Federal Reserve

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.

One topic that has caught the mainstream media's attention is the recent surge in Direct Bid take down participation in Treasury auctions, which as we pointed out previously (3 Year auction, 10 Year auction), has jumped from sub 10% average well into the double digit arena. Today the Financial Times dedicates an entire article to questioning just who may be going all out in their purchases of Treasuries as a direct bidder. We suggest that this "bid" is none other than China funding Direct covert purchases of Treasuries as an extension of the Fed's Quantitative Easing policy.

And so it escalates: first the head of the Argentine Central Bank was demonstratively sacked by the president, and now Argentina funds held at the Federal Reserve have been "embargoed" by US District Judge Thomas Griesa. We are doing a thesaurus check to see if embargoed is a synonym for confiscated. Wily old Ben - always coming up with new and improved ways to create funding crises thousands of miles away (as long as they are not at the Marriner Eccles building). We are confused how gold has so far managed to escape the same "embargo" fate as the South American country.

In the current hodge podge of abstract finance, it is easy to get lost in the numbers and lose sight of the forest for the trees. Which is why we provide the ultimate simplification: In calendar (not fiscal) 2009, the US grew its budget deficit by $1.47 trillion. In the same time, the Federal Reserve grew its securities holdings from $500 billion to $1.85 trillion, a $1.34 trillion increase. Keeping it simple: 91% of the budget deficit increase in 2009, under the authority of President Obama, was funded by the... United States.

TrimTabs' Charles Biderman makes another appearance, this time on BNN, discussing "circumstantial evidence" of the Fed's goosing of stock markets. And yes, the debate of who is buying futures consistently takes front and center position. Liberty 33 - your move: feel free to refute any and all claims presented by the TrimTabs CEO.

In this oldie but a goodie, Ron Paul hammers home the point of why the Federal Reserve needs to finally be accountable and transparent, despite the desires of Barney Frank, Wall Street, Ben Bernanke and all the current failed system's apparatchicks who will stop at nothing to perpetuate the broken status quo. For regular readers none of this should be news. For everyone else, this 1 hour program is a must watch. Clip courtesy of Fora TV and the Cato Institute.

A vigilant reader, who combed through the backup of today's Consumer Credit G.19 statement points out a flagrant and obvious error in the Fed's data. While luckily the data impact is not major (at most $4 billion, which in our day and age is a pithy 50% of Goldman's FICC trading desk bonus), the implication that the Fed does not check its work in something as critical as one of the core data series (or at least it used to be until a few machines took over the market, to whom, as today indicated, a record credit contraction somehow ended up being a positive event) is very, very troubling.

Bad news for fixed income market monopolist Goldman Sachs. Kansas City Fed President Thomas Hoenig, in response to a question from University of Maryland Professor Carmen Reinhardt said "dismembering firms is a fair thing to consider." Hoenig further clarified that regulators "have people who are experts who understand what's going on inside institutions who could figure out how to carve out" some parts of a financial institution if they are taking undue risks with taxpayer backing." Surely, we expect LloydBlankfein to comment promptly on how even the Federal Reserve is now thoroughly underappreciating the divine nature of its prop/flow-focused business model, and how originating the proactively entire volume of OTC quote flow is just a natural side effect of completely cornering the CDS, bond and loan market.

Jim Bianco submits: "The Federal Reserve owns 80% of AIG. With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices. That is, when faced with a financial problem, they create complicated tools (like CDS). When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone. Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer. You might even be named TIME’s Person of the Year."

Much has been written about the residential mortgage market and the problems it has caused and has yet to cause. The
following analysis focuses on this issue from the perspective of the ratio of outstanding mortgage debt versus real
personal income. Mortgage debt is represented by the Household and Non-Profit Mortgage Liabilities from the Federal
Reserve’s flow of funds report; personal income is represented by real personal income net of government transfers
from the Bureau of Economic Analysis.

Adam Smith, Charles Darwin and George Washington are not only rolling in their graves, they are dancing the macarena. A new study by the UMich School of Business has found what everyone has known since the crisis began, if not centuries prior: that the biggest, crappiest banks were guaranteed to get more bailout funding the more political ties they had (and more kickbacks they had offered). Is this sufficient to claim that capitalism in its purest sense has been corrupted beyond repair, courtesy of political intervention and constant pandering? Probably not, but it sure makes a damn good argument. In any case, the data is sufficient for all bears to start keeping a track of which banks are increasing their lobbying efforts and funding: those are the ones where the greatest weakness is likely still to be uncovered (if it hasn't already). And while the political relationship probably is not a big surprise to any realistic readers, another finding of the study makes a solid case for abolition of the "apolitical" Federal Reserve:

A new study by Ross professors Ran Duchin and Denis Sosyura found that
banks with connections to members of congressional finance committees
and banks whose executives served on Federal Reserve boards were more
likely to receive funds from the Troubled Asset Relief Program, the
federal government's program to purchase assets and equity from
financial institutions to strengthen its financial sector.

The unsupervised Federal Reserve gets to make or break banks, presumably under the gun of its one and only master, Goldman Sachs, which has already destroyed its major historical competitors: Bear Stearns and Lehman Brothers. This is a sufficient condition to not only audit the central bank but to immediately seek its abolition, and also to commence anti-trust proceedings against Goldman Sachs which is not only a monopoly, but by extension has veto power over the very regulatory mechanism that is supposed to keep it "fair and honest." The system is truly broken.

The Fed's balance sheet assets are back to all time highs at $2.2 trillion, while the "collateralization" of the dollar with MBS/agencies hits an all time low of 89.7%. Look for the dollar to be backed by increasingly less valuable securities.