Federal Reserve

Looks like Tom Hoenig's dissension at the recent FOMC vote is starting to generate some serious traction. A paper just released by V.V. Chari of the Minneapolis Fed, "Thoughts on the Federal Reserve's exit strategy" goes so far as blasting the Fed for demonstrating Goldman Sachs-like "hubris" courtesy of the persistent lowest common denominator resolution to every crisis, namely Bernanke's redux of MLK "I have a dream" speech for the 21st century, in the Chairman's "we have a printing press" thesis. "...The Fed differs from private firms and emerging markets in that it can “create” money to finance its debts. And indeed, that ability may well lead to hubris on the part of policymakers—similar to that seen among financial managers in the current crisis who were clearly overconfident in their ability to obtain financing. Regardless of such self- assurance on the part of policymakers, if market participants lose confidence in the Fed’s ability to obtain funds from lenders, the Fed would have to pay very high interest rates to obtain short-term debt. A self-fulfilling, high-inflation equilibrium in which expectations that the Fed will pursue lax monetary policy because banks demand a high-inflation premium will lead banks to demand that high-inflation premium." - Minneapolis Fed

The fed has completed $169.1 billion of $175 billion in the agency MBS program: there is just 3% of Agency dry powder remaining (no new purchases in the week ending March 3). The Fed has completed $1.22 trillion of its $1.25 trillion MBS debt purchase program, or 98%, through March 3 (including the $10 billion announced today). There is now just $35 billion left in Quantitative Easing capacity.

Other than that how did you like the play, Mrs. Lincoln?

The following just released video from the Cleveland Fed, in which the Fed explains the workings of the Fed, does not need much commentary, suffice to say that it likely came to you courtesy of the production and direction talents of Goldman's PR group. It appears the video is supposed to be some form of user friendly PR approach created by the same people that gave you Enron. Alas, some of the biggest roles of the Fed are sadly unaccounted for. We leave it up to you, dear readers, to uncover just what these are but here are some suggestions: buying everything in perpetuity, keeping Goldman solvent in perpetuity, keeping the Fed's shady dealings with other Central banks and primary dealers hidden from the public's eye in perpetuity, keeping fed funds rate at (or below?) zero or below in perpetuity, etc, you get the picture.

The Federal Reserve's assets were at $2.27 trillion as of February 25, jumping by $6 billion sequentially. Securities held outright: $1,975 billion (an increase of $62.6 billion MoM, resulting from $59 billion increase in MBS and $3 billion in Agency Debt), or $8 billion increase sequentially. The fed has completed $169.1 billion of $175 billion in the agency MBS program, or a 97% completion, and 96% complete with purchases of Agencies. The Fed has completed $1.21 billion of its $1.25 billion MBS debt purchase program, or 97%, through February 25. There is just $45 billion left in QE. Net borrowings: $103 billion. The monetary base increased by $81 billion in the past fortnight to $2.14 trillion. The ratio of total assets to Monetary Base declined slightly to 1.06x. Float, liquidity swaps, Maiden Lane and other assets: $191 billion. The CPFF program was at $7.7 billion. FX liquidity swaps are now at zero: we are carefully keeping an eye on this metric as any increase presently would indicate banks are again experiencing a dollar funding shortage. Maiden Lane I and Maiden Lane II increased and were $27.2 and $15.5 billion, while Maiden Lane III as always continues pretending it has value and came flat at $22.4 billion.

I think I’d shoot myself. [Laughing] I don’t think I’d go to work in the morning. If I were Chairman of the Federal Reserve I would let free market forces unfold. I would let rates rise to where they should rise. These are not normal rates that we have now. I would have to raise rates. I’d have to do it over time. - Fred Hickey

With Geoffrey Batt

With everyone's attention drawn to each and every step the IMF takes, while contemplating the imminent Greek bailout, which without exception and with the grace of a drunk 3-ton bull in a China store, leaves nothing but annihilation and currency boards in its wake, is the popular opinion once again getting the Houdini treatment courtesy of the mainstream media? One thing learned over the past year is that everything is a distraction for something else, and that something else, quite usually without failure, ends up being the Marriner Eccles building on Constitution Avenue in D.C. What we refer to is disclosure from a paper written by none other than the Maestro Jr, in 2004, titled "Conducting Monetary Policy at Very Low Short-Term Interest Rates" (oddly appropriate). In this paper, Bernanke discusses not only the possibility of purchasing corporate assets (bonds and stocks), but emphasizes that one other security class which the Fed may be inclined to acquire under conditions such as those today, and has an explicit authority to do so, are foreign government bonds. After singlehandedly rescuing every Wall Street bonus in the prior year, is the Fed now the shadow backstop for the Greek economy as well?

Cutting straight to the chase, and to Bernanke's musings:

The Federal Reserve's balance just hit another record high, at $2.29 trillion, jumping by a whopping $54 billion sequentially (the biggest weekly increase since mid-November). Securities held outright: $1,967 billion (an increase of $60.9 billion MoM, resulting from $56 billion increase in MBS and $5 nillion in Agency Debt), or a huge $53.6 billion increase sequentially. The fed is now 95% complete with its purchases of MBS, and 96% complete with purchases of Agencies. The Fed has completed $167.2 billion of its $175 billion agency debt purchase program through February 17. The Fed's MBS total is now $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion.

The Federal Reserve's balance remained at an all time high of $2.233 Trillion in assets, after a $3 billion increase in MBS and Agency purchases week over week. Securities held outright: $1,913 billion (an increase of $57 billion MoM, resulting from $52 billion increase in MBS and $5 billion in Agency Debt), or a $3 billion increase sequentially. The fed is now 95% complete with its purchases of MBS. Net borrowings: $127 billion. The monetary base increased by $50 billion in the past fortnight to $2.06 trillion. The ratio of total assets to Monetary Base remained constant at 1.08x, elevated from the historical ratio of 1.00x. Custody foreign holdings increased by $9.3 billion to $2,956 billion. A maturity profile of the Fed's assets indicates a skewed maturity distribution. Of a total of $2 trillion in dated assets, $132 billion mature in under 15 days, $226 billion in under 1 year, and $976 billion in under ten years.

"A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day. What are the advantages and disadvantages of this technology-dependent trading environment, and how are its risks controlled?... The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment." - Chicago Federal Reserve

• Securities
  held outright: $1,913 billion (an increase of $67 billion MoM,
  resulting from $64 billion increase in MBS and $3 billion in
  Agency Debt), or a $7 billion increase sequentially. 
• Net
  borrowings: $165 billion. Number for the January 28th week has not been updated.
• Float,
  liquidity swaps, Maiden Lane and other assets: $196
  billion. The CPFF program was was at $11.2 billion, another fresh all time low. FX liquidity swaps declined
  by $1.075 billion to practically 0. Maiden Lane I
  and Maiden Lane II were at $26.8 and $15.4
  billion, while Maiden Lane III continues pretending it has value and came at $22.5 billion.

As observant readers will recall, a week ago we pointed out a letter in which the New York Fed's Steven Manzari instructed AIG to stand down on all discussions with counterparties on "tearing up/unwinding CDS trades on the CDO portfolio." At the time we focused on the word "stand down" as an indication of the Fed's lead role in the process. At this point there is no doubt that the FRBNY, together with its law firm, Davis Polk, were in the pilot's seat during the entire AIG negotiation, and while Tim Geithner may not have been the responsible man for this, someone must have been - and for the record, our money is a double or nothing on recently promoted FRBNY Senior Vice President Sarah Dahlgren, who as of January 21st is in charge of the Fed's Special Investments [AIG] Management Group. We sure hope Sarah gets the chance to recall her memories beginning in the fateful month of September 2008 when she became the person in charge of the FRBNY's AIG relationship. But back to the letter - little did we know that our focus was on the right sentence... but on the wrong word. What should have struck us front and center, was Habayeb's admission that contract "tear downs" had been evaluated. This means that someone, aside from AIG, must have expressed an interest in a tear down, which if true would have dramatic consequences for the entire AIG debacle. Today, the WSJ presented the missing piece of the puzzle.

A talking point that has gripped the media in light of the sudden weakness ahead of the Ben Bernanke reconfirmation process, is the question of who should succeed the Fed Chairman, should he fail to obtain the requisite number of votes to continue. Many have said "Ben is bad, but anyone that would come after him would likely be even worse." While this is true for any of the potential successors (Donald Kohn, ex-Morgan Stanley banker Kevin Warsh, community-banker Elizabeth Duke, Daniel Tarullo, or ex-Goldmanite Bill Dudley, and speaking of the New York Fed, where Jeff Immelt is a Class B director: did Jamie Dimon, whose membership expired on December 31, 2009, get the Goldman renewal vote?), this is not an exclusive case. Which is why Zero Hedge proposes the candidacy of Stanford economist, and "Taylor Rule" creator, John Taylor for the post of Chairman of the Federal Reserve.

An interesting letter posted today by a reader on Jesse's Cafe Americain caught our attention. As the reader proposes, on many occasions during the UST period of Q.E. between March and November, the Fed may have well been front-run by one or more "players" casting serious doubt on not only the integrity and propriety of the Q.E. process, but on just how much potential "leakage" may be occurring from the 33 Liberty office on a daily basis. If this occurs in Treasuries, one can be confident that it is also prevalent in equities, MBS and all other asset classes. Is it hightime for the SEC to take a long, hard look at the primary source of market manipulation- the Federal Reserve Board Of New York? If not, can Mary Schapiro please approach the public with a referendum vote on whether or not she should be entitled to continue collecting hundreds of thousands of dollars in taxpayer money for continuing to do nothing.

This is it - we have gotten to the stage where every week we expect the Fed's balance sheet to reach new record highs. As the Fed has practically rolled off its emergency liquidity measures (foreign FX swaps are practically zero this week), the only variable on the margin will be direct securities holdings... and those are going to continue growing for at least 3 more months, and likely much longer. Look for the Fed's balance sheet to be at least $2.5 trillion by mid March.