-end. If you scale this up for the remaining purchases and the purchases by the Treasury Department, you get $776 mm/bp. This is using Option Adjusted Durations implied by pre-payment models that were conditioned on the housing market from 2002 to 2008. Those prepayment estimates are significantly faster than what has been experienced in the last two years.

If you use durations implied by coupon spreads (a pretty accurate measure of how the bond market views the current price risk on MBS) then your duration value of a basis point move in the markets or "DV01" jumps to $643mm. Scaled up for the whole program, you get $1,071mm/bp. If rates go up by 50bp, the FRB and Treasury would expect to lose $54 billion. If rates go up even more, assume durations extend and the losses on the next 50bp increase would be $75-90 billion.

If the FRB and Treasury were to hedge their negative convexity risk (bonds fall more than they rise for a given move in interest rates) they would need to buy interest rate options. The most likely option would be a 3yr into 7yr swaption, which currently trades at 5 points. If you hedged to coupon spread implied durations, you would be buying 3yr into 10yr swaptions, which currently trade at 6.5 points. There would be significant reflexivity if that amount of swaptions were bought (prices would be higher if there were more buyers). I estimate the average price paid would be at least 50% higher and have confirmed this with some of the best option traders in the world.

Bottom line: it would cost $142 billion for the FRB and Treasury to hedge the short optionality of their current MBS position.

The Risk of Other Bonds Purchased: Treasuries, Agencies, TIPs and Maiden Lane

These calculations are again based upon year-end positions. The durations are estimated by breaking each category of debt instrument into several buckets, estimating a duration for the bucket and then calculating a simple weighted average.














GSE debt




Other (Maiden Lane








The weighted average duration is 4.55 years with a DVO1 of $438mm per basis point. I will assume that since December, the remaining purchases have been in MBS instead of the other debt categories. Together with the scaled up to final size purchases of MBS, that would be $1,509 mm/bp or a $75 billion loss for the first 50bp move in the markets.

So what is the real duration of the market, or in other words how much duration has the Fed taken out of the market?

Accounting for the Net Duration Add to the US bond market

Mortgage market duration is estimated to have been roughly the same during the period of the FPP. There was no large scale refinancing, a sure-fire method to increase duration. The duration embedded in the existing mortgages increased slightly due to lower housing turnover and labor mobility. The recent GSE buybacks of >120 Day delinquent loans acts to reduce the duration of mortgages, as loans that were completely unable to voluntarily prepay are removed from the system.

Municipal market shrank in 2009. This was aided by help from the Federal government in the form of Build America taxable bond issuance and significant grants to State HFAs. Corporate bond market is small and did not grow in 2009.

Net Treasury issuance as $1.4 trillion, with a 4 year maturity and a 3 year duration. This is a net add of duration of which is $420mm/basis point -- the net result. The FPP took out $1.509 billion of duration per basis point. The mortgage market, municipal market and corporate bond market are estimated to have added zero net duration to the aggregate. The funding of a very large budget deficit required a significant duration add, $420mm/bp, by the Treasury Department.

Conclusion: the FPP reduced aggregate duration in the financial markets by almost 3.6x the duration that was added to the system during the period! This has kept long term interest rates much lower than they would otherwise have been. Without this, interest rates would have been higher, the yield curve would have been significantly steeper, and options would have been more expensive.

Think the Fed's departure from the capital markets on March 31 is priced in? Think again. Market are simply once again demonstrating that EMT is totally flawed.

What are the Implications of Ending the FPP?

1) Duration: MBS widening out will result in lower prices for agency pass - thus, this will lead to an immediate increase in the calculated OAD of the aggregate mortgage index and drive the curve steeper. A steepening of another 50bp will cost the FRB another $84 billion. Agency MBS spreads are 90bp tight to their historical average spread of 120 basis points to US10yr. If spreads widen out to the average (ceteris paribus) the FRB will lose $147 billion.

Prepayment models used for convexity hedging are slow to adjust. Like historical models that failed during the crises of 2008, prepayment models will ultimately be seen as failing to recognize the enormity of the duration problem. Moving forward, refinance activity will surprise to the downside. Mortgage rates are coming off record lows. And, the creditworthiness of the delinquent homeowners still working through the system will impede refinance activity.

2) Options Volatility: The end of FPP shorting options will drive interest rate volatility up by 50%, making the cost of covering the short options position rise to $213 billion. Options traders tend to be agnostic as to what options markets they play in. When fixed income implied volatility increases, option sellers will be more likely to short options to the bond market and less likely to short options to the commodity, equity and foreign exchange markets. These options markets are all linked by investors. Expect implied volatility in all other markets to rise when the world's biggest sell program of long dated options ends.

3) Fiscal Policy: If the FRB were to just explicitly short payer swaptions, they would generate significant option premium which they would book as income. That income would revert to the Treasury department and the FRB would be wishing, hoping and praying that interest rates never move. Instead they are implicitly shorting the options through the unhedged purchase of MBS, generating cash income, which they report and remit to Treasury. If interest rates were to rise, the yield curve to steepen and/or interest rate volatility to rise, the FRB would suffer a huge mark-to-market loss. This would not be reported on their cash basis income statement. They would continue to book cash income, as long as the book yield of their MBS purchases exceeds their financing rate (paying interest on excess reserves). The Federal Reserve does not mark to market, instead runs a "cash income statement".

If you look at forward fed funds (Eurodollar curve less basis swap), the FRB will go negative carry in March 2015, where 3 month financing rates are forecast to be over 5% (just gets worse and worse from there). The point here is that mark-to-market accounting is an iron law. You cannot escape the losses just because you do not report them. If the FRB loses $200 billion on mark to market, there will be $200 billion LESS that they remit to the Treasury Department every year. That will require legislation to either raise taxes or lower spending by $200 billion (or run up bigger Federal debt to be paid back by another generation).

4) Excess Reserves: The end to the FPP will not change excess reserves, but who cares since they are being lent back to the FRB at federal funds target rate of 25bp. The Federal Reserve has plans to remove the excess reserves via reverse repo agreements (used to be called matched sales back in the non-borrowed reserve targeting regime). If the Federal Reserve wished to sell all of the bonds purchased, the expectation is that they would receive lower prices than they paid. The FRB would then need to issue "FRB bills" to soak up the remaining excess reserves, equal to the dollar loss on the round-trip bond trade.

And the one question everyone is asking: "when?"

When Will This All Unfold?

Using efficient markets hypothesis, this information is freely available so the effects of the end of the purchase program should be fully priced into the financial markets. So why didn't bonds fall dramatically in anticipation? There are a couple of potential explanations. First, financial markets are not efficient. They are not the best prediction of what will happen in the future. As recent events confirm, financial markets are quite myopic, able to see at most three months ahead.

And markets can be distorted when participants are incentivized by factors other than profit. The Fed's participation in the bond markets was not driven by a desire to profit from their purchases. They systematically purchased mortgages (and Treasuries) without regard to price. This can have a distorting effect that is not recognized until their influence on the markets is removed.

Second, their involvement in markets not only influences the prices of assets but they influence the behavior of other market participants. As discussed above, many real money buyers synthetically created mortgages because of the lack of supply due to FPP.

Finally, the Fed removed a huge stock of mortgages from the pool of available mortgages in the secondary market. The impact will be felt for some time until the flow of new mortgages begins to trickle into the secondary market providing additional liquidity. In the meantime, there is a real danger of a buyer's strike as participants sit back and wait to see what happens now that the program is finished. This is happening at a time that the economic data is coming in strong adding to pressure in fixed income markets.

If markets were to become unglued, the Fed may purchase more mortgages and Treasury debt. The question is how other central bankers and market participants would react to this. Foreign central bankers will likely snap and become sellers if the Fed decides to monetize more debt. Also, domestic and foreign market participants would likely take it as a sign that the Fed is politically unable to exit the mortgage market and unable to exit quantitative easing. As FPP ends, there is the real potential for unintended consequences in domestic and foreign markets.

To all those who say buy the market - good luck. All we are doing at this point is literally shuffling the deck chairs as the Fed has managed to plug the leak for at best 5 years. Those who have access to the discount window and to the steep yield curve have at most 5 years in which to transfer as much future assets to the present discounted at the ridiculous zero interest rate which the Fed has so far successfully managed to defend. Forget the Fed selling assets: the Fed now realizes, as we have long claimed, that the conviction move by the market to an increasing rate exposure is all that will take to destroy the balance sheet of the biggest bank in the world, that of the Federal Reserve. Various tests by the 10 Year of the 4% resistance have so far been driven primarily by risk reallocation with equities. As Boyce points out, this is untenable and is a function of the ongoing delusion between stocks and bonds that without the Fed cutting duration as much as it has (not to mention that the average UST maturity profile is still woefully short), we would now be starting at an S&P level far lower than the infamous 666 lows. Yet the inevitability of this happening sooner or later is guaranteed: unless the CNY manages to become the reserve currency in the next 5 years, and the Fed somehow succeeds to convince the world that devaluing the dollar is what the Fed is all about, all we are doing is waiting for the hull of the USS America to fill with ice cold water and slowly sink.

Full Alan Boyce piece can be read here.


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Mon, 04/19/2010 - 17:50 | 308675 mikla
mikla's picture

Makes me wonder why Bernanke (or anyone) would want to be Fed Chair.

"Hey, look at the size of my ... stimulus!"

Mon, 04/19/2010 - 18:55 | 308759 Shameful
Shameful's picture

I think there is some appeal to being Fed Chairman.

Banking Syndicate: "Hey Shameful, would you like an infinite amount of money and power at your disposal with no oversight?"

Shameful: "Is the Pope Catholic? And making the world safe for pedophiles?"

Banking Syndicate: "Okay you can be Fed Chairman.  But you can't give yourself money directly.  But you can dole out money to anyone you want.  Oh and you have to listen to us and give us free money"

Shameful: "So I give you want you want, and in return I can give all my friends billions in loans collateralized by garbage?  And my friends are free to give me bribes and kickbacks when I retire?"

Banking Syndicate: "That's right.  Oh and you might have to take some public blame, but don't worry you are immune to any prosecution and can enjoy your later years in absolute luxury after reducing your host nation to abject poverty"

Yeah I can see how that deal would appeal to a few people.

Mon, 04/19/2010 - 19:37 | 308806 Inspector Asset
Inspector Asset's picture

Tim Geithner announces the new and improved monetary policy for U.S. that was hammered out over the weekend with Lawerence Summers and received a two-thumbs up from the Obama administration. The new policy comes as a result of the new tough reforms coming out of DC against Wall Street due to the crisis in 2008. Tim Geithner, speaks excitedly about the new policy and states "unlike the past, this new reform package, and new monetary has plenty of transparency and oversight."

In fact the new policy is so simple that oversight may not be needed at all, as pointed out by Congress member Maxine Walters. It is better known on the hill as "The 3 rule system."

Rule # 1. If the investment is worthless (toxic) the Treasury shall buy it and pay full price. If a price is not known, then we shall make up a price.

Rule # 2. If the investment has any value at all, or has the potential to show value in the future than the Federal Reserve shall buy it.

Rule #3. If you not sure, call Goldman Sachs and let them decide. Give them a little time so they can make their investments, as needed, before the herds stampede in looking for a deal.

Geithner admits the plan may seem to simple, but argues "that sometimes complex problems require simple solutions, and oversight." "This plan being so simple, allows for that oversight that was lacking before."

When asked what happens when the FED balance sheet gets so big, would it pose a risk of being "To Big To Fail?" Geithner sniped back,

"Don't you worry about the FED, they will take care of themselves." "Long after America is bankrupted, just an example of course, the FED will still be here standing. Get it? They are a separate entity! "

Geithner closed out the interview saying "we should be more concerned about the actions of our own government, than snooping around the FEDS business."

When asked, by Congress Maxine Walters, "which government, do you work for?: Geithner lit up like an alien, seemed confused, and then left the room. He was unable to answer the question.

Mon, 04/19/2010 - 17:51 | 308676 exportbank
exportbank's picture

But Jim Grant was just on Bloomberg with a Be Happy report

Mon, 04/19/2010 - 18:22 | 308713 No More Bubbles
No More Bubbles's picture

Grant has jumped the shark.  Everyone is a genius until they are revealed a fool......

Mon, 04/19/2010 - 17:53 | 308677 Cheeky Bastard
Cheeky Bastard's picture

Whoever thinks this is a natural occurrence is sadly mistaken. It was all planned, managed and executed by the people whos names we will never know. It was an artificial system built upon mathematical concepts and ridiculous equations, false sociological, geopolitical and economic paradigms. The collapse will be swift, painful and catastrophic for we have far to long relied on abstract complexities to solve millennium long, albeit unsolvable problems. And the more abstract we became in our solutions the bigger were the problems which those same solutions put fort. It is an inescapable fact of certainty that exponential growth for the sake of exponential growth via proxy usage of FIAT currency and reliance on the apparatus that exploits the inefficiencies of a FIAT currency to provide as with stability and reasonable living comfort for a period of time longer than 200 years, will bring back civilization just a notch above paleolithic gathering societies once the 500 year long trend [which started with merchant bankers in Northern Italy] ends. The ridiculous philosophical solutions bring forth in theories such as postmodernism and global political unification will not cure the prevalent illness which is deeply rooted, if not the heart, in this system.

Mon, 04/19/2010 - 18:24 | 308716 No More Bubbles
No More Bubbles's picture

Well put Cheeky.

Mon, 04/19/2010 - 18:29 | 308718 B9K9
B9K9's picture

As the picture becomes clearer, it's easy to view these proceedings from the perspective of a banker. Once you place yourself in their shoes, one can see the various obstacles & challenges that had previously been blocking their objective(s).

First and foremost, the most important task was to institute broad based enfranchisement. That's because the only effective bulwark against the type of coordinated criminal enterprise we see today were statesmen. Once statesman were reduced to pandering politicians buying votes with taxpayer funds, it was child's play to manipulate and trick representatives to act against their constituents' best interests.

The other obvious goals were to own the media and control/shape educational processes and standards. After the republic had been reduced to a democracy, subject to mass propaganda and institutionalized 'education' (tell me again why the principle behind exponential math & compounding principle+interest isn't taught from 5th grade on), it was astoundingly easy for the money-lenders to pull off exactly what we now see occurring on a daily basis.

The money-elite never, ever lost sight of the ancient lessons taught about usury; they are iron clad laws that cannot be refuted. Just like civilizations from thousands of years ago, we are once again discovering the truth about the credit-money system.

Mon, 04/19/2010 - 18:51 | 308754 Cheeky Bastard
Cheeky Bastard's picture




Inside Science - a news service supported by the American Institute of Physics - is breaking an important story:

A recent analysis of the 2007 financial markets of 48 countries has revealed that the world's finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power, and point out the worldwide financial system's vulnerability as it stood on the brink of the current economic crisis.

A pair of physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy as it looked in early 2007. Stefano Battiston and James Glattfelder extracted the information from the tangled yarn that links 24,877 stocks and 106,141 shareholding entities in 48 countries, revealing what they called the "backbone" of each country's financial market. These backbones represented the owners of 80 percent of a country's market capital, yet consisted of remarkably few shareholders.

"You start off with these huge national networks that are really big, quite dense," Glattfelder said. “From that you're able to ... unveil the important structure in this original big network. You then realize most of the network isn't at all important."

The most pared-down backbones exist in Anglo-Saxon countries, including the U.S., Australia, and the U.K. ... But while each American company may link to many owners, Glattfelder and Battiston's analysis found that the owners varied little from stock to stock, meaning that comparatively few hands are holding the reins of the entire market.

“If you would look at this locally, it's always distributed,” Glattfelder said. “If you then look at who is at the end of these links, you find that it's the same guys, [which] is not something you'd expect from the local view.”

Matthew Jackson, an economist from Stanford University in Calif. who studies social and economic networks, said that Glattfelder and Battiston's approach could be used to answer more pointed questions about corporate control and how companies interact.

"It's clear, looking at financial contagion and recent crises, that understanding interrelations between companies and holdings is very important in the future,” he said. "Certainly people have some understanding of how large some of these financial institutions in the world are, there's some feeling of how intertwined they are, but there's a big difference between having an impression and actually having ... more explicit numbers to put behind it"...

The results will be published in an upcoming issue of the journal Physical Review E.

The physicists name names. As Inside Science notes:

Based on their analysis, Glattfelder and Battiston identified the ten investment entities who are “big fish” in the most countries. The biggest fish was the Capital Group Companies, with major stakes in 36 of the 48 countries studied.

While it is true that the paper in the Physical Review E has not yet been published, I have found a draft version of their article from February which shows that the top 10 list of most powerful financial institutions (from most to least powerful) is as follows:

1. The Capital Group of Companies

2. Fidelity Management & Research

3. Barclays PLC

4. Franklin Resources

5. AXA

6. JP Morgan Chase

7. Dimensional Fund Advisors

8. Merrill Lynch

9. Wellington Management Company

10. UBS

Other tidbits:

  • Non-American players Deutsche Bank, Brandes Investment Partners, Societe Generale, Credit Suisse, Schroders PLC and Allianz are also in the top 21 positions.
  • The government of Singapore is number 25.
  • The world's largest banking group - HSBC Holdings PLC - only chimes in at number 26.


The data analyzed in the study is from 2007, and the playing field may have changed substantially since then.

Further analysis using this new methodology may yield important information.For example, given the massive government intervention in the markets, it is important to ask who controls stock now



Now you tell me; if this isn't the ultimate proof who, how and when has the power, the resources and the capital to swing the markets in their own favor trough cooperation with other parties in this purely conspiratorial cartel of financial institutions then i really don't know what is and what further proof do the regulatory agencies demand. If this does not [and it didn't] in breaking ALL those players into smaller players with smaller market shares and ban on further consolidation via mergers and acquisitions [thats what happened with Deutsche Bank after WWII when it was broken into 3 smaller pieces but within 30 years via mergers and acquisitions it once again became Deutsche Bank we all know and hate today] like it was done to Standard Oil and AT&T. If for nothing else than for purely idealistic purposes the end of this monopoly/cartel on financial services would serve us tremendously if with nothing else than with the feeling of satisfaction and short-term inner peace. I have no illusion that this will actually happen since not only is the USA an oligarchy dressed in the cloth of free democracy but the world as a whole is increasingly becoming more and more oligarchical trough shear force and influence of covert reasons which lay beneath Americas foreign policy and structuralization of international financial domain. Add to that the paradigm of globalization and PC bullshit about equality of everyone and everything and the lack of self-control in the Individual itself you start to recognize that for those of us, who are putting a large amount of their time and energy in actually thinking about this day in day out from a sound and educated position, this world is faster and faster becoming the epitome of Hell itself.

Mon, 04/19/2010 - 19:28 | 308796 Rainman
Rainman's picture

Outfuckingstanding rant, CB !!

Mon, 04/19/2010 - 19:36 | 308805 merehuman
merehuman's picture

prison planet of infinite illusion

Mon, 04/19/2010 - 21:08 | 308867 hayleecomet
hayleecomet's picture

Well this pretty much sums it all up for me.  As each day passes it becomes clearer that the only route to survival is through individual self preservation.  Everyone I know thinks I'm a wacko because I'm preparing for the worst case scenario.

Thanks for this link, CB.


Tue, 04/20/2010 - 00:18 | 308968 Thurifer
Thurifer's picture

Its like an old priest told me "Son, always remember what the Good Book says: we're going to f*ck things up so bad it will take God Himself to come down and straighten it out. "

Mon, 04/19/2010 - 23:46 | 308977 Rusty Shorts
Rusty Shorts's picture

 - learn how to built these, and you will survive...maybe.


Tue, 04/20/2010 - 00:36 | 309005 Temporalist
Temporalist's picture

In my opinion a Yurt is better choice.  They are more durable, can be elevated, have windows, and will hold up through bitter winters and feet of snow.

Mon, 04/19/2010 - 22:17 | 308914 tip e. canoe
tip e. canoe's picture

warping minds with schizophrenic confusion

Mon, 04/19/2010 - 23:33 | 308967 Tethys
Tethys's picture

Almost seems like a reflection of nature's law of evolution and survival of the fittest.  As the remaining entities become larger and fewer, the battles become more epic.  The recent crisis was just the latest round in which weaker, less connected banks such as Lehman, Bear Stearns, Wachovia, etc. were defeated and devoured by their competitors.  And weaker companies such as GM were assimilated into the government.  

Makes one wonder if the final battle will be between bloated govt. and borg-like GS - who now collaborate to eliminate competition, but will eventually have to face off. Or if the two are just different faces of the same multi-headed hydra, now finalizing its consumption of the remnants on a global scale.

As the old Kenyan proverb goes, when elephants fight, it is the grass that suffers.


Mon, 04/19/2010 - 23:41 | 308975 Shameful
Shameful's picture

Well if there is an ultimate showdown of ultimate destiny then it would be GS with it's tag team partner the Treasury vs JPM and it's tag partner the Federal Reserve.  In this throw down I got to go with JPM and the Fed.  Hard to bet against the Fed.

Granted they would be fighting over a husk of a USA and maybe world at that point, desperate to suck the last bit of juice out of the last producer.

Though I happen to think it's all same team.  They might bicker over who gets the finest choice of taxpayer meat but any real fight will happen far after a full meltdown/breakdown so it's totally academic at this point

Mon, 04/19/2010 - 18:26 | 308720 dnarby
dnarby's picture

You give them too much credit.

The central banks had a sweet deal going.  With the help of goverments, they could have remained a huge tick in the neck of the global economy, sucking, and sucking, and sucking the lifeblood of the host...  As long as the commercial and investment banks had stayed content to suck along with them.

But the commercial and investment banks got way too greedy, and bit the host in too many places, subsequently resulting in hemorrhaging all over and threatening the life of the host, which will be forced to ingest a purgative.  This purgative, while causing temporary discomfort, will eliminate the parasites for generations.

These guys are greedy AND stupid.

Thus the shock of Greenspan when he realized that financial institutions failed to act in their own best interest.  He couldn't believe these guys were stupid enough to fark up a BJ.

Mon, 04/19/2010 - 18:56 | 308760 cougar_w
cougar_w's picture

Xactly. The key here was Greenspan; I think he was actually shocked and dismayed. He really thought the "smartest guys in the room" had any smarts.

I have heard said elsewhere that the "captains of finance" are infants. Meaning indulgent, selfish, bored and in serious need of adult supervision. The evidence to support this observation is all around you.

If anything, it makes me more worried. I would like to think someone out there knows what the hell is happening.

Actually I doubt seriously that anyone out there has the first clue to what is happening.

All they can do is break you. Kiss your ass good-bye.

Mon, 04/19/2010 - 18:45 | 308742 Ripped Chunk
Ripped Chunk's picture

Many thanks Cheeky.

Needs to be said.


Mon, 04/19/2010 - 21:26 | 308875 velobabe
velobabe's picture

which started with merchant bankers in Northern Italy

cheeky your going to love this story.

i was engaged to george giannini.

only grandson of A.P. Giannini, founder,  Bank of America, Bank of Italy.

Amadeo Pietro Giannini.

what a loser, made me produce my baptism papers.

thought he had money but he really wanted mine.

lost dynasty. the mafia is still in charge plus the 5 burroughs are still in charge. from main to wall.

sexually he was a broke dick, just saying.


Mon, 04/19/2010 - 21:44 | 308891 merehuman
merehuman's picture

Velobabe, thats a good funny. Much thanks! LOL

Mon, 04/19/2010 - 21:49 | 308895 Cheeky Bastard
Cheeky Bastard's picture

Yeah Italians are known to be overzealous when it comes to denomination and access to money. Also, some part of Italy resemble medieval Albania with all the customs they have and shit. If you wanna re-live the Middle Ages just go into Neapolitan suburbs. Its like Gaul in mid 5th century. Also i think the insanity might be gene-encoded and does not diminish as the centuries go by.

Mon, 04/19/2010 - 22:40 | 308916 velobabe
velobabe's picture

you turn me on†

did you hear a thing i said?

it's a dagger lennon.

i am so stoned.

i just don't know sorry

Tue, 04/20/2010 - 08:34 | 309113 Cheeky Bastard
Cheeky Bastard's picture

you crazy bitch


i like you

Tue, 04/20/2010 - 00:15 | 308955 velobabe
velobabe's picture

fuck you every one of you

fuck you

just fuck you

sexually cheeky

Tue, 04/20/2010 - 07:46 | 309086 Cheeky Bastard
Cheeky Bastard's picture

cocaine is one helluva drug eh

try mescaline with whiskey and chlorophyll next time


Tue, 04/20/2010 - 09:30 | 309144 velobabe
velobabe's picture

NO cheeky, i don't do drugs

it just comes naturally.

Tue, 04/20/2010 - 01:03 | 309015 Hillbillyfreak
Hillbillyfreak's picture

So, what are you thinking.... Lakers or Cleveland?

Fri, 04/23/2010 - 19:33 | 315622 velobabe
velobabe's picture

WATER all gone, bye bye†

Mon, 04/19/2010 - 17:52 | 308680 Rainman
Rainman's picture

The Fed drinks a river of MBS poison and continues to live. The absence of that pesky mark to market confusion sure has its rewards.

But sooner or later King Kash Flow will catch up to Ben too. Even the printer has limitations.

Mon, 04/19/2010 - 17:54 | 308682 john_connor
john_connor's picture

I think I have said this before, but the Fed is in the process of killing itself.  When the Fed becomes a net drain on Treasury (aside from the gangster interest we pay them just to issue cash), then politicians will panic.  It will be either 1) shut down the Fed or 2) get voted out of office.  And yes, it will probably be too late.  Just in time for the Boomers to retire and need their Social Security and Medicare checks in masse.

Mon, 04/19/2010 - 17:57 | 308684 Cognitive Dissonance
Cognitive Dissonance's picture

From the IRA article itself.

"But for us, the bottom line is that hedge funds often times are merely extensions of the dealers with which they interact. It is often difficult if not impossible to tell where the dealer's interests end and those of the hedge fund begin, especially when the dealer and the fund seem to be working in concert to create securities that are being sold to third parties."

Sounds like a crime family to me, with branches and spin offs and carve outs to "expand" their influence.

Mon, 04/19/2010 - 18:47 | 308744 Ripped Chunk
Ripped Chunk's picture

Hedge funds unregulated, that is where the criminal element will focus influence.

Tue, 04/20/2010 - 00:16 | 308991 anonnn
anonnn's picture

When confronting apparent conflicting, crazy or "stupid" data, one can posit how such data could actually align, quite sensibly, to those involved in creating the schemes.

The RichAndPowerful do share at least one certain intention. Namely, each is driven to maintain his kingly status by unending butressing and defense.

They worry, fear  and obsess over stability of their status and priviliges.

They are already rich, by definition, so do not seek more money beyond its utility for defense of their status.

There are other game-plans that may account for the data. E.g. Sacrificing the world's Reserve Currency to undermine opposition forms of government to create a more controllable tyranny, like OneWorldGov. [Standard Oil was known to sell gasoline at a loss to drive competitors out of business, then adjust prices accordingly.]

Note this is not necessarily true for the RichOrPowerful, such as Bill Gates or your Chief of Police.


Tue, 04/20/2010 - 00:43 | 309008 anonnn
anonnn's picture

The above does not ignore a Black Swan.

Re SEC v GS: One agency's Public Relations stunt might be the tiny breech for legal-eagles   to cheaply slip through expensive walls of obfuscation.

Such could very well birth a Black Swan.

Tue, 04/20/2010 - 00:31 | 309001 RockyRacoon
RockyRacoon's picture

A crime family, eh?  Well, cougar_w says:

I have heard said elsewhere that the "captains of finance" are infants.

Does that make them the "Bambino Family"?

Mon, 04/19/2010 - 17:59 | 308687 Bullpasture
Bullpasture's picture


Mon, 04/19/2010 - 18:00 | 308689 Gordon_Gekko
Gordon_Gekko's picture

The point here is that mark-to-market accounting is an iron law. You cannot escape the losses just because you do not report them. 

It might be a problem for you and me, or even large companies, but I doubt an entity with the power to create money out of thin air using ledger entries AND engage in all sorts of fake "accounting" gives a shit about mark-to-market. The ONE and ONLY limitation on the Federal Reserve is the willingness of the populace at large to accept the bits of paper emanated by it as "money". The same goes for the TBTF banks ala JPMorgan - who are basically mini-Feds by themselves, what with practically ZERO reserve requirements and fake "accounting".

If the FRB loses $200 billion on mark to market, there will be $200 billion LESS that they remit to the Treasury Department every year.

"Lost" $200B? No problemo! Here comes a friendly "hedge fund"/"foreign entity"/"household" (cough, cough....Fed...cough). Need $200B? Here's $300B. Have fun! Just another ledger entry in the hidden books - just another day in the Fed-land.

Do you see what a TOTAL JOKE our "monetary system" is?

Mon, 04/19/2010 - 18:10 | 308697 IBelieveInMagic
IBelieveInMagic's picture

The joke is really on foreign partners who continue to deliver real goods and services for bits of digits and paper that the Fed and US banks put out. The dollars do not represent any real production/assets that foreigners can claim in the future. The USG pays endless entitlements and concentrates in building it's defence while the sucker foreign suppliers deliver goods and services. This is a great arrangement for us!!!

Mon, 04/19/2010 - 18:31 | 308712 Gordon_Gekko
Gordon_Gekko's picture

I hope you're enjoying the 20%+ unemployment rate, unaffordable "health care", underwater real-estate and stock market "investments" and cost of living that NEVER goes down. Indeed, things are fucking GREAT in the United States!

Oh, and what was that again? "Concentrate on defense" mean somebody actually needs to defend this? 


Yeah, we MUST "concentrate on defense" while 20% of the population is unemployed and/or homeless living in tent cities.

Mon, 04/19/2010 - 18:57 | 308762 IBelieveInMagic
IBelieveInMagic's picture

Now imagine how things are in the rest of the world!

We have been consuming way beyond our needs/means and we have come to assume that is the normal. We have behaved like a bunch of greedy kids in front of a basket of chips just grabbing and stuffing ourselves before others get any.

All this ill gotten consumption has been enabled only with a strong army and a reserve currency. Say thanks for it!

Mon, 04/19/2010 - 19:01 | 308769 Shameful
Shameful's picture

Good point GG.  What people fail to realize is that the productive capacity is gone.  Sure they may be getting worthless pieces of paper but ultimately they will still have real things, and the ability to make real things.  All we will be left with is a bunch of broken toys, a shattered currency, an empty husk of an economy, and a reputation as the worlds villain.

No one can tell me how the jobs will come back. The legal and regulatory structure will keep them away if nothing else.  And look around you.  Would you rather hire a kid educated in our school system or roll the dice in another country, where even if the worker doesn't work out you have lower costs and legal/regulatory liability.

Mon, 04/19/2010 - 22:21 | 308919 tip e. canoe
tip e. canoe's picture

psssst, shameful, the jobs aren't coming back...pass it on.

Mon, 04/19/2010 - 22:45 | 308937 Shameful
Shameful's picture

Well as long as we have the dollar we don't need jobs.  We just ship paper and and get assets in..and that will work until it doesn't and then the "fun" begins.  Will be a swell place when all the imports turn off...I'm sure that the American people will greet such changes with poise and decorum and our government will act responsibly.


Tue, 04/20/2010 - 08:32 | 309108 IBelieveInMagic
IBelieveInMagic's picture

The fix is easy -- abandon the reserve currency status. We can then join the rest of the world in the real world.

I want to see which politician would support that move?

Mon, 04/19/2010 - 21:05 | 308865 chindit13
chindit13's picture

For Sale:  Fixer-upper in the middle of America's Cultural Heartland, this modified two story walk-up has a light and airy feel about it.  The possibilities are endless.  Lots of extras come with this property;  too many to mention!  Post modern landscape design, while not everyone's cup of tea, blends seamlessly with the natural environment.  Truly this property represents the new American Dream.  Attractive financing terms to fit your no income budget.  Call 1-800-H-WANGER!  This home will not last!  Hurry before it's gone forever!  Be part of America's housing recovery!

Mon, 04/19/2010 - 21:27 | 308876 Hulk
Hulk's picture

You forgot the price Chindit13.Its a million three! 

Mon, 04/19/2010 - 21:47 | 308893 merehuman
merehuman's picture

And its surrounded on all sides by mile long foreclosures, empty houses all.

Mon, 04/19/2010 - 23:49 | 308978 Tethys
Tethys's picture

... This jewel commands an exceptional site where every major room looks out to unobstructed, sweeping views. Experience tranquility and peacefulness as you watch the sun paint spectacular visions across the church steeples in the distance.  Outdoor entertainment is a breeze on the rooftop terrace with panoramic views...

If that's CA I'm thinking $1.5M easy, with three offers already in.


Tue, 04/20/2010 - 01:10 | 309019 Hillbillyfreak
Hillbillyfreak's picture

I'm feeling a little cramped in my double wide and am looking to move up.  The number didn't work when I called.  Could you check the number and pass on the correct number.

Mon, 04/19/2010 - 22:20 | 308918 tmosley
tmosley's picture

If you count non-productive government jobs, those jobs that are dedicated to compliance with government regulations, and government contractors as unemployed, it would be more like 80-90% unemployment.

Other nations produce nothing, and don't have the benefit of nigh-unlimited free consumer goods.  They are all in the third world.  That's where we are headed, and that is where we would be RIGHT NOW if it weren't for the foolishness of the productive nations in taking our paper.  We've had the "benefit" of 30-40 years of overconsumption in exchange for little or no productive value.  In effect, our entire nation is on welfare, and like people on welfare, we would indeed have been better off without it, but we have had a better standard of living given what we have done than we would have otherwise.So don't misunderstand, we have been morally destroyed by the acceptance of welfare, but we have been made materially "richer" because of it, even if it is in the national equivilent of booze and lotto tickets (McMansions and "innovative" financial products.

Tue, 04/20/2010 - 08:34 | 309112 IBelieveInMagic
IBelieveInMagic's picture

That sums it my friend. Damned if you do, damned if you don't! Might as well enjoy the free consumer goods while you can get it..

Tue, 04/20/2010 - 00:43 | 309009 Temporalist
Temporalist's picture

Ok so I need to sweep up the place a what?


Why you are posting a picture of my home so that people will come and try to rob me should be against the law.


Now I'll have to keep the doors locked.

Tue, 04/20/2010 - 01:11 | 309020 Hillbillyfreak
Hillbillyfreak's picture

That's your house?  Is it for sale or not?

Mon, 04/19/2010 - 18:24 | 308715 Gordon_Gekko
Gordon_Gekko's picture that you Pelosi?

Mon, 04/19/2010 - 18:48 | 308748 Rainman
Rainman's picture

I assume the pic is in Detroit, but it could be D.C.

For the price of a Humvee tire you could level and haul 3 of these pieces of shit.

Mon, 04/19/2010 - 18:31 | 308725 Kaiser Sousa
Kaiser Sousa's picture

we do but 99.9 % of their indentured slaves do not...

all they know is "Dow 11,000 baby...!"

truly pathetic....

Mon, 04/19/2010 - 18:39 | 308735 drwells
drwells's picture

Other than the Sprott paper, is there any good material out there that investigates the possibility of the "household" sector being used to mask covert monetization by the Fed? Thanks!

Mon, 04/19/2010 - 21:37 | 308886 suldog
Mon, 04/19/2010 - 23:17 | 308961 drwells
drwells's picture

Thank you kindly sir. Reading now.

Mon, 04/19/2010 - 22:52 | 308940 hamurobby
hamurobby's picture

The ONE and ONLY limitation on the Federal Reserve is the willingness of the populace at large to accept the bits of paper emanated by it as "money".

I believe it cant disappear, BECAUSE THE MONEY HAS ALREADY BEEN RELEASED INTO THE SYSTEM when the toxic assets were originally financed and sold. You cant get it back, the fiat money already has been spent. It comes back, as stealth inflation, no matter where you hide it, but we (and every accountant out there) all know they are hiding "it". That is double trouble, because "it" creates a catalyst for a lack of CONfidence, a very slippery slope when you are needing low interest rates for the government that lets you exist. Then the fedres has to monetize the debt, and then the result is all the USD around the world comes back home with vicious velocity. got gold?

Mon, 04/19/2010 - 18:07 | 308692 buzzsaw99
buzzsaw99's picture

Too logical therefore entirely implausible. The fed has an iron constitution, they could eat a bowl of termites and shit out solid gold bars.

Mon, 04/19/2010 - 18:12 | 308699 msorense
msorense's picture

So the market will top out in 2015?  And I thought it was done as of last week.  Dow 36,000 here we come.

Mon, 04/19/2010 - 21:20 | 308870 malek
malek's picture

No, the dollar will be finished in 2015 at the latest.

What that means for the market - who knows?

Mon, 04/19/2010 - 18:14 | 308701 market cynic
market cynic's picture

Ben Bernhanky and Alan Greedscam- The poster children of Moral Hazard

...along with those who appointed/reappointed and confirmed them and those who elected, re-elected, and will re-elect them...

Oh, I forgot..... that's a majority of  U.S. voters over the last 20 years.

Voters bitch about the robber barons and the elected/appointed government officials in their hip pocket who are bankrupting the country, but just try to run as a candidate who puts eliminating deficits as the top item on your platform..... will last about 14 seconds.

Mon, 04/19/2010 - 18:17 | 308705 No More Bubbles
No More Bubbles's picture

What is this talk of 2015?  Lets get real here.  We won't even make it out of 2010 without this total fucking fraud of a system falling apart.




Mon, 04/19/2010 - 18:26 | 308717 mynhair
mynhair's picture

This market is intent on remaining insane longer than I can stay sane.

Where's my Robo adjustment?

Mon, 04/19/2010 - 20:22 | 308841 Cognitive Dissonance
Cognitive Dissonance's picture

I didn't know you taught art MsCreant. :>)

Mon, 04/19/2010 - 20:46 | 308853 Miyagi_san
Miyagi_san's picture

No gymnophobia there...would like to see her in the bleachers at a Red Sox game

Mon, 04/19/2010 - 18:31 | 308723 dnarby
dnarby's picture

Japan or some other sovereign will likely blow up before the US.  That will just bring it about quicker.

Quicker the better, I say.

Mon, 04/19/2010 - 18:48 | 308746 No More Bubbles
No More Bubbles's picture

I believe all the "dominoes" are lining up perfectly to fall in unison.  Canada, Australia and China property bubbles are in terminal blow-off right now.  Global stock markets are in full bubble mode with absolutely ZERO attachment to reality.  Intelligent market observers are totally confused right now and questioning their sanity. 

This entire reflation attempt is a failure at it's core.  It doesn't address the problem but rather perpetuates the same failed theories which should have been totally discredited by now.

Everyone I talk to KNOWS this system isn't working, but yet many suffer from the delusion that it will all work out.  IT WON'T UNTIL THIS REGIME FAILS!


Mon, 04/19/2010 - 19:05 | 308771 cougar_w
cougar_w's picture


This is the real risk, that contagion will enter the system from outside. BB cannot do much about a loss of support in Japan or China.

I look askance at prognostications longer out than 12 months. And lately, more like 3 months. This economy is on unpowered controlled descent. If they can land her in the Hudson River and we all walk away it will be a greater miracle.

Mon, 04/19/2010 - 18:35 | 308728 Tart
Tart's picture

I sure hope Dylan Ratigan updates us on today's Goldman' baloney. Perhaps a child like video of how two republican SEC members tried to save the day for Goldman. He's on that fair and balance show so I'm sure he will right?

Mon, 04/19/2010 - 22:08 | 308905 mynhair
mynhair's picture

Kinito, why are you trying to hide?

Mon, 04/19/2010 - 18:37 | 308731 Kaiser Sousa
Kaiser Sousa's picture


now ur talking my language...

takes balls but can be done...i know cause i've done it..

and not because i couldn't pay but because bankers r scum...

if everyone did this the entire scheme would come to a halt and the bankers dominion over us all would be expunged....

Mon, 04/19/2010 - 18:38 | 308732 Kaiser Sousa
Kaiser Sousa's picture


now ur talking my language...

takes balls but can be done...i know cause i've done it..

and not because i couldn't pay but because bankers r scum...

if everyone did this the entire scheme would come to a halt and the bankers dominion over us all would be expunged....

Mon, 04/19/2010 - 18:50 | 308751 No More Bubbles
No More Bubbles's picture


Mon, 04/19/2010 - 18:54 | 308758 rawsienna
rawsienna's picture

Enough with this just default bullshit.  The banks do not take most of the hit - the honest mtg paying taxpayers do because over 50% of the loans are guaranteed by FNMA/FHR and FHA.  If you are underwater and it makes sense, by all means consider walking.  If you have a second lien and you are underwater - blow it off. But this is just nonsense. 

Mon, 04/19/2010 - 19:09 | 308779 cougar_w
cougar_w's picture

I would have agreed with you about taxpayers footing the bill ... 6 months ago.

Since then the Fed is footing the bill ... for every thing and every one, including Greece.

And the Fed pays for it in fiat accounting entries.

It's hard to even call it moral hazard any more. Let's just call it was it is: The New Normal.

I will probably default outright sometime in the next 6-10 months, once my cash reserves are healthy. But by then it will be what everyone is doing and we won't even be having discussions about who is paying.

Mon, 04/19/2010 - 19:55 | 308827 MsCreant
MsCreant's picture

I know you know this, but talk to a lawyer.

Mon, 04/19/2010 - 22:27 | 308924 Amish Hacker
Amish Hacker's picture

Excellent advice, especially if you're hoping to walk away from a second mortgage that might not be a "non-recourse loan."

Mon, 04/19/2010 - 22:28 | 308925 Amish Hacker
Amish Hacker's picture

Excellent advice, especially if you're hoping to walk away from a second mortgage that might not be a "non-recourse loan."

Mon, 04/19/2010 - 18:46 | 308743 theworldisnotenough
theworldisnotenough's picture

So as I read this I'm thinking "Holy sh!t the Fed could go under!!"

Then what? What do we do for curenncy? Silver certificates baby. Could this be why silver is flying off the shelf?

If the Fed went under what would we use to give our country and currency some legitimacy? Back it with silver. Of course we could get a stronger currency by exploting natural resouces, but that is not as immediate as printing silver certificates.

Mon, 04/19/2010 - 19:06 | 308772 Shameful
Shameful's picture

Who would be stupid enough to trust the USA currency?!?!?  I mean it's not like we haven't defaulted several times in the last century.  FDR and the gold revalue was a default.  Nixon closing the gold window, a default.  Hell you can look at the coinage change away from silver as a default as well. 

"No this time I double pinky swear!  This time I promise that I'll stick with sound money no matter what!  Those times before, they don't count, I'm serious this time!"

It's just not believable.  The real answer is kill legal tender laws, let the people decide.  Why back with gold or silver when we could just use gold or silver.

Tue, 04/20/2010 - 01:05 | 309016 M.B. Drapier
M.B. Drapier's picture

Gresham's Law?

Tue, 04/20/2010 - 01:12 | 309022 Shameful
Shameful's picture

Exactly.  Gresham's Law, so if we see real gold and silver leave circulation even when the currency is "backed" that will show you the confidence there is in the currency.  I know that there is a good chunk of out here that would take possession of our gold and silver should our currency be "backed".  Not a lot of trust in the con game right now.  The real answer is kill legal tender laws and let people make a decision about the currency they want.  If they want Dollars or Euros or Yen or Dongs that's great, but it also allows people to use gold and silver directly.

If we back gold like the old gold system in the US what is to stop the problems that plagued the old gold backing systems?

Tue, 04/20/2010 - 08:21 | 309102 M.B. Drapier
M.B. Drapier's picture

But, as far as I can see, even with a specie currency and no legal-tender laws, there's a dilemma: either sellers sometimes choose to accept coins of a given type at the consensus value (not necessarily the face value) for coins of that type, or every seller assays the melt value of every individual coin received at every transaction. In the first case, Gresham's Law applies and the clipping, shaving, sweating, drilling and coining begins - not to mention debasement by the legitimate issuer. If you could somehow enforce the second option (how? - it would involve legislation in the same sense that drug prohibition involves legislation) then transaction costs increase and buying a gas-station slurpee isn't worth the hassle.

Realistically, the likely outcome would be that people would make day-to-day transactions electronically or in some kind of asset-backed paper - or outright scrip - and regularly convert their balances to and from gold. But this is more or less exactly the situation that exists today, no? There's nothing to stop most people from regularly converting to physical gold, it's just that presently most people's inflation expectations are low enough that they don't want the hassle (plus the currency risk, plus the security risks).

(I may add more later, but I have to run now.)

Mon, 04/19/2010 - 19:12 | 308785 cougar_w
cougar_w's picture

I think you can relax. Nothing in operation today (including the Fed) will exist in its current state by 2015. All attempts at predictions past 2011 are IMO simply ludicrous.

Mon, 04/19/2010 - 18:48 | 308745 unemployed
unemployed's picture


If the FRB loses $200 billion on mark to market, there will be $200 billion LESS that they remit to the Treasury Department every year

 Errr,  the high water mark of remittances was 41.7 Billion in 2009.

Mon, 04/19/2010 - 18:59 | 308767 ShortStack
ShortStack's picture

Ah okay thanks. So it's not a big deal at all, just less money in remittance to the Treasury -- nothing economy-ending heh. The tone of this article is very misleading.

Mon, 04/19/2010 - 19:24 | 308793 jm
jm's picture

It is bigger deal than you think if you look at it another way.

Leave DV01 aside and focus on the net present value of future cashflows.  Not taking anything away from dynamic estimation, I'm just condensing the point into the present.

If net present value of future cashflows goes negative, then the Federal reserve is bankrupt in the same sense as a reinsurer is insolvent. 

They will need to be recapitalized by the treasury, resulting in negative remittances.  In essense another, bigger, multi-year bailout for the Fed this time. 

When you place this is the context of the looming funding gap for sovereigns, IGs, HYs, and leveraged loans coming up in Europe and here, there is more than enough reason for concern.  

Anybody please correct me if I'm wrong here. 

Mon, 04/19/2010 - 21:27 | 308877 unemployed
unemployed's picture

 I suspect Alan had his tongue in cheek when he mentioned that 200 Billion DV01,  and left it as an exercise for the reader that the Fed could go bankrupt.  In the scheme of things the US deficit running 1.5 Trillion a year is a tad bigger elephant in the room.

Tue, 04/20/2010 - 00:02 | 308986 Burnbright
Burnbright's picture

How do you go bankrupt when your job is to literally make money?

Tue, 04/20/2010 - 08:39 | 309117 jm
jm's picture

You can't print money at will like that.  No one would hold your debt and you would be in a worse situation, because ultimately no one would take your currency either.

The Fed balance sheet means it has gone all-in on their strategy, but that doesn't mean the US government has.  The US has gone without a central bank before and can do it again.

Mon, 04/19/2010 - 19:10 | 308780 Cheeky Bastard
Cheeky Bastard's picture

Yeah, and in no way will the Politburo members in Washington do anything about that.

If it can further someones, or strengthen someones political career they will go for the jugular. that much i can guarantee you. the only thing that surpasses the greed of a politician is his self-interest.  

Mon, 04/19/2010 - 18:49 | 308747 ShortStack
ShortStack's picture

Why is this such a big deal? The Fed is holding them for long-term, not for gains, those are the garbage MBSes that had no liquidity, so we knew we were going to take a hit. The losses are NOT cash outflows, they are merely unrealized losses.


I think this is much ado about nothing...


Could someone who is knowledgeable of the technical aspects let me know where I'm wrong?

Mon, 04/19/2010 - 19:07 | 308776 AssFire
AssFire's picture

They are losses because mark to market connot be extended and pretended forever.

Now what about the 5 trillion (Fannie & Freddie) not counted in the deficit? When is that going on the books?? After the unforeclosed/ non-mortgage compliant homes have been gutted like Detroit's homes; hard to think anyone would want a big portion of the 5 Trillion.

Moodys=Arthur Andersen

Mon, 04/19/2010 - 23:38 | 308965 hamurobby
hamurobby's picture

They are losses because mark to market connot be extended and pretended forever.


Mark to market would be bankruptcy to the fed, its a triangle circle jerk (gov, fed and GS etc), the rest of the world doesnt buy it, they just havent come up with another reserve currency yet. What amazes me is, the Saudi (NCB) doesnt demand gold for payment of oil.

The "non mark to market" is like running the printing presses, but its just not actually physically papered over. It does not matter what Suzy at the grocery store thinks about it.

Mon, 04/19/2010 - 19:05 | 308768 rawsienna
rawsienna's picture

Boyce is partially correct.  The 2bb of so of asset purchases did drive rates lower but that money displaced private holders of mtgs to buy other assets such as corporates, high yield and equities. If they didnt do it, rates may or may not be higher but other asset prices would sure be a lot lower or their yields much higher - If stocks were 30% lower  long end treasuries would be lower in yield. His duration analysis is spot on but the carry on the mortgage portfolio would be approx 50 bp if libor moved along the forward curve (mortgage zv).  He should have known better. No negative carry until borrowing costs go above 4.75%

Mon, 04/19/2010 - 19:43 | 308808 jm
jm's picture

This is so true.  Fed MBS purchases rotated private money to other assets, while treasury purchases kept spreads anchored to a low reference rate.

I can't see the 10Y over 4.5% in current context.

Mon, 04/19/2010 - 20:36 | 308848 rawsienna
rawsienna's picture

that was the objective - problem is that sometimes the medicine is worse than the disease - when we do not see the handoff from the public sector to private sector (for many reasons), we will have another market meltdown. My sense is later this summer.

Mon, 04/19/2010 - 19:31 | 308800 FranSix
FranSix's picture

The hue and cry is inflation, but nobody looks at inflation adjusted charts:


I believe we will see very low interest rates for a very long time, even perhaps negative interest rates on the discount rate.  The only place you can logically call for an interest rate bull is Japan, but then again, they are mulling over Yen depreciation.


Mon, 04/19/2010 - 19:47 | 308816 kaiserhoff
kaiserhoff's picture

I'm not a bond dude, but this is a classic post.  As I understand it, the author is pointing out that credit markets are not only illiquid.  They are really lousy at evaluating absolute, as opposed to relative risk.  A friend describes CD's as certicates of depreciation.

Remember first principles.

Market manipulation is not just evil.  It is inherently destabilizing.  That instability increases over time as:

1 Crooks and insiders game the system

2 Decent people withdraw from markets they don't understand or suspect are rigged.

Seen any evidence of that lately???

Most of the ZH crowd sees sovereign debt as the weak link in the ponzi.  I have long favored real estate as too obviously overpriced and over leveraged to last long.  It may be simpler than that.

A founding priciple of economics is Gresham's Law.  "Bad money drives out the good."  Has anyone offered you a Kennedy half in change lately? For decades Americans have increasingly demonstrated contempt for dishonest money.  Federal reserve notes are only valuable for paying off debt, but if all debt will be written off anyway, or become a joke through inflation, who needs the paper?  Hoarding is in the eye of the beholder.  Some things will hold relative value.  Some will not.

What always happens in a Ponzi?  Over time, it takes more and more effort just to cover the outstanding markers.  Be of good cheer.  We may yet win, because the others are so stupid.


Mon, 04/19/2010 - 20:24 | 308842 john_connor
john_connor's picture


Mon, 04/19/2010 - 21:32 | 308883 Hulk
Hulk's picture

Good to see William Black finally got a zh account!

Mon, 04/19/2010 - 22:37 | 308928 tip e. canoe
tip e. canoe's picture

i'm not a kaiser, but this is an equally classic comment.


Mon, 04/19/2010 - 19:48 | 308818 sangell
sangell's picture

2015 on present trends. No guarantee. Impressive post.

Mon, 04/19/2010 - 21:11 | 308868 Aeternus
Aeternus's picture

"Austerity Measures"

Coming to A theater, er, state near you.


"Sovereign Default"

The sequal, coming sometime between now and...... whenever.

Mon, 04/19/2010 - 21:24 | 308874 Sam Clemons
Sam Clemons's picture

Now we know why the US government needs to create recessions.  They are darn good at it too.  Build up tons of malinvestment which collapses and forces people into Treasuries.  Unsustainable, but fun for now.

Mon, 04/19/2010 - 21:55 | 308897 Madhouse
Madhouse's picture

The concept of having Treasury numbers and Fed numbers is an absurd charade. It is the high court version of the concept of public debt and then debt that is owed by the Social Security Administration. Utter B.S.

Voters have to demand 1) cash accounting and 2) Full layered disclosure. Say 5 layers with large buckets all the way to line by line detail.

Of course, never going to happen, because it is a you know what ...

What is happening here is that the entire scam is being exposed and starting to unravel. It will be an avalanche..


Mon, 04/19/2010 - 22:03 | 308900 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

"The Fed has managed to plug the leak for at best 5 years."

Fair enough, but I say three months.  I say we have three months until the precious metals market begins to capitulate in a manner never seen before.  I say in 6 months even MB will be able to tell that GOLD HAS DECOUPLED FROM THE MARKETS.  I say it happened a year and a half ago at its recent bottom on Oct 24th and Nov 13th of '08.  I say the markets tracked gold, not the other way around.  I say it became obvious last fall when the doelarr carry trade ended but gold continued to climb.  I say it should now be totally obvious after what I am naming the "Shanghai Split", when last night the Asian Samurais and Ninjas went for gold over equities.  I say it is now public knowledge, and this should be heeded.

Three months; just in time for JPM's "M"arket "M"anipulators to be done throwing their silver shorts down the hole.





Mon, 04/19/2010 - 22:41 | 308931 tip e. canoe
tip e. canoe's picture

ponzi paper smothers golden rocks,
but silver scissors cut paper ponzis

Mon, 04/19/2010 - 22:43 | 308935 dumpster
dumpster's picture

join the hemlock society

show um ,, that your body is not for sell


wait you say a couple million   lol sold

Mon, 04/19/2010 - 23:18 | 308962 Mark Beck
Mark Beck's picture

So the FED may take a loss with money it created and backed by holders of USDs, on bad investments, or when interest rates put the burn in the churn. Resulting in the Treasury perhaps not getting their rightful remittance, and may have to raise taxes to compensation.

Lets rephrase this:

If you control the creation of fiat money you control the nation. The nation works for you.


The comments made confirm that the FED never ever reduces the money supply. Monetarily the FED should reduce the money supply (electroBUCKS) when loans are paid back. A prudent and wise choice to maintain the value of the USD. But, it never does so. It keeps the money in circulation by buying more debt (churn). A concept of constant expansion of the money supply, without regard for protecting the currency. A fundementally flawed concept born of central banking.


The author also has the tone that the FED would be disturbed by a loss. Nonesense, this is an abberation of the myth that the FED is concerned with protecting the dollar. It is not. The FED talks as if they are working to protect what they themselves created out of no effort of their own. It is a grand lie that our congressman seem to fall for time and again. Ben can talk in general terms about we have initiated this program to do this or do that, to the tune of Trillions of dollars, and nobody ever asks how this will all be paid. For some reason they cannot see the costs of the FED. Somehow they do not see that the obligations of the FED are by extension those of all the tax payers.

Mark Beck

Tue, 04/20/2010 - 00:11 | 308987 hamurobby
hamurobby's picture

If the expansion of currency is commensurate with the expansion of population, does that nullify inflation if they are equal? Is there a correlation between our open door policy of illegal immigrants and the census with m3? so many questions...

Tue, 04/20/2010 - 00:17 | 308992 Shameful
Shameful's picture

No. Inflation of the money supply is simply the increase of the money supply.  Without an increase of the money supply there would be an increase in the purchasing power of money with increase of population of increases in productivity.  If you talk about price stability maybe, but inflation is a monetary event.  Inflation could increase but prices could still go down on a slide in demand, likewise there could be deflation and an increase in prices if there is an increase in demand.

Price increase does not equal inflation.  Just like if I have a cough it does not mean I'm sick, or if I'm sick it doesn't mean I have a cough.  Do not mistake a symptom of the disease for the disease.

Mon, 04/19/2010 - 23:38 | 308969 agrotera
agrotera's picture

Thanks for the estimates--

I cover my eyes when i try to imagine our country out of the hands of thieves--people who will steal on the magnitude that these people who "own" our country steal, have no regard for human life.

Mon, 04/19/2010 - 23:57 | 308984 glenlloyd
glenlloyd's picture

"...a sign that the Fed is politically unable to exit the mortgage market and unable to exit quantitative easing."

Was there every any doubt? Once you start down this path there is no exit without pain, and once people start feeling pain they'll be politically forced to start again. We only need to look at the other historical attempts at QE (or whatever other pretty names they've called it) to see how difficult it is to stop once this blatant monetizing of debt starts.

The really great thing is we'll have a ringside seat for all this fun.

Tue, 04/20/2010 - 00:24 | 308996 DagnyTaggart
DagnyTaggart's picture

I think this analysis misses the fact that the fed is just going to let everything run off and assumes the size of the portfolio stays the same in perpetuity. Currently the run off rate us atone 10 to 15 billion a month from prepays and maturities. Also looking at the treasury portion in full size is a bit misleading because it was around 500-600 billion before the crisis. Another strategy is to give it to Fannie or Freddie to manage which no doubt helps nothing but allows the agencies to run hedges. I completely disagree with your loss statements. Losses only matter once they are realized. Losses from interest rates will not impact anything if held to maturity. The fed can run as an insolvent institution with a 400 to 1 leverage ratio if it so chooses. As long as it is cash flowing everything is fine. They will probably charge more fees or something if funding costs rose. But I just can't see funding going above 5% on the short end of the curve in our lifetime.

Wed, 04/21/2010 - 18:37 | 311536 mkkby
mkkby's picture

People, this is just silly.  Yes, the system is unsustainable.  And yes it is rigged.  But the fed cannot go bankrupt because the fed makes money with an accounting entry.  Second, every other country out there is weaker and whenever a domino fails the flight to safety trade will make the dollar stronger.  We are not going to crash one day.  The decline will be slow, just as it has been for the last 30 years.



Fri, 04/23/2010 - 07:30 | 314217 bernorange
bernorange's picture

As a layman, I'm trying real hard to understand this article (because I suspect it's somewhat important), but it's mostly Greek (yeah, I know) to me.  Is the article saying that the Fed is going to lose it's ability to inflate the money supply at a profit circa 2015 (best case scenario)?  Assuming I got that correct, when it comes to pass ... what are the implications?

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