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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wyosteven's picture

Good comment, but unfortunately the average US citizen doesn't come with the money multiplier like banks do.  This should tell you the gravity of the problem they are trying to face.

To me, the most obvious solution to this was Main Street all along, but not through givaways and welfare, but simply let people keep their earned money. Abolish the income tax in lieu of a consumption tax (VAT).  

The fed is forcing people into the risk pool by destroying the beach.  This is crucifying prudent savers, risk averse, and future citizens that had nothing to do with the issues at hand while everyone else at the present can't swim.

faustian bargain's picture

I wish I could understand this better than I do. I know this is smoking gun type material, but I'm struggling to keep up. I was (not so) blissfully ignorant until fall '08. Now, every morning I check ZH and I'm like, "WTF?"

Modus's picture

same here, crazy stuff goin on out there....

although, is there a necessity to hedge if they intend to hold all mbs until maturity? of course, then there is no exit strategy at all

Burnbright's picture

That's kind of what I am thinking. They are not hedging on raising interest rates because they will keep them low at all costs. But as Tyler pointed out that means hyperinflation.

BlackBeard's picture

That's great.  There would be no better ending to this story, than if the Fed were to blow itself up.

faustian bargain's picture

But first I want to see Bernanke go all Tom-Cruise-on-Oprah's-couch on national TV.

cougar_w's picture

Fine. But would it really be worth the inevitable emotional scarring?

faustian bargain's picture

Couldn't be any worse than watching C.Romer try to spin some bad news on any given interview. Or could it. I'm afraid the past couple of years I have built up a tolerance for masochism.

TheGoodDoctor's picture

I get the feeling that C. Romer hardly believes her own bullshit that she is spewing in any given interview.

non-anon's picture

Every time the WH trots her out, it is freaking scary the way she looks and talks. Totally unrealistic!

faustian bargain's picture

now at kitco.com:

The website is currently down due to technical difficulties.
We apologize for any inconvenience and we invite you to check back shortly. For any information or Online orders please contact us at 1-877-775-4826. Thank you for your understanding.

Pegasus Muse's picture

This stuff just makes my head spin.  Ditto what Faustian asked. 

How do I protect myself?  Buy gold & silver?  Anything else? 

JW n FL's picture

One sentence... no numbers.... no sources.... you are a fucking blessing to your Country, idiot.

gmrpeabody's picture

Me thinks you may not be around much longer.  Arrrgg!

JW n FL's picture

Why? becuase I provide 3rd party information?


because I offer more than 1 line of whinning?


becuase there is substance to what I offer?


Becuase the Gold bugs out number me?

gmrpeabody's picture


Because, I believe, you just set the record for being junked.

tmosley's picture

More likely because you run around screaming and calling people idiots.

There are plenty of ill informed people on these forums, but none are so persistent as you.  Cut it out, and stop pretending like you know everything.

JW n FL's picture

What exactly did I say I know everything about?


What am ill informed about?


You are an idiot.


Your 3 sentences of nothing... your actions, more than my pointing it.... out make the statement true.


I share information... sourced and sited... 3rd party... stuff anyone can read and debate the facts on...


You... say I am a Meany! and that I am ill informed... but instead of trying to help me... by sourcing and siting facts you call me names... you are the Sheepeople... offer nothing and do nothing but take up space.


So, idiot... where am I wrong? lets have a discussion about the facts... unlike you... I am happy to be wrong and learn something. I am greatful to learn... from anyone on any subject... and that will not likely soon change...


i could make the logical leap you are on of the true believers of "Fox News" or a gold bug... becuase i dont see how.. since you have not said anything worth responding to... why you would single me out and call me a meany, know it all... so share for the benefit of all...


Or complain, whinne, piss, bitch and / or moan... in 3 sentences and offer nothing of substance...


Consider this a challenge... help me learn.. help everyone learn... Please?!


I once again am all for learning and being wrong, I dont have an ego the way you have described.. if someone teaches me and helps me... I am forever greatful!

merehuman's picture

yes we all have an ego. We have noticed yours right from the start. Your attempts to be helpful are appreciated. But perhaps, you like myself , need to be better informed. This is a very deep rabbit hole. From 1913 to 911 and the lies we all believed. Bildeburg to Kramer, goldmans minions all in CBs worlwide, A coincidental huge profit by few while their countries die. Its huge. And we the unwilling aware few victims can do little but warn the innocent.

And we all should be warning our fellow countrymen who do not see what we see and have no computers.

Yes we need to act , and that first action should be to inform our citizens

hack3434's picture

Click on the 5 & 10 year chart to see the "bigger" picture...god...you're truly are a fucking shill and an idiot...

JW n FL's picture



Yeah buy Gold! Moron!


The Spot Price of Gold is $ 1126.50Current as of Apr 01, 2010 01:32PM . Not For trading purposeshttp://www.blanchardonline.com/lp/price-of-gold.php?content=18668274311&gclid=CN3ouL6R5qACFZhc2god6HIpHwRisk verse reward... and when the Fed does print thier way out... which they will, the middle market will hedge thier savings into Gold and you will make a Fortune! Go Gettum Tiger!

merehuman's picture

King World news had a great interview on gold and silver manipulation whistle blower. Yesterday the site was attacked and someone ran over the whistle blower. MSM is keeping mum on this. CTFC meet was a boost for all gold and silver owners (actual only, paper holders are  screwed).

boiow's picture

that was the story of the decade. when it takes off and it will, the world will be a very exciting place.

being a witness to all this is a bit like filming the titanic as it hits the iceburg.

merehuman's picture

I am watching it via various websites, primarily Zerohedge.

Ripped Chunk's picture

Ammo and something to fire it from.

Remember the vast majority do not have a clue how bad it can and probably will get.  Are you going to throw your gold and silver at them when they figure out how much of it you have and come for it?

JW n FL's picture

Careful Brother... the Gold Bugs dont like reality... they like pump and dump.

WaterWings's picture

Hey, you seen Master Baits around? Wait a minute!

Rusty Shorts's picture

Hey, that's exactly what I was thinking...MB.

merehuman's picture

WW and Rusty, i agree, had same thought repeatedly.

trav7777's picture

They won't figure out how much your guns and ammo are worth and come for them???

Mako's picture

And who do you think is big enough to sustain those losses?  You are asking them to hedge a position nobody on this planet can cover. 

All you guys are getting closer and closer to end game.

And no it won't be hyperinflating, the only thing that would be hyperinflating is graves as the credit system implodes.



carbonmutant's picture

In a "Kick the Can" administration nobody cares. All they need to do is keep it going long enough to drop it in the next guys lap.

Mako's picture

It last about 60-80 years or a generation.   There is nothing anyone can do, it was over before you were even born, the only question has been "when". 

"There is no out, there is only in"

tip e. canoe's picture

"The thing's hollow—it goes on forever—and—oh my God—it's full of stars!"

kevinearick's picture


We have found a strange footprint on the shores of the unknown. We have devised profound theories, one after another, to account for its origins. At last, we have succeeded in reconstructing the creature that made the footprint. And lo! It is our own.


JW n FL's picture

When is the last time we had a Government that was not just "kicking the can"?


I would love to see anyone in this room... "almost everyone" 99.99999999999999% be the President of America over what we as a nation have suffered... But how long before anyone with a real agenda to try to straighten out America would be shot down in the street by some guy with a sling shot?


The Status Quo does not want change... and will kill to keep and real change from happening. That is the fate we all suffer... hoping that the lie does not crush our Country. Most of us here would survive and do well and would even live well... in the event of a crash... but I have a real concern for most.. not just us with brains. I dont wish hardship on any of my fellow Country men or women, but I dont know if that the lie will be able to out run the truth this time around. I really hope that all of us do well and I really hope the Country does well... but we are all sitting on top of a house of cards printed by the Fed... that is 30,000 feet high... and the fall could kill us all.


wyosteven's picture

There are simple solutions that are already in place and just haven't been enforced -- transparancy and accountability.

With those two pieces justice becomes the free market.  Obviously, we have none of that at the present and money is the red herring.

Mako's picture

The solution is coming whether there is transparency or not... the equation could give a rat's ass about transparency.


You either supply the equation exponential growth or the system dies... humans have no ability to supply long-term exponential growth.

Pinkfleud's picture

 "not just us with brains"

Very arrogant of you to think you have a brain ! From everything I've read you sound like just a whiner and an inflamatory asshole. Please don't insult those of us that actually have some gray matter to exercise. If you have a solution cough it up, otherwise relagate your bitching and your attacks to the Alex Jones blog.

deadparrot's picture

I agree. Goldbugs see any and all regulatory shenanigans as bullish for gold. A blowup at the Fed would mean an international financial reset in which all assets plunge. The only things that would have any value are goods you can barter. In such a situation, i think the govt would bite the bullet and allow deflation to preserve the dollar. Going the hyperinflation route would just kill the dollar and economy. Deflation is the lesser of two evils.

faustian bargain's picture

I think the jury's still out on whether the government (or the Fed, or whoever is really in charge) cares about the economy per se. I think "their" priority is maintaining power, and if the economy/society/civilization has to be killed to do that, well that's a price they're willing to (make us) pay.

Maybe "they" have some new strategy brewing in the wings, for transferring to a non-economical means of maintaining power.

wyosteven's picture

There are only two other means - fear and force.

Mako's picture

The system is credit, not gold.  The system ran out of gold to run the system. 

Going back to a barter system will mean almost no credit, which is deflationary.   You can't feed 7 billion with or without gold when the system collapses.  Didn't seem to help the Jews in Europe the last time.


faustian bargain's picture

Well, in that case I guess the population problem will solve itself eventually. And/or the nonproductive set will learn some new skills in highway robbery.

tip e. canoe's picture

Mako, you can run a barter economy on credit.  just have to put buffers in to limit everyone's exposure to hustlers gaming the system.

Mako's picture

Even in the Road Warrior there was credit... Mad Max got out lockup with 5 gallons to bring a truck back, in return he got his car back with a fuel tank of gas.... credit was given in the form of his freedom with 5 gallons of gas.  

You are not going to feed 7 billion in a barter system... the liquidation process this time will be one of legends.

tip e. canoe's picture

"You are not going to feed 7 billion in a barter system..."

depends how limited you define barter system? 

RonnieHonduras's picture

The market would accept a medium of exchange.  It would be especially demanded by the haves. Someone's gold watch, or gold (or silver) coin, what's the difference.