Guess Who Was The Biggest Beneficiary From The Fed's POMO Bonanza
There was a time before the Fed announced it would commence sterilizing its Large Scale Asset Purchases when every day in which there was a Permanent Open Market Operation, or POMO (remember those?) was a gift from Bernanke, virtually assuring the market would ramp higher. This phenomenon had been documented extensively in Zero Hedge and elsewhere (a comprehensive analysis can be found in "POMO and Market Intervention: A Primer"). The pronounced market effect of POMO was diminished somewhat once the Fed sterilized the daily flow injection by selling short-term bonds to Primary Dealers, even though the Fed continues to buy $45 billion in long-term bonds to this day, effectively mopping up all 10 Year+ gross Treasury issuance, and keeping the stock of long bonds in the private market flat at ~$650 billion as we observed before. All of this is well known. What was not known is who were the Fed's POMO counterparties. Now we know. Yesterday, the Fed for the first time ever released Transaction level data for all of its Open Market Operations, in a time window starting with the passage of Dodd Frank on July 21, 2010 and through the end of the quarter. The Fed will now proceed to release quarterly POMO detail with a two year delay as part of its transparency objective.
The new data focuses on discount window transactions (completely irrelevant now that there are $1.7 trillion in excess reserves and the last thing banks need is overnight emergency lending from the Fed when there is already a liquidity tsunami floating, yet this is precisely what the WSJ focused on), on FX operations, and, our favorite, Open Market Operations, chief among them POMOs. What today's release reveals is that once again a conspiracy theory becomes fact, because we now know just which infamous bank was by fat the biggest monopolist of POMO operations in a period in which banks reported quarter after quarter of zero trading day losses. We leave it up to readers to discover just which bank we are referring to.
Total POMO notional in period July 21, 2010 - September 30, 2010 by bank.
And by number of transactions. Nuf said.
So the next time someone asks you how a firm can have just 2 trading days of minimal losses in a quarter...
... and 7 days of $100+ million trading day profits, such as in this case Goldman Sachs (source: Sept 30, 2010 10-Q), now you know.
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