WH and Fed sleeping together

Bruce Krasting's picture

For me, the most significant development from the Fed’s announcement is a change in policy where the Fed will re-invest proceeds of maturing MBS securities in new issues of Agency MBS paper. Prior to today, the Fed re-invested principal repayments in Treasury bonds.

I wrote about the possibility of a mega mortgage ReFi by Fannie and Freddie (here and here). I (and many readers) pointed to an obvious flaw in the ReFi story. If a Trillion or so of mortgages were rapidly prepaid, then who would buy all of the new (much lower coupon) mortgage paper?

Now we have the answer. The Fed will put the new MBS paper back on its Balance Sheet, $ for $. There will still be many bondholders outside of the Fed who will get prepaid much faster than they had assumed. Most of that is in pension/bond funds. No one cares about them.

I think that Treasury will announce the plans for a Mega Refi in the not too distant future. It could come this weekend or next week. Obama will wait just enough time after the complex Fed decision so that 99% of all people don’t connect these two dots.

In that 1% will be Republicans. They are going to be mad as hens tonight that Bernanke ignored their last minute plea not to play more monetary games. The authors of that letter, McConnell, Boehner, Kyle and Cantor are really going to be peeved. Not only did the Fed step further on the gas, they greased the skids for an Administration's plan to ReFi mortgages.

It’s not at all clear that the Fed’s latest move are going to accomplish a thing. I’m not sure that the Big ReFi is going to be such a success either. But that doesn’t matter.

What’s important about this is that the Republicans will respond. They will not give Obama another leg up with his one-year stimulus program. Any chance of that went up in smoke with the Fed’s VERY political decision on MBS today. Can you say, "Collusion"?

This is a real circus now. In this one the bears aren't dancing. They’re fighting. The claws are out and it’s going to get bloody.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
the grateful unemployed's picture

so the Fed and the WH are working together to help the economy, that's hardly collusion. Okay the GOP wants to prevent economic recovery, (on the back of future taxpayers, these are the same guys who rubberstamped the Bush charade) that's partisan gamesmanship.

If Obama can't pull things together by March then the adults will come off the bench. one can feel the urgency here, and a one term Presidency is not what the stock market wants, they want to back Barry, just to keep the good times rolling. 

they need a new bubble, and I have an idea, a JOBS bubble. yes sell America on a bunch of new high tech jobs and give them low interest student loans. then have the SLA sell those those loans in tranches. have the ratings agencies give them all AAA ratings. pull juvenile deliquensts out of continuation school and send them to college.

yes invest in education, online colleges, to be sure. call it the Job Ownership Society. No one will ever make enough to pay back their loans, but with wages rising? Okay back to square one.


Implicit simplicit's picture

The fed and the WH house would need to reconcile the fact that the fed plan calls for only investing the proceeds from existing maturing MBS securities in new issues of Agency MBS paper. This does not constitutte a mega refi program unless they say the fed will buy more than presently stated. I wonder how much matures monthly on average?

piceridu's picture

read it again " Not only did the Fed step further on the gas, they greased the skids for an Administration's plan to ReFi mortgages." 

Implicit simplicit's picture

I did read it again. I know what Bruce is saying could happen. I am asking how it would go down considering what the fed actually did say which was:

 The Committee also will maintain its existing policy of reinvesting principalpayments from  its securities holdings. TheCommittee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

They would need to justify additional refi beyond what was matured, and I think that they would get pushback  on that. I don't believe it would  be  a done deal.

Buck Johnson's picture

It's going to get nasty indeed.

disabledvet's picture

First off this was a great call. I've been pondering a big move by The Folks at the Top ever since they replaced the Marine General as head of the National Security Agency with "the guy from Fannie and Freddie." That was some time ago so it took a lot of mainstream media retardisms before i would be proven right "yet again!" And to think all you have to do is read the newspaper and have an interest in history. Anywho...i find no reason for this to become "nasty" at all. All of DC was in agreement with the real estate speculators--how can they object to the bailout of their bad idea? I say not only that either side of the aisle can't...but they won't as well. I say this because all one need's to do is "Follow Hank"...as in Hank Paulson...who put Fannie and Fred in "conservatorship." this thing is too sacrosanct (see above) so it's just something that we live with. ramping up securitization will provide something to the homeowner now that "savers" have been completely annihilated by "Operation Twist." More to the point are the "actuarial considerations" involved in Operation Twist (obviously the growth projections implied for all these state and local benefit checks to be liquid are somewhere between Neptune and Pluto...and still headed straight out of the Solar System and "going, going, GONE!") so "it all comes back to housing and a house." It has been said "a man's home is his castle." Now we all know "in America The Castle is The Home." Great job....now move along it's been old news for a year as reported on by me of course.

Crisismode's picture


It's time to pick a timeline.

You have shirked this for some time now.


Take a position and tell us when the truck flies off the cliff.



Maybe-Not's picture

Bruce is correct. Please borrow him your crystal ball and he will tell you the day the hour the minute. This is so obvious. I have said this for the last 3 years or more. Remember the big black woman that said Barakster was going to pay her mortgage? She was NOT kidding! I don't now how or when but that will be the rabbit that gets the Obummer back in the driver seat! Bank on it!

I will take this one step further. The Bernank and Obummer are working together. The Bernank is a man that said he would drop $$$$ from helicopters. Mortgage write downs are not choppers but they are one hell of a way to increase the perceived wealth of a nation. A nation with a middle class that is struggling. This is coming, I am sure of it...or....Maybe-Not?

GoldSilverDoc's picture

"borrow him your crystal ball".


King_of_simpletons's picture

Banksters sleep with those in power. It doesn't matter if they are Republicans or Democrats. So what's new ?

Village Smithy's picture

Bruce you have illuminated the mystery of why the Fed failed the market today. It didn't intend to. We were just too stupid to grasp the Princetonions idea. I think you are right on, operation "mega refi" is on. Bernack is at home asking his wife right now "do I have to spell it out for them, 600 billion in back door QE isn't enough?" I predict an announcement/clarification tomorrow AM so BTFD.  

Jumbotron's picture

Republicans fire back ????!!!!


They'll fire the very thing a guy with no balls and no prostate fires.......BLANKS !!!!!   LOL  :)

Soul Train's picture

I find it absolutely amazing that Ron Paul did not insist on being on the team with McConnell, Boehner, Kyle and Cantor to submit that letter to the FED !

What's that about???

Georgesblog's picture

In 1913, the White House and Congress conspired with the rich men of the earth to franchise brothels called Federal Reserve banks. As Larry Bates says, the Fed is no more Federal than Federal Express. The Federal Reserve struggles so badly for credibility. The next thing you know, porn stars will be getting elected to public office. Oops! That's already happened. Maybe it's later than we think. If the horse has left the barn, they'll have to do a talent search for their next dog and pony show. But I digress. This matter is far too serious for levity. The harsh, cold reality is that Baron Rothschild had the dark side of  human nature figured out, pretty well. Those who profit from playing the debt game will be silent, and those beholden to it won't speak against it. People believe that, as long as they can go places and buy things, everything is good. That hasn't ended yet, but people certainly have to adjust to lower expectations.


FreudianSlip's picture

Hey George...absolutely spot on!


And governments, entire countries & their military provide services for free and at the expense of their taxpayers...for the power money guys.  

And, it's not that many people at the top.  A very small elite club who enjoy making phone calls and playing games of deception with billions of lives at stake.

We're fish....they call us FISH.  Fish are something to scoop up and use when needed.  Fish eyes can't close and don't look straight ahead, they look to the side and see nothing.   And fish have no leader to follow but instead clump together in massive schools following each other while swimming wildly here and there without thought, direction or goals.



SwingForce's picture

Bruce, you have gotten so much smarter in the last 2 months! Look at Triple xXx 's End Credits: ADRENALINE keeps me in the game....Watch the Snake.


Quantum Nucleonics's picture


Your analysis is usually pretty good, but here I think your being naive on the politics.  Republicans aren't going to be mad about the Fed's action to the extent their letter was ignored.  They knew it would be ignored.  It was all about political posturing.  They've already said the President's stimulus package was DOA, why would this change their mind.


A mega refinance may or may not be something the Fed and/or Administration think is a good idea, but looking through the political optics there is no reason to expend the political capital since it won't bring the unemployment rate down or fluff the GDP prints between here and the election.  It's not something that plays to a relevant constituency - the demographics of underwater homeowners (disproportionately minorities and working poor) already vote democrat.  Plus, refi-ing the mortgage of your average republican voter pissed about deficits and ObamaCare isn't going to change their vote.

narnia's picture

QN, you need to review your home ownership statistics.  home ownership is high in white & asian, middle & upper income households and substantially lower (by 40%+) in all other demographics.  if you own a home, you are way more statistically likely to be a R or I than D.  being underwater has more to do with when & where you bought or refinanced.  WAY MORE R's & I's in FL, CA, NV, OR, WA, etc., are underwater than you think- and those are some pretty important states.

i completely disagree on your summation that a national refinance / bankruptcy in the housing sector would be neutral to the economy.  that no real market in homes exists & the prospect of real natural house deflation are the huge dampers to the economy.  

plus, what's going on now is immoral.  that banks are allowed to collect on all these fraudulent interest rate spreads from good people & unload their crappy decisions on the same good people as taxpayers is a national disgrace.

hidingfromhelis's picture

"WH and Fed sleeping together"

That, sir, is the most persuasive argument for effective birth control that I've ever heard.

nah's picture

why are the republinuts peeved dude the banks have all the power now... thats good rite

masterinchancery's picture

Apparently your education level is typical of librocrats.  Wall Street supported obama and all the rest of these crooks, and continues to do so.  He has thrown a lot of taxpayer money their way. You probably don't care about that because you don't pay any taxes.

Quantum Nucleonics's picture

You may be shocked to learn that virtually every big bank in America is run by major supporters of the Democratic Party.  Exhibit A: Jamie Dimon, Exhibit B: Lloyd Blankfein, Exhibit C: Brian Moynihan

anony's picture

Larry Summers, Bobby Rubin, Larry Fink, Gary Gensler just to name a few more.  Getting a New York jew to vote for a Republican would be like getting them to vore for Adolf Hitler.

Not that it would make any difference who actually runs the government.


whstlblwr's picture

It's why Republican just win New York race in most Jewish district in country. LOL idiot.

steelhead23's picture

I am no expert on the authorities granted to the U.S. Federal Reserve banks.  However, as regards the purchase of securities my take on the Federal Reserve Act is that the Fed is authorized to purchase only paper that carries the full faith and credit of the U.S. Gov't.  GSE paper carries no such guarantee - other than a verbal pronouncement from Geithner back in Dec. 09.  As I said, I am no expert, but the concept of taking the proceeds from one illegal purchase to conduct further illegal purchases seems on its face to be a criminal conspiracy.  I could care less if it is Republicans or Democrats who call Bernanke on this, but someone should.  Or, for God's sake, enlighten me.

Hansel's picture

The Fed addressed this a long time ago.  The Fed issued a declaration stating that GSE paper was good enough for the Fed to buy.  They can buy GSE debt because they said they could.

Quantum Nucleonics's picture

Someone at the Fed must disagree with you, because not only do they own a big stack of GSE paper, but several steaming piles of CDO's, ABS's, private label MBS, CMBS, and god knows what else from their Bear Stearns and AIG adventures.

adr's picture

A mega refi won't help the housing market because why would you sell your house and buy a new one if your current mortgage with the refi is a far better deal than you could ever hope to get from a bank on a new house.

Besides it really isn't the mortgage payment putting people out of their homes, IT IS PUNISHING INFLATION AND TAXES!!!!

My mortgage payment is $580 on a $135k home but add taxes, insurance, and the rest of the required BS and my house actually costs $975 per month. Lowering my rate to 4% will save me about $50. Sure over the long run it will save maybe $20k or so but over the 30 years inflation will cost me a lot more than that.

I don't think an extra $50 a month is really going to do much good. Eliminating FICA would give me an extra $200, now you're talking!!!!

Quantum Nucleonics's picture

Eliminate FICA, yea SS is on a death spiral anyway, might as well bankrupt it now.

Mike2756's picture

It'll help the banks unload their junk again.

Vilnin's picture

"In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction."


Correct me if I'm wrong, but this also seems to amount to a continuance of QE just under different auspices.  Given the Fed's bloated balance sheet of treasuries, if they're rolling em, ostensibly they're still pursuing an expansion of the monetary base just perhaps at a slower pace than an announced, enhanced (bigger and brighter QE).  Benny isn't turning off the spigot, he's just going for a steady trickle instead of a gusher.

Bastiat's picture

Who will buy UST paper?  Will that monetization be laundered through European banks in exchange for "swap" bailout money?

Big Ben's picture

The Fed's fundamental assumption that reducing interest rates will increase consumer spending may be incorrect. Reducing interest payments for someone means reducing interest income for someone else. I personally know of some retirees who are cutting their spending because their interest income from bonds has dropped so much.

And today's super-low interest rates might lead someone who is nearing retirement to conclude that a much bigger nest egg is required, so it is necessary to save more and consume less. So the zero interest rate policy may actually be a net drag on the economy.

One thing that the ZIRP definitely does do is to make it easy for the Federal and state governments to borrow money, probably a lot more money than they should.

duckhook's picture

You are completely wrong about the states.Lower long bond rates predict much lower growth rates in the economy so that will mean t lower revenues in the future and much lwer assumed rates of returns on pensions.The already hugely underfunded liabilities of the municipalities will  balloon that much more and lead to mas defaults within 5 years

cynicalskeptic's picture

Retirees don't spend at the level of new households.  The CONSUME CONSUMEM drivers are new households and young families.   Though wealthy middle aged types spend a fortune on high end stuff they don't drive the economy - you can only sell so many Bentleys and so much jewelry from Tiffany's.

Reality is that MOST people in the US are skating by - they don't HAVE the money to consume mindlessly any more.  Frankly, ever growing consumption and growth is a suicidal model for a planet withlimited resources but our leaders haven't figured that out yet - 'long term planning' is unknown to these morons.

Lord Koos's picture

Actually, high-ticket items consumed by the top 5% of Americans amount to an ever-increasing percentage of the goods sold:

 Consumer spending accounts for roughly two-thirds of U.S. gross domestic product, or the value of all goods and services produced in the nation. And spending by the rich now accounts for the largest share of consumer outlays in at least 20 years.

According to new research from Moody’s Analytics, the top 5% of Americans by income account for 37% of all consumer outlays. Outlays include consumer spending, interest payments on installment debt and transfer payments.

By contrast, the bottom 80% by income account for 39.5% of all consumer outlays.



Big Ben's picture

It is true that young families are responsible a lot of consumption. But I wouldn't completely underestimate the spending capacity of retired people. I know several that I think are spending pretty much everything that comes in. For example, just a couple of days ago my neighbor (a retired teacher) was saying that she would like to replace her roof, but just didn't have enough money to do it this year. So she is going to patch it. She said she was afraid to dip into her savings because given the low current returns she was afraid of running out.

I think the Fed's policies may be creating a fear factor which depresses spending. Low returns cause retirees to worry that they don't have enough savings, so they cut back on spending. Others worry that inflation may destroy the value of their savings and they also cut back on spending.

stev3e's picture

Absolutely correct.   There is no possible way out no matter what the Fed does because they cannot create meaningful wage inflation - the type that will increase consumption.

Can't do it.

Greenhead's picture

The amount of additional debt needed to do a Mega refinance to impact all the folks who would want it is not politically feasible at this time.  Hopefully, never.  Don't think there is enough MBS rollover to engage this type of program today. 

CompassionateFascist's picture

Those two bears aren't fighting. It's foreplay.

Archimedes's picture

There will be no Mega refinance. Get over it....

fyrebird's picture

The Repubs will bluster, but they can't do jack.

The economy is going down the shitter. Anybody who does anything at all that could look like "I like things going down the shitter" is gonna wind up toast.

People do not understand "policy" all they understand is "toast" and they don't want to be it. Simples. It's gonna be nothing but "i <3 teh economiez" for the next 12 months. Nothing will happen, nobody is throwing shit, anybody steps up on real issues will have their head totally handed to them.

Stalement, bitches, it's what's for dinner.

chet's picture

Well put.  Criiticize the Bernank and Obama all you want, but just remember that the alternative to an inflationary printathon is a deflationary depression. 

There is no right answer.  Therefore neither side has a right answer.

juslen's picture

You mean there is no easy asnwer. The right answer is deflation, its the only thing that won't wipe out people who saved and prepared for economic downturns like this. Inflation means the bubble inflates bigger and bigger until eventually peoples savings become worthless and sooner or later the bubble has to burst and deflation happens anyways. Unless of course we end up with perpetual inflation and that would destroy the entire U.S economy. By doing the right thing and stopping the money printing and debt, the much needed correction will be able to occur and the recovery will be much more swift.

Panafrican Funktron Robot's picture

Agreed.  Until total debt starts increasing again, we can have either a flat nominal and strongly negative real growth rate, or a negative nominal and moderately negative real growth rate.  Either way, negative real growth = inevitable.

aerial view's picture

Big picture: Again the Fed clearly demonstrates that they control an infinite money printing machine and can create accounting tricks that even Houdini would be proud of while the rest of Americans must continue to suffer under their debt enslavement tactics.

brokesville's picture


Ying-Yang's picture

Now we have the answer. The Fed will put the new MBS paper back on its Balance Sheet, $ for $. There will still be many bondholders outside of the Fed who will get prepaid much faster than they had assumed. Most of that is in pension/bond funds. No one cares about them.

I dunno Bruce... they may have to go through MERS on this transaction.

Panafrican Funktron Robot's picture

The MERS issue is probably exactly why they're pushing this.  Nothing like a refi to clean up bad titles/assignments.