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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boiow's picture

money= the most marketable commodity.


vote_libertarian_party's picture

uhhhmmmm...It's all above my pay grade...but this sounds pretty scary.


My wife keeps asking me when the stock shorts will pay off.  I keep telling her be patient.  The next wave of the tsunami will be here soon.

tmosley's picture

Stock shorts are unlikely to pay off at any point ever, as they are priced in dollars.  If you were to short in terms of gold, then you would have a winner.

Mako's picture


It's end game, the final solution to the equation.  

I am actually surprised that nobody understood what the Fed was doing and why the Fed was setup.  

They are the lender or now the buyer of last resort, if there were someone that could and/or would hedge against then why would you need the Fed in there?  It's a nice article but I am confused as to why this is news, what did everyone think the Fed was doing?


It's game over guys, it was game over when everyone started playing this game way before you were born.


crosey's picture

Mako...yours is a unique perspective, one that I have not yet considered.  But the outcome is of Biblical proportion.  The next deluge will not be with water.

Mako's picture

It always ends the same way.   Humans continue to use the same equation over and over expecting a different result.   Yes, most religions figured it out thousands of years ago but modern Man is so advanced they can't even do simple Math.

I wrote on my blog what a good article this was but that I was confused as to why people are surprised there is no hedge.   Not only will there be no hedge, the System will have to continue to leverage up to survive.  Of course, the amount of power needed now is getting way past what humans can output.


lookma's picture

Mako, are you kd in disguise? You are so in tune to the problem, but so unabashedly unaware of the solution that has been repeated over and over for time immemorial. They need to depreciate the debt load wrt to real stuff or deflate. Barter economy will not return. Maybe not even a sound medium of exchange will emerge. But it's the most basic principle of econ that there must be a store of wealth. You seem to think no, but why? Because you keep repeating so without any supporting basis? I wonder what that store of value might be? Probably something real and unique people value. Hmm, I have a guess... Cheers, love your posts but hate your willfully ignorant rants. Don't bury your head in the sand and hate, take yourself and educate. best wishes

boiow's picture

a store of wealth is only something (commodity or service) that people want now or in the future.

Dicite justitiam's picture

hey b, you ever read Eric Lonergan's "Money"?

sodbuster's picture

Maybe they figure- why bother with the 2.4 trln in SOMA holdings- the shit is totally worthless anyway! Just a thought.

SDRII's picture

Smoking pile of rubble; mission accomplished by making the PDs whole; to the moon

JW n FL's picture

Distressed Debt is worthless?


Positive Carry? http://wallstfolly.typepad.com/wallstfolly/2007/07/under-water-uni.html


Just for the fun of it.

Nearing Coleman's picture

What is more important: NYFRB SOMA hedging or low-cost US Treasury funding?

hedgeless_horseman's picture

Larry Fink votes that hedging the portfolio is more important.  And unlike most people, his vote counts.


Dicite justitiam's picture

The 'economy'.  What an amazing beast, this uncontrollable force of nature she be.  Just to behold the uncompromising force is breathtaking.  The more we attempt we control it, the more unruly it becomes.  Although the rational fact-checker and competent ship-captain in me fights the inclination to imbue a moral component into this drama, witnessing this action makes it hard to believe there is no 'moral' force, unmeasurable, immutable, that cannot be denied.  Moral carries connations that are not quite appropriate, but that's the closest word I can find.  Stay humble, my vigilant friends.  This is not a surrender to ignorance and gnashing of teeth--hell no.  Action is appropriate, but it should be not of the character of obfuscation, vacillation, and denial.  Confront, struggle, and take measure of the man.

It is breathtaking, and the weather-channel addict in me is keen.

bugs_'s picture

Anyone the Fed offloads risk to will explode
and the Fed gets it back.

I'm surprised the Fed would hedge at all
given this truism.  It looks more like some
kind of "experiment" or "practice" in a
"25 Billion dollar sandbox".

Ripped Chunk's picture

Because they didn't think anyone was watching too closely.

That is how this whole fucking robbery has been allowed to go down. 

And when they actually did try to look they were told: "shut up and vote or we will collapse the system and there will be marshall law"

non-anon's picture

I wonder what kind of meds Ben, Geithner, et al are on.

tip e. canoe's picture

whatever they are, betya a silver $ they have a blue coating.

non-anon's picture

I just marvel at the way they can sit there and BS us the way they do, I would be cracking up and losing my mind!

boiow's picture

the promise of more frn's or power.

SDRII's picture

One wonders when stories like this start to appear in the papers:




JW n FL's picture

Great read and Thank You!


But the house cleaning in Syria and surrounding nations will continue... Iran is fast tracked to get kicked in the nuttz... and nobody wants to be Iraq part Duex... Syria has made marked improvements with relations to the U.S. and wants to be Jordan part deux..


The Euro trash that did not step up to help in Iraq are shit out of luck... and will be traded off to the Russians a bit at a time.. for thier dis-loyalty...


I can source and site this stuff for you but Google works just as well for you as it does for me...





But privately one can hear that France is resentful of a United States that waited three years to enter World War I while France bled, and waited two years to enter World War II, doing nothing while France fell. There are many causes of the current Francophobia in the United States, and it was evident before the clash of the two countries over Iraq. The French see a new aggressive strain of messianic universalism in U.S. policy, a willingness to impose democracy by use of the U.S. military.

The French-American War Over Iraq.




Eurpoe will be made to pay for thier un-involment in Iraq... and Syria sees the writting on the wall...


This is a repost.. but has some interesting articles... maybe you will enjoy reading..

The Russian's got most of those missiles already...

U.S. replaces Bush plan for Europe missile shield


wait? I mean…



OOOOOOOOOOOOOO! Wait you mean the nukes?

Germany's Call for Removal of US Missiles in Europe Reopens Debate


Plus! 14.06.2004


The facts: Germany's unemployment rate is at 4,5 million, when adding the quiet reserve it is more like 5 to 6 million. Trend: consistent. Black market labor has reached, with approximately 17 % of the GDP, its highest level since the Federal Republic's coming into existence. Trend: increasing. The employer's costs on a high level. Trend: persistent. Fewer German company's go public. Trend: reaching zero. In 2002, the number of insolvencies rose 10%, not only because of new insolvency policies. Trend: restrained.

Something not so, so dated then? 06-06-05


In Germany, for instance, a recent poll showed that 56% of the population hates the euro. They want to dump it and restore their beloved German mark.

No wonder! The German economy — like France’s — is mired in one of its worst recessions since World War II. Unemployment is running at 12%. Tax receipts are plunging. GDP growth is a paltry 1%, despite massive efforts to get it going.

How about this one?

The Germans posturing for their Gold back out of our repositories in New York video is or has been removed? I watched the Video last year… in which the cameras had to be turned off inside oval office for the emergency of the Germans wanting their gold back… this was a full access day when the problem accidently was presented… http://www.msnbc.msn.com/id/30892505/#31073805

http://www.freerepublic.com/focus/f-news/2265231/posts this summation of the event is wonderful.


The German’s… being the German’s… and going protectionist have been pre-cursory events to… The German’s being the German’s… Russia?

Russia seems to get along with whoever does not like us… have you noticed that? I would like you to review this picture and tell me if you see any animosity or worry?  http://allworldcars.com/wordpress/wp-content/uploads/2007/07/bush-2dand-2dputin-2din-2dcar-2dgaz-2d21-2d2.jpg



So… maybe you would like to see George with Putin directly after Russia practiced naval war games with Venezuela? They look like those you have already seen… Russia is one of the U.S.’s best friends the chess game that goes on is for public consumption.


War games with Venezuela…


Fishing Games with George in Maine…




So the Mid-East… has an Nuke problem as provided by Russia the World’s second largest oil producer… and America as the second largest importer I doubt they want any trade problems with us (us being the U.S. proper)… and it would seem that Russia’s friendliness with another Oil rich country at odds with the U.S. would be consistent with their (their being Russia) past behavior… to what end? World domination? Or so they can jack up the price of oil or be the number one supplier because they allowed the idiots to be what they truly are? Idiots.

I am not trying to say that the German’s are really to be watched… and that Iran is screwed… the leadership in the Bunkers is screwed… for the record the Iranian people that I saw running around with Ted Coppel look fine by me… downright friendly even… educated and not wearing Burka’s. http://video.google.com/videoplay?docid=-2642456727429311901#

Maybe we should have stepped up and helped Iran during the elections? I think so.

To answer your last question… no Obama is a Lobby puppet… don’t get me wrong Obama is a politician thusly owes and must pay his Pipers…  But Obama has forwarded Bush Policies in how many different instances? Almost All!? And taken Bush’s “Right Wing Policies” and pushed them even further than Bush. That’s a fact.



merehuman's picture

Thanks for the links  JW

JW n FL's picture

I don't know everything... but I freely try to share what I do know.... so that it can be improved upon... so that the reality we all suffer can in fact be known by many as opposed to just the few...

I think most have a limtied amount of time and thusly rely on the Networks to bring them thier information...

The left wants to hear what they want to hear... the right wants to hear what they want to hear... but in the end its just the Lobby dollars moving the pawns / politicians around the board. You are the only person here who thinks I am helpful.. becareful... you would not want to be put on the anti Gold list? Oops!

SDRII's picture

Landis is as bad as the neocons only he comes at it from the left and MI6/Us intel were activily tweeting or assisting so it is rumored. Furthermore, the IRanian arrest of the western backed leader of a Baluchi terrorist cell via plane intercept seems to confirm as much - that is westernm involvement in the elections. So your wish is likely true.

theprofromdover's picture

France's problem?

Not WW1 or WW2, they did fine out of these minor inconveniences.

They just never got over the fact that the western world chose to speak English.

Like UK, they still think they have an empire and influence.

Unlike UK, they still have a chip on their shoulder, and lifts on their slip-ons.


Germany's problem?

The people want to cecede from the Euro joke (and are probably right to).

Unfortunately Germany is still (as always) energy-poor.

For the right reasons, in early 2000 they voted to remove nuclear power generation from German soil.

In the new short-sighted world, soot is bad, radioactive is good. (Go figure)

I hope they have the nerve to jump.


Might lead to some honesty around Europe.


trav7777's picture


His children are among the richest minors on earth, billionaires.

Remind me what he invented or the businesses he owned or the great capitalist he was.  Like, say, Arafat or Bhutto.

assumptionblindness's picture

The Fed has nothing to worry about and they know it.  Interest rates will NEVER go up.  Well, not until/unless we have a Republican President or Congress anyway.  George Soros and his friends are playing nice nice for the moment...

JW n FL's picture



Becuase there is very little new building... the inventory held... will gain in value.. due to inflation (or the squeeze on debt helf offshore) and any kind of growth rate in the future... the here and now crowd... who pray for the end of the world every day... 10 times a day... want failure... but the Fed will print its way out of trouble and the distressed debt assets held will have value in the mid term... at which point the same "AAA" rated banks that dumped them (as not to carry) will buy them back at a discount to then flip them for a profit!

All courtesy of the American Tax Payer...

The Lobby will insure control of the "AAA" rated banks market share as well as profitability...

Dont BUY GOLD! Buy B of A http://www.google.com/finance?q=NYSE:BAC

or pray for the end and lie to yourself that the end is near! the Fed can print faster than the truth can be explained to idiots.

boiow's picture

you don't live in reality. how the system and the taxpayer can keep that lot in the air is impossible.

even the best jugglers got to eat.

the system will default, no bigee.

passive_lurker's picture

Better the central bank take the losses than our commercial banks, right?

JW n FL's picture

The Central Bank is not going to see losses.... the Commercial Banks will not relize losses... the American Tax payer will pick up the tab, AGAIN! Courtesy of the Lobby making sure...

Banking Dollars to the Lobby…

714 client(s) lobbied for specific issues containing the word 'bank' (See all)

Here's the Top 50 (by number of bank mentions)

· American Bankers Assn

· Federal Home Loan Bank

· National Assn of Realtors

· Credit Union National Assn

· Process Handler Et Al for Hire

· Brassell, Robert J Jr

· Estate of Robert James Brassell

· Bank of America

· Goldman Sachs

· JPMorgan Chase & Co

· National Assn of Federal Credit Unions

· Securities Industry & Financial Mkt Assn

· Self Help Credit Union

· Independent Community Bankers of America

· Loews Corp

· Morgan Stanley

· Mortgage Bankers Assn

· Estate of Delois Albert Brassell

· HSBC Holdings

· Citigroup Inc

· US Chamber of Commerce

· Delta Airlines


· United Services Automobile Assn Group

· ACA International

· Consumers Union of the US

· Council of Federal Home Loan Banks

· Credit Suisse Group

· National Assn of Bankruptcy Trustees

· Delphi Corp

· National Assn of Home Builders

· Financial Services Roundtable

· International Council of Shopping Cntrs

· Advanta Corp

· Deere & Co

· National Cooperative Bank

· US Public Interest Research Group

· American Council of Life Insurers

· American Veterinary Medical Assn

· Clearing House Payments Co


· Principal Financial Group

· American Insurance Assn

· Cerberus Capital Management

· Coalition for Employment Through Exports

· Zions Bancorp

· Ameriprise Financial

· General Motors

· Air Line Pilots Assn

· Arab Bank



Really? The Banks are using profits to pay for their Lobby? not the 0% Fed Window?


**** "In the first three months of 2009, the financial sector spent $104.7 million to lobby Congress and the administration, down 8% from the same period last year" ****


So that I am clear... 2008 was a vintage year for Banks? they made soooooooooooooooooooooo much money on 2008 that in the first 3 months of 2009... they could drop $104.7 MILLION DOLLARS?



tip e. canoe's picture

"brevity is the soul of wit"

Rick64's picture


Almost everybody knows these facts you have been printing. It seems you think we are not aware, but it is common knowledge. The one thing they disagree with is your view on gold, and everybody is entitled to their opinion. To call people idiots, morons ect.. is unneccessary.   Arrogance breeds Ignorance.

JW n FL's picture

The Gold Bugs can Junk me till the cows come home... they are idiots. Buy high to sell higher and all fear based?


Great business model to follow... but, its a free country... they can waste thier monies however it suits them.


Buy bank stocks and buy bullets... either way you will be right. and I own some gold... at $600 an oz I was in though... and most people can not afford the amounts needed for Gold to be of any real use to them. Better they buy canned soup.


Junk the truth Gold Bugs! Junk away!

Sancho Ponzi's picture

I personally don't think Bernanke has any intention of selling his MBS crap, thus why hedge what you cannot sell? (or perhaps could sell at a steep discount)

It's like he's playing the ultimate extend-and-pretend game of chicken. Can asset valuations and wages increase enough to allow selling of his toxic MBS crap at little or no discount? I think he already knows the answer to that question, and will be long gone before the Fed is able to offload any meaningful amount of asset backed securities.

JW n FL's picture



Becuase there is very little new building... the inventory held... will gain in value.. due to inflation (or the squeeze on debt helf offshore) and any kind of growth rate in the future... the here and now crowd... who pray for the end of the world every day... 10 times a day... want failure... but the Fed will print its way out of trouble and the distressed debt assets held will have value in the mid term... at which point the same "AAA" rated banks that dumped them (as not to carry) will buy them back at a discount to then flip them for a profit!

All courtesy of the American Tax Payer...

The Lobby will insure control of the "AAA" rated banks market share as well as profitability...

bingaling's picture

JW I am trying to figure out your angle here . Do you think the Fed and the dollar are invincible ?

History has proven again and again that is not the case . If you think taxpayers are gonna bail something this big you are nuts . There will come a time when a person will just not show up for his job if it doesn't pay, including soldiers .

JW n FL's picture

I think that most are not ignorant but stupid... which works against us... there is no angle there.


As for the spin machine and the Fed's ability to out print the truth.., I think honestly it is an up-hill battle at best.


To audit the Fed... would be an exercise in futility.. even if we could crunch the numbers the off book transactions that they would bury or hide.. Plainly, the truth would never make it out the door even if the laws where reversed.


And let’s say for conversational purposes that the truth did make it out the front door… how many studies that take how long to complete would be fully comprehended by the public by and large?


We are in the same boat you and I, paddling the same direction even… but that does not mean the gene pool of America is capable of comprehending the truth.


I am sorry Brother… that’s just how jaded I am… please and I mean PLEASE! Prove me wrong…


I provided 3rd party accurate information whenever possible to open people’s eyes… but I just don’t think some are capable of understanding why and how much they are really fucked. Forgive the vernacular Good Sir.



faustian bargain's picture

To audit the Fed... would be an exercise in futility.. even if we could crunch the numbers the off book transactions that they would bury or hide.. Plainly, the truth would never make it out the door even if the laws where reversed.

And let’s say for conversational purposes that the truth did make it out the front door… how many studies that take how long to complete would be fully comprehended by the public by and large?

I think that's too much fatalism for my taste, but maybe you're right, i dunno. I do think, counter to your first question, that if the Fed really didn't have anything to worry about they would go ahead and submit to an audit. And as to the second question, I guess that's  something that could only be answered definitively by trying it. I don't see the harm in going for it, but I do see some harm in discouraging it.

JW n FL's picture

I am all for the Audit! I am with you! but how honest will the Fed be? thats the thought that keeps me awake at night.

I think it is in the Feds best interests to Lie to the Public, or be tried for treason? People lie to protect themselves, thier way of life and thier asses...

I am sooooooooooooooo happy to be wrong... I am sooooooooo happy if the Fed would be honest and forthright... but I just dont see that happening. I am all for the push, I will openly support the Audit, I will stand with you and March and I will fund the commercial drive. I am with you!


Sancho Ponzi's picture

The big banks are doing everything (including a concerted effort to cut off all lending to residential builders) to prove you right, but there are problems with your logic: 

1) Median home prices are still north of 3x of household incomes with no relief in site

2) Wages are barely holding steady

3) There is a huge oversupply of large houses 

4) The demand for smaller houses will lead to new construction funded by local and regional banks

If you are talking in the next 10 years, yea, I see that. If you're thinking that's going to happen before 2012, I can't see it happening.




JW n FL's picture


I was only talking about Commercial... not the residential... sorry I was not more clear..

Considering Cionstruction is the second largest economic driver in the Country... and that $1.4 trillion in Commerical is maturing (Commercial side)... with new equity requirements of $300 Billion(ish) which is all just a pass thru to the bottom for the Banks, who already have more cash on hand than they can spend (AAA rated, not main street)...

We are screwed again.. on the commercial side... Besides... B of A is offering debt forgivness, again! it worked so well last time... I am joking... to be clear.

LeBalance's picture

this is a dupe post from above.

SayTabserb's picture

I agree with this take on the situation. The Bernankster has always indicated that he would shrink the Fed's balance sheet "at the appropriate time" or some such meaningless qualifier. He knows the time will never be "appropriate" until the underlying mortgages expire, one way or another, or until there is a significant, huge swing to the upside in residential values, making most of his collateral good and marketable.  If the collateral keeps going bad, well, so what.  That's why the Fed, and not some real organization, holds it. Money isn't real to the Fed.  It's all just digital entries.

Sancho Ponzi's picture

It's like holding onto a junker stock that's dropped from $100/share to .10/share. Technically you haven't lost anything until you liquidate. If you can prolong liquidating forever, no problem.

boiow's picture

you have lost any payable dividends. plus the ability to release your capital for new investment that can pay dividends. if something is not making you money then its losing you money.

Hondo's picture

The interest rate risk on the SOMA has always been there even during the inflationary years.  I'm not particularly worried about it as it most likely will never be sold but rolled at maturity (besides who in any economy could take the other side of an IR trade for a central bank....no one and not any group of banks as someone will always end up taking the hit).  I'm more concerned about the hedging positions in ML1 and its rational given Fed comments to the contrary and why in the world would it make a difference versus SOMA to hedge it..........and more importantly who took the other side of those trades.