not going to expand their purchases of Treasury debt. The market backed
up 9bp on the 10 year in 15 minutes. But by the end of the day the
market was pretty flat. Treasury is faced with a difficult task. They
have to sell several trillion in debt. And they have to do it at
historically low interest rates. The ‘flight to quality’ trade is over,
the market is on the ‘growth trade’ now. And soon the Fed will not be
buying a good percentage of each new issuance. Rumor has it that there
is a plan to address this dilemma. I was not invited to this big party
so this info comes third hand. A draft proposal:
This
would be a new security for Treasury. There is no maturity. It never
pays back. It is also unusual in that it is a re-set floater. It will
be priced at a spread over the two-year note. The amount of that spread
is being hotly contested.
This deal is the brainchild of Mr.
Geithner. Treasury is desperate to get the average life of its
liabilities stretched out. They are currently at an average of only 48
months. The goal is to have that extended to 60 or more months. As the
maturity on this deal is ‘infinite’ the average life of the Public
Sector debt would be significantly extended. Nice optics.
This
transaction would eliminate Treasury’s funding requirement for at least
six months. It would take a great deal of pressure off of the bond
market. That would solve another of Mr. Geithner’s problems. This deal
is getting a lot of support from the White House. The thinking in D.C.
is “Stuff the banks. We own them”.
The
problem is that the audience for this is limited to the big banks. The
same banks that just got hit over he head with the Stress Test. The
word is they are whining miserably about having to take this much paper
on. Their concern is that it puts too much pressure on the balance
sheet and the business is not profitable.
Those problems are
being addressed. The Fed will allow the banks to take this paper on
with no reserve requirements. In addition they have agreed to accept
this new collateral at the Discount Window with no haircut. This way
the banks have guaranteed access to 100% funding for this big buy.
The
accountants have been leaned on and have rolled over. They have agreed
that the banks can keep this off their balance sheets. Forever. It is
likely that a new FASB ruling will establish the proper accounting
treatment. The argument is that over the life of the transaction (200
years?) the banks holding the Greenies will likely have tax liabilities
back to Treasury in amounts greater than the par value of the
securities they hold. Therefore they are able to defease the assets and
achieve the desired off balance sheet treatment.
So it is down
to pricing. Last I heard the floater was going to be set at 40BP over
the current two year. The really big news was that in order to get the
deal done the Treasury has agreed to a one time, this deal only, fee of
1/2% to the underwriters. In this case the Buy side is the Sell side so
the fees of $5 billion will stick to the banks. The dealer community is
slavering to get it done with those fees in mind.
Some of the
management is getting behind it too. There was a rumor on Madison
Avenue that Citi was going to build an ad campaign around this. The
theme is, “You helped us, so we’re helping you”. It has a ring to it. They are going for that ‘BFF’ thing. So this deal could be a 'go'.
Just kidding. Sort of….
Barnum's corollary:
In between the birth of each sucker a new ponzi scheme is hatched.
You may be kidding but perpetuities are just one little attitude adjustment away. The national debt becomes an interest only credit card. Banks using them as capital is brilliant. Utter genius. Every social program ever thought of becomes instantly affordable.
It certainly sounds laughable....I'm not sure if this is a joke or not. Nothing surprises me now.
OMFG if it is true.
MS
"Just kidding. Sort of…."
So then the article was just a "joke?
I seem to have lost the ability to discern between farce and reality over the last year or so.
Handle with Care: The interest rates on virtually all maturities is less than the rate of inflation. When you consider that you have to pay tax on this income the return goes negative. So in that sense the holders of Treasury debt are actually 'paying' to hold this crap.
I've thought about this quite a lot and I still can't figure out why the US government has to pay out interest to private bankers via the Fed in order to issue its own money.
Would someone with a brighter brain than mine please enlighten me as to why a greater and greater proportion of the nation's productive wealth being sucked out to a tiny oligopoly is the right way to run monetary policy?
i don't see any real problems with this treasury proposal....should have been started sooner...think of the first sale as only a pilot with several more to be auctioned by december....
It's New Coke
One trillion? Easy!!!
Greenies for Green Card Program
Every applicant, illegal or not, who purchased a face value of $1 million greenies will be immediately qualified for Green (shoots) card which shall bear no maturity date until such day the holder is called by the motto of zero hedge.
It is said there are some 12 million illegals residing somewhere in the USA and there are some 5 billion potential applicants around the world. Find one million such applicants and you got your 1 f**#@ trillion without paying back, ever.
Can I get in on this auction? Would love to hold UST for infinity? I mean who wouldn't? What if they stop issuing debt? What if they have chronic Budget surpluses and all the debt is redeemed?
I have $25 in my checking....oh $25 Billion. Never Mind..
So you fix the failed end of cycle ponzi scheme by starting a new ponzi scheme.
Brilliant!!
in other news, Shiti is gonna fail this Friday for the 44th time and will be saved by the Discount window.
who knew?
"
Bank of Israel halts daily dollar-purchase program
By SHARON WROBEL
Aug 11, 2009 10:10
The Bank of Israel on Tuesday will stop its program of buying $100 million on a daily basis but reserve the right to intervene in the foreign-currency market, the bank announced Monday.
"As already announced [last Monday], the Bank of Israel will act in the foreign-exchange market in the event of unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign-exchange market are disorderly," the central bank said in a statement. "The new operating policy of the Bank of Israel in the foreign-exchange market will provide a better response to the economy’s needs."
The central bank said it would discontinue its program of daily purchases, which began in July 2008, because the targeted level of foreign-currency reserves had been achieved. Foreign-currency reserves stood at $52 billion at the end of July; the target set by the central bank in November was between $40b. to $44b.
Following the announcement, the dollar dropped 1 percent to NIS 3.87."...
"Last week, Fischer said the central bank could not beat the market in the long term and would not continue to buy foreign currency indefinitely",,,
http://www.jpost.com/servlet/Satellite?cid=1249418575155&pagename=JPost/...
Maybe Ben better reconsider......
Off the top of my head here: The Israeli economy has been outperforming everyone which has been putting pressure on their currency to rise. Speculators probably caused the Shekel appreciation to be overdone. Canada was recently complaining about an overly valued Loonie based on similar reasoning. Buying dollars, by the Bank of Israel, and selling the shekel would counter some over speculation. It would also help drive up exports.
I have to say that I like this kind of illicit business. Reminds me of the kind of tricks old buddies at Enron used to play between their businesses but on a much larger scale.
Of course, Enron would have survived and thrived it if wasn't for those f-in whistle blowers. These whistle blowers and naysayers are ingrates. Why can't they just appreciate what they have?
The funny thing is that these tactics will happen out in the open because the Treasury says it's OK. It makes me smile :-)
-- Phil
Love the Philster...you sick bastard. :)
glad to read the "just kidding" at the end, but fear similar plans will go unridiculed.
It even sounds eco-friendly.
Much more clever than the rumored "Retirement Bond" which will just be Treasury issued debt placed in your retirement account - in place of any and all options currently available.
haha, a floater...whether that poop reference was intentional or not its quite appropriate.
But to the point of stuffing the banks, right on. The Fed & Treasury have been running out of stooges who will play their game. Too big to fail is as much a benefit to the moneyprinters as it is for the banksters. So all the parties get together and scratch each other's backs in the name of saving the world.
TBTF also means too big to prosecute or discipline. Any meaningful fine would run counter to the govt's efforts to recapitalize. Any prosecution might get people asking why the govt is doing business with criminals. We keep AIG alive as a money laundering operation and we will protect primary dealers as they're essentially off balance sheet SPE's for the Fed.
We have to keep AIG alive so Bill Gross can keep cashing in on short term AIG 15% notes...he loves that TARP backing and eats it for breakfast. Of course, he knows it will all fall apart, eventually. But he loves playing the Timmy trade.
Perhaps the Fed will have to change the PD's POMO rally team from the Plunge Protection Team to the Plunge Team to recreate a flight to quality in Tsys. If they are all in sync, the only loser is Main St and the consumer isn't spending anyway, nothing has really changed in terms of the mortgage/housing market, and CRE is on it's way to implosion. Want cheap debt? Kill the market, rally the dollar, kill commodities and bring on the Depression. And stick Paulson with BAC and COF stock to remind him that his winning years might be ending. Just a rambling thought.
Issue debt with no stated maturity and float the coupon with minimum spread over one of the shortest term instruments available..... BRILLIANT!
What happens when banks get hit with the second wave of write downs and the safety trade is back on? Even if they priced 80bps over, rates will go back to zero. Who wants a perpetual with a .80% coupon? Anyone...Anyone...Bueller....Bueller???