Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? (And Are Unhedged)

Tyler Durden's picture

An interesting thing happened when we were combing through the Fed's Maiden Lane 1 portfolio. After going through holding after holding of crap, that would make junk indignant if one were to call the Fed's adopted holdings of muni CDS, Subprime mezz bonds, and Agency CMO such, we ended up looking at the rate hedges section. As is disclosed by the Fed, the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0, short 7828 TYH0, short 2240 USH0, and is short a bunch of eurodollar positions. Also, the interest rate exposure is in thousands so the Fed has about 3 trillion in notional swap exposure. Now Maiden Lane is supposed to be an adopted, run off (or, as Geithner likes to boast, run on) portfolio, presumably without active management. Which is why we were surprised by the presence of the TYH0 and TYM0 positions: these did not exist at the time the Fed created Maiden Lane I! In fact TYM0 did not exist until March of 2009!

See below:


Fair enough - we now know that the Fed is paying Blackrock with our money to manage the interest rate exposure on its Maiden Lane I positions, just so JPM could get a steal on Bear Stearns (oh yeah, and Jamie Dimon is furious today that the Fed not only bailed him but gave him Bear on a silver platter). This means that the Fed paying Larry Fink several million a year to put on some interest rate hedges and some various futures. And for what - to avoid a blow up in a $25 billion portfolio?

What about the bigger picture?

As Jefferies points out today:

One has to ask why the SOMA is spending all this effort with Blackrock to hedge interest rate risks in a $25 billion MBS portfolio when it’s holding $1.25 trillion of MBS assets, plus a trillion of long dated Agency debentures and Treasuries. There is a billion dollars a basis point of interest rate risk in the SOMA.

You read that right, while the Fed is pretending to care about interest rate concerns in an increasing rate environment and is hedging ML1, it has one billion DV01 risk for its house bailout package. This is a stunning number: the second rates commence creeping higher, you can kiss all that profit on TARP and what not not only goodbye, but the losses on the SOMA books will likely destroy America. And yes Virginia, it is negatively convex: once rates start creeping wider, they will accelerate faster and faster until everything escapes the control of Ben Bernanke.

Ron Paul, Alan Grayson, and every other activist in the Congress and the Senate should immediately ask the Fed why is Ben Bernanke hedging its ML1 IR exposure, while leaving its SOMA exposure completely unprotected even when the DV01 is about 100 times greater!!! A 1% move in rates would lead to a $100 billion loss for taxpayers. Should we have a failed auction, or go back to Paul Volcker times and have the 10 year hit over 10%... well, you do the math.

Going back to Jefferies:

I think this whole move on transparency opens up way too many avenues for attack on our venerable Federal Reserve. It’s the most complicated time in monetary policy history and Congress is now on a warpath. This is not good for independence and it’s not good for credibility. Based on what I see the Fed will have tough questions to answer on its management of the SOMA account after this release. And if they are pushed into a corner on interest rate hedging because of this, it gets very interesting…..hedging 1bio/bp basically amounts to one thing - asset sales! Good luck trading.

One can now see why Tom Hoenig has been the voice of reason: unless the IR risk is promptly offloaded to private hands before rates begin creeping higher, and impact a portfolio of rate sensitive products, never before as concentrated as it is now in the clutches of the Federal Reserve, the mindblowing DV01 on America's assets will lead the country to a prompt, and very negatively convex bankruptcy, long before China realizes it should stop bidding on our auctions.

And to simply for those who may be a little confused by the jargon: the Fed's lapdog BlackRock is hedging that which is irrelevant: the smallest portion of the Fed's rate exposure. But because Tim Geithner has a penchant of appearing on TV and saying how well Maiden Lane is performing, the Fed has decided to protect against a major hike in rates. Yet that which is truly relevant, the Fed's nearly $2.4 trillion in holdings of MBS, Agency and Treasuries is completely unhedged. Good luck finding the counterparty that would be willing to put on a $200 trillion gross notional interest rate swap with the Fed. (or maybe one already exists, and since it is off balance sheet for the Fed nobody would ever have a clue. That counterparty would have America by the proverbial testicles). If rates do go up, and if the System Open Market Account holdings are unhedged, hyperinflation Catch 22 - here we come (oh yes, and the Federal Reserve is now a ticking time bomb, which can only be defused by forced asset sales which would be a prelude to wholsesale tightening and an S&P back to 666). Good luck trading indeed.

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Selah's picture

This is a rhetorical question... right?


Selah's picture

Oh, and Gold seems to have answered your rhetorical question.

JW n FL's picture

Gold Bugs are IDIOTS!


Feel free to quote me... buy high to sell higher all based on fear...

GoldSilverDoc's picture

And paper bugs are.... what is the word for somebody more stupid than an idiot? Cretin? 

Yeah.  Paper bugs are cretins.


Ripped Chunk's picture

Gun bugs will rule.

Stop arguing.

dark pools of soros's picture

ask the Hutaree how that went...

Ripped Chunk's picture

The ideology of defending your family, your home and your business has absolutely no connection whatsoever to individuals like the Hutaree militia and the things that they plan.

You clearly fear these types of people. I do not.

It is the everyday crazy no one ever notices, that never worn camo in their lives, never been on any training exercise that are much more dangerous than these Hutaree individuals. 


WaterWings's picture


Considering the upside-down situation we are in, I wonder how valid the charges are. Isn't sedition a national pastime?

Sedition is the stirring up of rebellion against the government in power. Treason is the violation of allegiance to one's sovereign or state, giving aid to enemies [foreign and domestic], or levying war against one's state. Sedition is encouraging one's fellow citizens to rebel against their state, whereas treason is actually betraying one's country by aiding and abetting another state. Sedition laws somewhat equate to terrorism and public order laws.



And I would never condone initiation of force - ever! The shot heard round the world was defensive. If the plot to ambush and kill innocent police officers that lawfully protect fellow citizens is true, then the accused deserve their punishment. We can only hope now that a fully-informed jury of peers will decide their fate after viewing evidence.

If a government no longer respects the rule of law is it not ironic that it is illegal to attempt to subvert it? Should we allow TPTB to have a monopoly on force when every action it makes carries with it the implicit threat of lethal force?


Are we willing to so easily relinquish our proud heritage?

2nd Amendment


A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.


How would the course of history been changed had the people been able to defend themselves?



"Common Sense" gun laws don't make sense:



Disarming law-abiding citizens does not make sense. It's called "victim disarmament":



Wouldn't Robo want to let these all these women protect themselves?



http://olegvolk.net/gallery/d/29914-1/MP5K_3454.jpg (don't fuck with me)


How ironic that we view the highest levels of violence and gore on a daily basis through television and movies, yet recoil at the sight of a weapon? Programming? Get over it, or go the way of Darwin.

SWRichmond's picture

Thursday, 5 June, 1788; Patrick Henry is at the Virginia Convention considering ratification of the Constitution.  The Bill of Rights does not exist.  Henry is adamantly opposed:

I shall, with the aid of my judgment and information, which, I confess, are not extensive, go into the discussion of this system more minutely. Is it necessary for your liberty that you should abandon those great rights by the adoption of this system? Is the relinquishment of the trial by jury and the liberty of the press necessary for your liberty? Will the abandonment of your most sacred rights tend to the security of your liberty? Liberty, the greatest of all earthly blessing — give us that precious jewel, and you may take every thing else! But I am fearful I have lived long enough to become an old-fashioned fellow. Perhaps an invincible attachment to the dearest rights of man may, in these refined, enlightened days, be deemed old-fashioned; if so, I am contented to be so. I say, the time has been when every pulse of my heart beat for American liberty, and which, I believe, had a counterpart in the breast of every true American; but suspicions have gone forth — suspicions of my integrity — publicly reported that my professions are not real. Twenty-three years ago was I supposed a traitor to my country? I was then said to be the bane of sedition, because I supported the rights of my country. I may be thought suspicious when I say our privileges and rights are in danger. But, sir, a number of the people of this country are weak enough to think these things are too true. I am happy to find that the gentleman on the other side declares they are groundless. But, sir, suspicion is a virtue as long as its object is the preservation of the public good, and as long as it stays within proper bounds: should it fall on me, I am contented: conscious rectitude is a powerful consolation. I trust there are many who think my professions for the public good to be real. Let your suspicion look to both sides. There are many on the other side, who possibly may have been persuaded to the necessity of these measures, which I conceive to be dangerous to your liberty. Guard with jealous attention the public liberty. Suspect every one who approaches that jewel. Unfortunately, nothing will preserve it but downright force. Whenever you give up that force, you are inevitably ruined. I am answered by gentlemen, that, though I might speak of terrors, yet the fact was, that we were surrounded by none of the dangers I apprehended. I conceive this new government to be one of those dangers: it has produced those horrors which distress many of our best citizens. We are come hither to preserve the poor commonwealth of Virginia, if it can be possibly done: something must be done to preserve your liberty and mine.

Rick64's picture

Thats when the real power grab was going on. Henry was right.

WaterWings's picture

And now, thanks to surveillance technology, you can bound, gagged, and labeled a terrorist without even leaving the safety of your own home. They come to you!

Guard with jealous attention the public liberty. Suspect every one who approaches that jewel. Unfortunately, nothing will preserve it but downright force. Whenever you give up that force, you are inevitably ruined.

Most excellent.

Hulk's picture

Hutaree are idiot wack jobs.....

JW n FL's picture

^^^^ yes sir... if the fear plays out and goes wide spread... the only metals that will matter will be the jacketed verity... http://www.google.com/#hl=en&q=.223+ammo&aq=0&aqi=g10&aql=&oq=.223&gs_rfai=&fp=ca6b5a4f84435186


G36... Herstal 57... AR-15 converstion to a 146 kits? https://www.brownells.com/.aspx/pid=31987/Product/AR_15_M16_OPS_416_GAS_PISTON_CONVERSION_KIT

Rusty Shorts's picture

 How in the hell does oil fit in this picture ??

WaterWings's picture

Huh? Clear it up a little and make it relevant, like this:


JW n FL's picture


BullPup for close quarters...


down range weapons... AR-15 converstion to a 416... G-36... .223 being a round easily sourced, I am big on...

Here is one reason why... http://www.youtube.com/watch?v=AGwkHktkTxU

I am not a fan of the ACR fire rate... http://www.youtube.com/watch?v=7rWvCc77wvk&feature=related but its not a terrible gun..

G-36... http://www.youtube.com/watch?v=MW9lf3pfdGw&feature=related is H & K... what else can I say?

Common round 9mm... mp5/s maybe... for the $12,000 dollars? maybe there are other options that would make someone happier...

The conversion kit to a .45 ( http://www.youtube.com/watch?v=syuaThniTa4 ) ... or .223 ( http://www.autoweapons.com/photos07/jul/1775hk.html )makes me like the gun a little better.. preban stuff everywhere..


Shotgun? http://www.benelliusa.com/shotguns/benelli_m4.php if its good enough for my Marines... its good enough for me.

Tri rail when every possible... I would as well recomend.

Cursive's picture

When TEOTWAWKI comes, the agro and ammo and camo crowd will rule.  Gold and silver will just weigh you down.

SWRichmond's picture

Gold is capital; anyone holding any significant amount of it will be able to hire all the mindless shooters he/she wants if your TEOTWAWKI ever actually happens.  Look around you; they're plentiful and easy to hire right now.  dot gov employs hundreds of thousands of them.

Cursive's picture

We need to stop talking about gold and silver in generic terms.  What kind of gold and silver are you talking about?  Krugerrands?  American Eagles?  Canadian Maple Leafs?  Gold or silver jewelry?  Because from what I've read about the Argentinian collapse, you don't want bullion.  You want jewelery that can be exchanged at street level.

jeff montanye's picture

lots and lots of simple gold (10k or 14k i would think) rings, we are told.  gold coins would be good if banks still function, one can get to/from a bank and gold isn't seized by the government.  remember it is the exit and entrance to one's domicile that is most dangerous and the many-shot semi-automatic hand gun that is most useful.  this would seem to make on-line (or at least telephone or mail order) transactions more attractive, imo.  

however if the future experience is only as negative as "the great depression" or previous 19th century depressions (see "my man godfrey", "the grapes of wrath" et. al.) and we want to be closer to the penthouse and carole lombard than to the dump or the relief camps, we are really talking portfolio management rather than hand-to-hand combat.  

in these prior times (of, admittedly, semi-fixed gold prices) gold miner stock ownership outperformed bullion, was easier to transact and was less likely to be stolen.  this might even be true in an argentina-type situation where keeping gold rings, coins etc. for trading is only as good as one's own variable ability (mine is weak) to defend such "attractive nuisances".  it's so hard to get good help these days. 

also in the '30's the government did require the "turning in" of privately held gold bullion, coins, etc. before the government allowed the price to rise, hence the 90% fineness (coin quality) of some u.s. central bank stock, rather than the 99% supposedly required for "good london delivery".  from what i can glean, this shadowy world is still quite mysterious but being pricked, increasingly, by tiny shafts of sunlight, some radiating from these pages.     

SWRichmond's picture

the many-shot semi-automatic hand gun that is most useful.

It's not a magic wand.  I probably shouldn't start this here, but all the shots in the world won't do you any good if you can't hit anything and your opponent can.  These guys, for example, call themselves firearm experts, but they suck, really bad.  They fact that they're not embarrassed by their lack of ability speaks volumes:


WaterWings's picture

Ha! Yeah, @ 18:00 is when the roll in the targets - LOL. It is probably 30-35 feet, no? But for guys who do it as a profession... Plus, shooting at the range is a minimum - drilling with movement and moving targets is the only way to be sure - no one will stand there while you try to empty your mag in their general direction.

In self-defense, of course.

Nutnfancy project is pretty awesome if you want to hear extensive reviews on gear - informed me on a few of my purchases that I wouldn't have considered otherwise.

SWRichmond's picture

Jewelry that can be chopped into tiny pieces and exchanged at the street level is not capital.  That's not what I'm talking about.  You're thinking too small.  I'm talking about wealth that can be used to buy other capital assets that can in turn be used to produce more wealth.  You know, farmland.

bc0203's picture

That works until the powers that be believe in "redistributive change."

SWRichmond's picture

Well, at some point we all must decide how we want to live.

WaterWings's picture

Okay, here's my $0.02:

The only advantage of Maples, Krugs, Eagles, etc. is that they have an established weight and purity - much easier to detect attempted forgeries. When a buyer is evaluating your coins they are more liquid than generic rounds because of recognition. This is one of the main problems with bartering - what value does the buyer place on it anyway? What if they buyer isn't willing to match what you think the value of your coin is? If all paper fails, and it eventually will (all, as in, even mining stocks (but toilet paper has inherent value ;-) )) if we take into account the long view of history and compare it to our current mutual predicament, then only unreproducible tangibles will hold value. Only. This can be food, ammunition, batteries...but the all of that can rot, expire, faked. Not precious metals.

Okay, that's all I'll say about that.

If you are small potatoes (< $5,000) I wouldn't really consider gold. I would go full silver. If you are walking around with 5 Maples you will have a hard time getting the value out of them. Gold is your long-term savings, silver is your checking account. If you don't have enough for long-term savings, then you only need your checking account anyway. Looking at the historic ratio of gold/silver, silver has some serious catching up to do in terms of comparable value to gold. You just can't go wrong with s.i.l.v.e.r. (no, I'm not a silver dealer).

If the system has not failed yet, you will be able to redeem your silver at any coin shop. If the system crashes over night, all your electronic dollars are forever irretrievable, and you'll wish you had food, ammunition, and transportable shelter if certain threats necessitate a move from your residence - having farmland to run to is not a bad idea. Living there in advance, with all your savings, is a better idea - but that's tricky since you still would like to make an income whilst shoveling goat and chicken guano. 

Get necessities to preserve your life, then get precious metals. Keep a minimum amount of cash (~$1,000) - it will be good for a little while after a major system shock - imagine waving what you know to soon be a worthless $100 bill in front of a gas station attendant for that last tank of gas...

Oh, and the whole gold confiscation thingy? They just made it illegal to exchange in public - anyone with a brain put it in a secret place instead of selling it to the gov't, which turned around and revalued it anyway. Bastards then...and bastards now. Well, they're just thieves with guns and official titles. Little did they know what was around the corner.

Burnbright's picture


You don't understand value, no gold bugs are not "buying higher to sell higher". You seem to think paper money is absolute pricing of things. Read or book or two please.

JW n FL's picture

You can use the Feds printing... as a way to value gold higher... you can use consuption... real consuption making or things and / or stuff... You can use inflation as the base to make your case...


But if the World melts down... Gold will not out value Bullets, EVER!

merehuman's picture

the world melted down repeatedly amongst european nations. Gold allowed passage and bought lives. Read history.

jeff montanye's picture

one would think there is a positive synergy between a skillfully used sidearm and, say, gold coins in extremely extreme conditions.  however one would hope one could anticipate such conditions and avoid them (e.g. emigrate before hitler is elected rather than after kristallnacht).  that, and the recent market trends, would seem to argue against home ownership.  

Cookie's picture

Wipe your ass with your greenbacks, it will be cheaper than tissue soon

hedgeless_horseman's picture

4-1-10, 14:12, Ben Bernanke: I hate the Internet; damn Al Gore

4-1-10, 14:14, Ben Bernanke: Wishing those dolts in the Dep't of Education would do a better job dumbing down our citizens' math skills

4-1-10, 14:15, Ben Bernanke: Mind your own business, Durden


faustian bargain's picture

4-1-10, 14:18, Ben Bernanke: WTF this math captcha...where's my damn calculator

tip e. canoe's picture

4-1-10, 16:20, Ben Bernanke:  Enjoy your easter holiday at the Extended Stay Hotels!  Only $99.99 per night!  Free CNBC!

john_connor's picture

It's Supreme Leader Bernanke, with the 3 branches of government and all citizens reporting to him.

ZackAttack's picture

The three branches of government: money, television and bullshit.

JW n FL's picture

God Love Ya!


by hedgeless_horseman
on Thu, 04/01/2010 - 13:19


4-1-10, 14:12, Ben Bernanke: I hate the Internet; damn Al Gore

4-1-10, 14:14, Ben Bernanke: Wishing those dolts in the Dep't of Education would do a better job dumbing down our citizens' math skills

4-1-10, 14:15, Ben Bernanke: Mind your own business, Durden

Carl Spackler's picture

Maybe, it is Little Timmy's science project as he tries to outdo the rest of the class?!?

bc0203's picture

QE1 was a standard central banker's response to a banking crisis caused by an asset bubble in real estate.  As Carmen and Rogoff point out in their book "This Time It's Different," central banks almost never effectively recover from this type of intervention; another crisis such as currency/default results within, on average, three years.  This is what seems to be playing out today.

The really sad twist on QE1 was letting the primary dealers get rich off the proceeds of the discount window without putting them under MUCH tighter regulation, regardless of how much of a mess the financial system was in.  This, combined with the fact that other central banks around the world (with better credit ratings) will be competing for in the same market for sovereign debt going forward, make it difficult for me to believe that the US will be able to afford to finance QE2 at sustainable rates.

Because of the nature of US Federal Reserve debt, hyperinflation is not really an effective option; I'm going to bet they try to restructure the debt at some point in the not-too-distant future, which is, in effect, a form of default.  The alternative will be rioting in the streets, which will not be acceptable to those trying to stay in power.

jeff montanye's picture

generally on target, imo, but i remember a good bit of rioting a while back and they elected and then re-elected richard nixon (didn't vote for him but imo a far better president than george w. bush and probably ronald reagan; i'm still waiting to see on obama but first indications are not good at all).

AnonymousMonetarist's picture

Looks like the PPT will have to invert that V.

Strong dollar policy indeed!

sweet ebony diamond's picture

the $1 trillion MBS principal has to be paid back somehow.

people need incomes to pay back principal.

cleaning old peoples genitals doesn't provide a great income.

any other ideas banksters?

SmittyinLA's picture

you mean of course "indigent old people's genitals", remember there is no "lock box", those old people HAVE NO ASSETS to even pay minimum wage, not that minimum wage is sufficient to live on or pay taxes anyway.

jeff montanye's picture

that is a crucial distinction because, if not exactly cleaning, providing assistance in that general area for the very well-off old person can be extremely lucrative (or so i have heard).

Hansel's picture

We're gonna be rich!!!

buzzsaw99's picture

Despite the decline in the current fair value of the collateral, the Board does not anticipate the Maiden Lane loan will result in any net loss to the Federal Reserve or taxpayers. The Maiden Lane loan was extended with the expectation that the value of its portfolio would be realized either by holding the assets to maturity or by selling the assets over an extended period of time during which the full value of the assets could be realized.