Focus: How to Sell Its Mortgage Securities” I read Hilsenrath. He
writes well, he knows his stuff and he is connected. I think he is
blowing “Fed Speak” at us with this one. Here’s the link,
you decide.
Reading the article I was left with the impression that JH had used both
public information and the thinking behind some ‘off the record’
conversations with Fed officials. The Fed does not tell what it is going
to do unless it wants to. Ever. Not even to Jon Hilsenrath. So when you
see this “Fed speak” it should be considered in that light
The article is a rehash of the Feds balance sheet dilemma. It raises the
question of, “What’s the Fed going to do with all that paper it just
bought?”
On reading, you are supposed to get this warm feeling that the Fed is
acutely aware of the size, scope and significance of their QE actions.
That these steps were just a ‘natural’ consequence to the “Emergency”
and now that we’re returning to normal the “Emergency Measures” are
going to be unwound. No problem. They have this completely under
control.
The article (I think) leaks the information that next weeks Fed meeting
will continue the ZIRP Forever language (at least six more months). It
also confirms that there will be some more of the “experimental” reverse
repos in the coming weeks.
JH points to the public comments of some Fed members indicating that
that they actually want to sell some of what they own. To me this is
just noise to make it appear that there is a real debate. There will be
no Fed selling of MBS for at least 24 months. The quote from Bernanke on
this topic:
"I currently do not anticipate that the Federal Reserve will
sell any of its security holdings in the near term, at least until
after policy tightening has gotten under way and the economy is clearly
in a sustainable recovery."
This is completely open ended. He might as well have said, “We will
start selling when the terror threat level is returned to green.”
Don’t hold your breath.
So the article leaves us with the inescapable conclusion that the
Government effort to prop up the mortgage market is now completed and
the next phase is going be a period of relative balance sheet stability
followed by a plan to unwind the mess. That is peachy news and we
should all be very happy, right?
Well I am not. Some facts here. The Fed dramatically (and predictably)
slowed its purchases of MBS in March. They have made no new purchases
since then. So they have lived up to the bargain, but the other arm of
the federal financial puzzle started buying in MBS at just the time the
Fed stopped. The Treasury department through Fannie and Freddie started a
program that commenced in March and will continue for some time to come
where they will be buying in $100rds of billions of MBS. So the beat
goes on and on. From our friends at Fan and Fred:
F/F will buy in defaulted mortgages and pay the holders of the MBS cash.
This will come to the investors in the form of a pre-pay of principal.
It is very normal for a portion of the principal to be returned to the
investors on a monthly basis. The F/F steps just accelerate the process.
When the investors (big funds) get the principal back they (usually)
turn right around and plow it back into new MBS issues.
The steps taken by F/F are completely different in form to the Fed’s
purchases of MBS but in substance they have the same affect. It
decreases the outstanding mortgages, and therefore influences mortgages
spreads. Keep the game going for a bit longer.
I admit that I am an old cynic and generally assume the darkest motives.
But the timing of F/F to start their buy back programs in March and
April at precisely the same time that the Fed is “finished” with its
business is no coincidence. It was planned and coordinated months ago.
This is just more manipulation. Bernanke understands this and probably
had a hand in the timing of the F/F buyback programs.
The fact that the government is continuing to impact mortgage rates was
not mentioned in the JH article. In fairness, his piece was directed to
just the Federal Reserve's role in the buy ins. But I don’t think we
are getting the full story from the WSJ. We are getting what the Fed
wants us to hear. The real story is that Washington simply can’t stop
interfering in the mortgage market. If D.C. really did stop, we would
have a problem. And they know it.
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Now that the Treasury backstops Fan/Fred to an unlimited degree (since Christmas of last year), the Fed finances new mortgages via Treasury borrowing > direct payments to the GSE's. It's just another variation on the shell game. The government is bound and determined to prevent loss in real estate, whether it does so fraudulently is irrelevant.
Haven't you heard, greed is good?
We knew the MBS support had to come from somewhere. This was the logical conclusion back in early January.
Who or what is buying all of this global debt and with whose real or unreal money?
+10 on this article. Somehow I had missed the
shift from the FED purchases to F/F. The $400B
Christmas present was going under someones
tree(just not me)
They've turned off one Firehose of liquidity and switch to
another.
Stocks ARE undervalued!
Stop worrying about P/E of 100, thats a bargain in
tomorrow's dollars. S&P will be 500 in 3 years, we'll
just be calling it 1500.
What bugs me, is that they get paid off full value
for a nonperforming loan and can turn around and
buy two houses for the cash. The little guy is still
at the back of the line.
I remember reading how in the 20's Germans walked
into Czechoslovakia with bags stuffed with Marks
The locals hadn't heard about inflation and thought
they were getting rich selling out.
Its time to start thinking like the Brazilians in the
80's. Money is a hot potato, he who holds on will get
burned...
Bruce, do you remember this article on Zero Hedge?
http://www.zerohedge.com/article/federal-reserve-insolvent
That was a critical article in understanding everything the Fed is doing. Great work.
Yes I did and I just reread it. It was done on 3/8, before the F/F buybacks were announced.
The point made was that reasonalbe "haircut" on the Fed MBS would wipe out their $50b in equity. So they are actually broke because the haircut should have been at least 10%.
So now treasury steps in to "cleanse" the crap out of the MBS. In theory this means that there should b no "bad crap" in the Fed's MBS and therefore no possible loss.
This is part of the socialization of the losses. We have protected the private sector lenders with TARP, we have protected the Fed from loss. So the tax payers takes it all in the ear.
I like the last line of the piece:
"ultimately (the losses) will lead to a systemic catharsis of unprecedented proportions.
At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.
Actually GSE MBSs have always been guaranteed, and the federal government has been explicitly on the hook to bail out the GSEs' losses since before the Fed started buying MBSs. When you get your head around it, you'll realize that this buyback doesn't change much.
bruce you have very legitimate suspicious but you're confused.
you're absolutely right that the WSJ did not initiate this story, the fed did. i take it as a reaction to a similar story by CNBC, that focused more on alleged disagreements among fed board members and suggested hawks were gathering strength. look out for similar stories in other media - it might have been an off the record briefing, not just a 1 on 1 with the WSJ.
the GSE purchases of MBSs that you point to aren't much substitute for the fed's purchases. when a mortgage within a GSE MBS goes bad, the GSE as guarantor must compensate the MBS's owner. the announcement you are pointing to was a government decision to have the GSEs buy back some old, bad MBSs rather than make compensation payments. perhaps buying out those old, bad MBSs will help free up money in the financial system to purchase newly issued MBSs, or perhaps those owners of old, bad MBSs will put their money elsewhere. i doubt this is going to have any big impact on the primary market for MBSs.
the fed's purchases of MBSs are a totally different matter. the fed has been monetizing a big chunk of the country's newly issued mortgages, substituting for the private primary MBS market. the fed is still completing some purchases that were agreed before march 31, but that will be done in a few weeks.
actually, my impression is that there is genuinely discord on the board as big decisions bear down. since bernanke's style is to avoid decisions until TSHTF, i think we will be seeing more of these kinds of stories as hawks and doves get increasingly anxious about the Scylla and Charybdis of inflation and rising rates.
End the fucking Federal Reserve crime cartel.
Banks/gov more interested in owning property then owning mortgages?
With a caretaker in place until inflation takes off, thanks very much.
this just in...NASA builds rocket made out of paper, but Obama says, no need to light the fuse, simply stack the paper end to end, leave a sugar trail on the bank notes and colonise Mars with ants that excrete water than can be reversed back down the watermark. You cure the money supply and the water shortage in one go. (Bloggers ponder the value of paper when the electronic value of cash money in circulation exceeds the value of pulpable wood for banknotes by 3,000 times; 2,900 times more than the 2,000 year m.a.).
Yes - take a bucket of water out of the deep end of the pool ( where there is alot of water!!) and walk around the pool and pour it into the shallow end. Thats the ticket. And everyboby will get all excited and write articles and do analysis on this event!!!LOL.
But ultimately all Fed debt is U.S. debt, present, future or otherwise. So it will fall to the rapidly disappearing middle class to carry this, since Wally, Goldy and JayPee are bonusing their money out of the country and into hard assets.
There is a huge difference between Fed mortgage buys and Treasury buys.
The Fed purchased with newly printed money, while the Treasury must borrow allready existing dollars to supply Fan and Fred with the cash to make the purchases.
Fed purchases are inflationary, Treasury purchases are not, and only keep mortgage rates in line with (rising) Treasury rates. In sum, Fan and Fred purchases are not stimulative in the same way that Fed purchases are. They merely transform defaulted debt into the ever rising pile of government debt and sovereign risk, while the selling banks are handed more taxpayer cash to speculate in other markets.
so the treasury must borrow allready existing money ,,lol
from whom? .. usually they borrow from the fed who create the dollars first. into existence ,. or they sell bonds to governments who borrow the money in background deals from the fed / or the fed prints the money to buy the monetized bonds ,
all steps lead to a central bank printing money out of whole-cloth.
money is created as a results of innovation, work, savings . more left over from consumption
all the rest is inflationary .
so what is the huge difference between the fed and treasury ? no difference ,, just a different color of lip stick on the same type of pig
"so what is the huge difference between the fed and treasury ? no difference ,, just a different color of lip stick on the same type of pig"
Treasury can't print money!!
All Treasury can do is tax or borrow. Neither of these actions is stimulative.
Now many on this board believe that Treasury is crediting the checking accounts of selling banks with cash, without borrowing or taxing. That is printing money illegally. Congress has given that power exclusively to the Fed.
But if the Treasury is printing illegally, we will know simply by checking the monetary base and M-1 each week. The same is true if foreign central banks are printing dollars (illegally). It will show up in base and M-1 - both of which have been contracting lately.
All Treasury can do is tax or borrow. Neither of these actions is stimulative.MrPalladium well dah
or they can request another extension of borrowing power.. next up 15 trillion
what do you mean not stimulative , the fed is beholden to the political process /
they request the printing presses run at all hours , for wars, for entitlements , for a bridge to nowhere in alaska ,
your banging a knat with a sludge hammer here.
how many on the board believes that the treasury does not call the shots.
borrowing not stimulative ,, and what opium den do you hang out in.. lol
Treasury borrowing is stimulative to the stock market in the short run, and it is also stimulative for the economy but only in the very short run. However, once interest rates begin to rise, the stimulus ends and rates are about to begin that rise.
Sorry, 'gols soars to sky' shall be 'gold soars to sky'.
Greek debt is a testing bomb, if no working, another euro country becomes bigger testing bomb. If all these don't work well, then US has to nuclear its own stock market, but by what? how to control damage?
If Saudi's case is real, then soon gold price has to be raised sharply, otherwise all physical gold will move to China and India, left US and Europe with paper. Back to 70's because France was doing same thing, US was forced to disconnect Dollar and Gold, by then 2700+ tons of Gold had been shipped to France. Could history repeat this time? How do you manage 0% interest rate while gols soars to sky? I guess that US has to nuclear stock market to create 'super deflation' to scare away Gold buyer and let them cry in pile of pile of Gold. Let them learn a lesson in pain that Dollar is your God.
Yep, while we are playing childish and manipulative games with paper, the chinese and indians are collecting the actual valuables.
One thing I like about the chinese, not to much fuck around in them....
why is there no government agency that oversees the Fed. We can not depend on congress since they are in collusion with Fan/Fred and with the Fed so it seems there really is no way to counter the utter fraud of it all. No wonder others like the asians are buying gold, they see there fantasy of our government and do not want to be a victim. We need some sort of collapse that really takes them down so we can rebuild with some honesty.
"I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery."
- Ben Shalom Bernanke
When I went to grad school at the U of C the my prof told me on the first day of class: "Always remember, The Wall Street Journal is not your friend." With the Murdock ownership, they have now become the economic house organ for the ruling elite.
Complete and utter lawlessness.
Plain and simple.
Can someone tell me if there is a precedent for this, propping up the RE market, by a govt or quasi-govt entity (massive bank) and what the outcome was?
If I were a foreign govt and I saw the U.S. doing this I'd be highly skeptical to say the least.
They have no idea what to do so they will do nothing. If they were smart - which they clearly are not - they would sell a few hundred billion over the next year before they start to raise rates. Demand for yield right now is very strong and there is a shortage of MBS in the market place. They messed up and overbought the market. Given current market liqudiity they can easily sell a few hundred billion - a sure sign that they bought too many.
I've been working for the past 9 months in Saudi Arabia (government position) and have witnessed the infusion of Chinese "buyers" descending into Riyadh's gold souks (markets) and buying up the gold contracts the government (Saudi's central bank) dispenses to these PM dealers. As of April 10th, 2010, according to the Ministry of the Interior, Chinese buyers have purchased 16.2% of the gold contracts to the tune of 210,000 ounces with a 6.99% adjusted mark-up over spot. In Saudi Arabia, that's a much higher premium paid than the normal 2.99% mark-up. With a raised eyebrow, I inquired into the gold markets in Jeddah, Danman, and Mecca and discovered contracts were being purchased there as well by Chinese buyers (though I don't have the figures from those cities yet).
There has been an unprecedented surge in Saudi gold purchases in the past two weeks by the government with over $8.5 billion being spent on the yellow metal, reported by the Gulf News citing local industry sources.
According to the newspaper, the Gulf regional stock markets have fallen very sharply since early October, leading to an exodus of cash which needs to find a safe haven. But, IMO, that's just a cover.
Gold is currently trading at prices similar to a year ago, and 30 per cent off its March peak. But it's not the Saudi investors piling into gold.
News about the Saudi gold rush (if it gets out) is bound to fuel speculation about the alleged large physical gold transactions that have been taking place at prices well above the spot price set in the futures market. It is very unlikely that such a large hoard of physical gold could have been bought for the depressed current price.
It is my belief that China's purchasing of physical gold in vast amounts through the backdoor of KSA keeps the transactions mute and off the wire services, in the same way China couldn't possibly purchase the IMF's 300 tons without juicing up the price of gold on the open market.
This seems to smell of a coordinated effort between the two countries. 210,000 ounces in the span of 5 days (Riyadh only) would seem insignificant when were talking about trying to make up 3,000 tons to add to China's 1,500 tons currently. If China somehow manages to extract enough gold from the Middle East, and other regions in the world through backdoor purchases, combined with their own mining operations, and reaches the magical 4,000 tons (half of the u.s's holdings), then it's a new ballgame.
Artificial,
News about the Saudi gold rush (if it gets out) is bound to fuel speculation about the alleged large physical gold transactions that have been taking place at prices well above the spot price set in the futures market.
This has a real bad smell to it.
Sounds very possible and you have provided a terrific insight but why would the Saudis buy gold when they are long a commodity that is equally, if not more valuable?
You Need To Diversify Yo Bonds Nigga:
http://www.youtube.com/watch?v=Qid_WGBrQjA
1958 history class USA , 11th grade
first words out of instructors mouth teaching about nation states
I quote from memory LOL
"The golden rule
He that has the gold Rules "
since then the school kidos have been taught mush from the very pavlovian bell ringers
please the Saudis realize that oil is a deprecating asset..
do some real sleuth work and find that they have been paid gold and fiat payments in tandem for their gold..
one of lifes little silent ironies
its just the minions and square heads that we see from time to time here on zero hedge . that understand squat about the value of gold .
The world sans a few fiat brotherheads of the bell . rant against the very real money that will soon be required in all international trade .
Bruce!
Is it manipulation or a recognition that the housing market has yet to recover to sustainable levels and therefore needs additional life support? (Differing perspectives of the same issue.)
I'm no expert...but the Fed could just print money and buy the $1.3T in MBS.
Does Treasury/Freddie/Fannie have to raise money to buy the loans? Don't they need to sell bonds or get funding from Congress?
Anybody have knowledge on how funding would be different and possibly limited in Phase II?
your point about either selling bonds or getting congressional funding is extremely well taken. please see john hussman's 2-16-10 analysis. current policy does not look constitutionally kosher to me (so what).
F/F have received over the Christmas holiday (without even so much as a hint of irony) am unlimited line of credit from the good old US of A. As they are in receivership, they probably do not need to even publish financial statements. In my view al that is happening is that the detritus is being moved from the Fed's balance sheet over to F/F - another set of entities that d not have to disclose.
BTW, "print" money to buy the crap is exactly what the Fed did.
Yes, as precisely admitted recently by Ben Bernanke to a question posed by Ron Paul on that exact point. Bernanke had reaffirmed that the Fed would not monetize the debt, and Paul followed up re: the MBS purchases, asking whether the Fed had not simply printed the money to buy all the MBS bonds. Bernanke nodded, as if to say, "Oh, that. Sure." By the way, why is this thread so calm, intelligent and informative? Where are the completely o/t tirades more typical of the "main page?"
Nice article Bruce.
We should expect nothing but lies from the Ministry of Truth.
Exactly. The Fed seems to always point to unemployment as the thing that will tell them to tighten or not. I suspect there is going to be a high level of structural unemployment for many years. So the Fed will wind up keeping rates at zero for way too long and creat a much much worse bubble in money than the housing bubble or dot-coms. Whre this bubblw will manifest in unclear - probably not housing. maybe commodities, gold,oil emerging ,arkets - the usual suspects. It may have one consequence which is force Asian countries to stop pegging to the Dollar/US Monetary policy as inflation becomes a raging issue.
I already see bubble right here. check some of these NFLX, ISRG, DECK, WYNN.
BUT also check GOOG, POT, MON, FSLR, DYN, RRI. I smell a stealth bear market underneath these "bull" rallies.
Never apologize for being cynical when we deal with these people.
Thanks for the head's up Bruce.
If they wait until the "economy is clearly in a sustainable recovery," they'll have to wait until Dow hits 20,000, because that's when the last holdouts will plunge their remaining savings into the market, and will buy 3 iPads each from the "wealth effect" due to the Dow 20K. But by then the wealth transfer from the top-10% to the top-0.001% of the population will have been accomplished (just as the wealth transfer from the bottom 90% to top 1% has been accomplished in the last 25 years) and gold will trade around $5000-6000... I seriously doubt that by then the nation (and the Fed itself) will remain as we know them now.
If the Euro proceeds do go down the toilet and is percieved to have structural issues that will not go away - then the Feds job will become much easier. Then they can monetize openly and basically say "whatchoo gonna do aboutit?" . We might be in this happy situation later this year it seems to me.
So I guess we can speculate instead on whether the Fed will start paying the banks interest on the reserves. The only issue here seems to be if you make reserves too attarctive, then banks may not buy as much in Treasuries - and I believe that is the real purpose for leaving the excess reserves out there . After all the Fed directly buying treasuries is considered "monetization" - so better to give the banks free money so they can buy treasuries . I guess some 4 year olds may be fooled by this on an off day - but it nevertheless enables the Fed to keep asserting that they are not "monetizing" govt debt.
Freudian slip Meant Fed not "Ded" - grateful or not!!
No Primefool
You were right the first time Ded, as in soon we all will be...
I am seeing a lot of articles on whether the Ded will increase "rates". What "rates" are we talking about? Historically by "rates" people meant the Fed Funds Target Rate. The Fed does not set the Fed Funds rate(the rate at which banks lend excess reserves to other banks) - only the Target. In order to nudge Fed Funds Rate towards the Target the Fed inserted or extracted excess reserves from the system.
At the present there are over $1 Trillion in excess reserves in the banking system. So it is silly to even talk about the Fed raising the Fed Funds Target. This will stay close to Zero until excess reserves are reduced down to where they used to be a few tens of Billion.