The Moment When The Fed Admits It Has Become The Market's Muppet

Tyler Durden's picture

The following exchange between then-Kansas Fed president (and current FDIC director) Thomas Hoenig and the Chairsatan, uttered during the historic Sept 16, 2008 FOMC meeting, is of particular importance for four reasons: 1) it appears to be the first instance in the Fed records, where the phrase "too big to fail" is memorialized; 2) it highlights something that has become all too clear by now: in giving to a culture of moral hazard, the Fed is now being openly "played" by the market (read the big banks); 3) it confirms that the Fed has learned zero lessons from the crisis and 4) the thinking behind the "Bernanke (global) Put" is laid out for all to see.

MR. HOENIG. Mr. Chairman, I have thought about this considerably because I think we have come to a time in our history when we have institutions that clearly ought to be and may in fact be too big to fail. I think we tend to react ad hoc during the crisis, and we have no choice at this point. But as you look at the situation, we ought, instead of having a decade of denying too big to fail, to acknowledge it and have a receivership and intervention program that extends some of the concepts of the FDIC but goes beyond that. That is, if you are insolvent, it is not a central bank issue—we are a liquidity provider—and therefore the government comes in. But unlike the GSEs, everyone has to take some hit—the equity holders, certainly the preferred stockholders, also the subordinated-debt holders, and perhaps the senior ones—by assuming a certain amount of loss. They would have immediate access to—pick a number—80 percent. The research would help us pick that number, and they can have access, but the rest becomes a subordinate-subordinate position after the liquidation so that you have still a sense of market discipline in play and you don’t get the system gaming it in that, if you know there’s a bailout coming, you buy the debt and sell the equity short to make a bundle. I think therein lie the distortions that are absolutely detrimental to the long-run health of the economy.


Regarding how we go forward, I think we are going to have many lessons from this. Part of the problem has been very lax lending and, obviously now, weaknesses in some of the oversight. Also a history of our reacting from a monetary policy point of view to ease quickly to try to take care of the problem and, therefore, to create a sense in the market of our support has raised some real moral hazard issues that we now need to begin to remedy as we look forward in dealing with future receiverships. We are in a world of too big to fail, and as things have become more concentrated in this episode, it will become even more so.


CHAIRMAN BERNANKE. I certainly agree—and the Treasury Secretary and I have said publicly—that we need a strong, well-defined, ex ante, clear regime. But we have the problem now that we don’t have such a regime, and we’re dealing on a daily basis with these very severe consequences. So it is a difficult problem.


MR. HOENIG. I think what we did with Lehman was the right thing because we did have a market beginning to play the Treasury and us, and that has some pretty negative consequences as well, which we are now coming to grips with.

Yes Tom, unfortunately 5 years later, not one lesson has been learned, as for the "market playing" you and the Treasury, we too can't wait for the moment when not even the market can "game" the clueless mandarins at the Marriner Eccles building, and it all comes crashing down...

Comment viewing options

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

New normal is 5 years old.

Oh regional Indian's picture

Bankster speak, as convoluted as legalese....

Dangerous, these policy wonks, because they know how to use the language perfectly for their carefully chosen, sounds lke someone sat and rewrote the real grunts and moans into this crafted wonk talk...


Soul Glow's picture

Old normal.

Language can be made to pervert.  

TeamDepends's picture

Ben pulls out "ex ante" and gets several "harumphs" around the table.

Payable on Death's picture

Sheesh, Tyler. It's Kansas City (Missouri) Fed. This is a repeated error.

Look in your wallet for "J".

Ham-bone's picture

Who will buy all those Treaury's now the Fed is tapering??? Those Treasury's that allow US to run these deficits and service debt so cheaply???

Given that the pendulum of "foreign" / Fed vs. domestic (US non-Fed) purchases of Treasury debt has become so skewed and so dependent upon these "foreigners" to maintain their purchasing in the wake of the Fed's taper(s), seems a good time to determine who will buy the new issuance and who will rollover all that existing debt.  And why.

US has $17.3 T in Treasury debt. 

$5 T is in intra-government debt (SS and the like).  This portion is barely increasing as SS surpluses have ceased but the government will continue to roll this over without any issues.

That leaves $12 T in public outstanding debt.

Nearly $2 T is in ultra short duration Bills that can be viewed almost as a cash substitute.  These are held by institutions and the like and although yielding nothing to next to nothing (and very vulnerable in an interest rate shock) are likely to continue to find a home as a cash substitute. 

That leaves $10 T in Notes / Bonds (plus TIPS) comprising all the medium to long term (over 1yr to 30yr) Treasury debt.  This debt was primarily held by domestic buyers up to '00 (pensions, insurers, etc.) but since that time to now, this has radically changed.

Reliant on the good will of "Foreigners"

While the public outstanding debt has increased from $3 T in '00 to $12 T+ now, the total amount owned by domestic sources has remained relatively unchanged.  So, if $9 T in debt was added and relatively no more was purchased by American sources, who bought it?  "Foreigners" and the Fed combined to purchase approximately 80%-90% of the increase of Notes / Bonds.  "Foreigners" now hold $5.6 T and the Fed $2.25 T in Notes / Bonds...or in other words, they hold $7.85 T of the $10 T medium/long term US debt. 

The Fed's motivation is clear but why "foreigners" have bought and continue to buy and hold ever greater amounts of ever lower yielding US debt that is sure to be paid back in devalued US currency is a vexing question?

Some may do it to weaken their currency or park large dollar trade surplus'.  However, Luxemboug, Belgium, Ireland, Singapore, etc. etc. are truly mysterious gigantic holders of Treasury debt.

Now that the Fed has begun it's taper and for sake of argument will continue to fully taper to zero monthly purchases and ultimately will stop rolling over the $2.25 T in Treasury's it currently holds (consider this a theoretical exercise...but maybe not).  Who will buy these $10 T and still growing US Treasury Notes/ Bonds?  Domestic buyers have shunned these Treasury's due to their extremely low yields and purchased relatively more attractive options.  Absent yields moving up significantly above inflation, domestic buyers will maintain their boycott.

This leaves "foreigners" to rollover their $5.6 T and buy nearly all new issuance ($500 B + annually @ the minimum) and subsequent to the Fed's taper, begin buying up the $2.25 T of notes/bonds the Fed will not continue rolling over.  What is being suggested is that "foreigners" will grow from the current 50%+ and become 80% to 90% owners of all medium/long term US debt.  And the suggestion is they will continue to buy despite yields remaining low and despite the $ becoming an ever lower % of global trade as Euro and Yuan based trade continues increasing. 

Who are these benevolent "foreigners"?  According to the Treasury's TIC report, ”foreigners” is simply the term TIC applies to Treasury’s purchased / held in “overseas custody accts", the data is provided by US based “custodians”, data “may not be attributed to actual owners”, and ”data may not provide “precise” accounting”… (see TIC FAQ #7 at:…).

In essence, the TIC report explains how many Treasuries are purchased and when and where they were purchased (Belgium, HK, China, Canada, etc.) but does not claim knowledge of "who" (or that who's nationality) purchased the Treasury's.  To wit, a German or Japanese or American can purchase Treasury's in Canada or Luxembourg or the UK and these purchases are attributed to the country where the purchase occurred, not the nation of the purchaser. 

So What???

The “red flag” in this was the Fed tapering. The Fed in it’s recent QE3 were buying nearly all medium term Notes / Bonds issued (up to their 70% limit) plus significant % of rollovers.  But on their stated exit from QE, “Foreigners” who double the Fed’s total holdings, should have seen rates would be rising and prices falling absent this buyer…typical “investors” would have been selling to front run the Fed’s exit. The Fed would have known this taper would cause a rate shock. But no selling…no yields to the moon. Rather “foreign” holdings have hit a new record high as of December.  Seems these “foreigners” are not typical “investors” and upon the exit from the “market” of a buyer of 70% of issuance, they are unconcerned. Typical “investors” would be concerned w/ the likelihood of losses. 

I have a sneaking suspicion that debt ravaged Ireland did not buy $106 B in Treasuries since ’08. And Norway did not add $77 B, nor did Belgium add $244 B since ’08…and on and on. I don’t doubt the Treasury’s were purchased nor that the purchase occurred in these locations…I simply question where the money came from and who actually owns these?

I believe there is a good likelihood of a shadow QE at least as large as the on the books QE and maybe this shadow QE is double the size of “QE”. Whether this is via currency swaps, ESF, Fed authorized agents, or whatever manner…there are likely many more dollars than acknowledged to maintain a “market” for ever more US treasury debt @ ever lower yields. This would also seem consistent w/ collapsing velocity of money since new money isn’t loaned or multiplied…just conjured and retired. 

Tell me why this is crazy, impossible, unlikely, or whatever.  Just don't tell me you agree with me.  Let's try to deconstruct this notion.  Thanks.

Ham-bone's picture

Cheatsheet to "foreign" Treasury ownership / trends


              $1 T  --->  $1.6 T ---> $5.6 T


China $60 B  --->  $400 B ---> $1.27 T

Japan $315 B --->  $600 B ---> $1.18 T

Taiwan $35 B --->  $38 B  ---> $182 B

HK       $39 B --->  $52 B  ---> $159 B

Singapore $30 B->  $30 B  ---> $86 B

India      <$5 B -->  $15 B  ---> $69 B

Thailand $13 B ->  $16 B  ---> $52 B

TOTAL   $497                         $3 T (600% increase, '00-'13)


Brazil <$5 B  --->  $54 B  ---> $245 B

Canada $15 B  ---> $28 B  ---> $56 B

"Carribean banking centers"

        $      35 B ---> $68 B  ---> $291 B

TOTAL  $55 B                    $592 B  (1100% increase)


"oil exporters" 

        $45 B ---> $112 B ---> $238 B  (500% increase)


Russia <$5 B --->  $9 B   ---> $139 B

Norway  <$5 B ---> $20 B  ---> $97 B

UK    $50 B  --->  $100 B ---> $164 B

Switzerland $18 B> $34 B  ---> $175 B

Turkey <$5 B  ---> $25 B  ---> $52 B

TOTAL    $83 B                       $627 B  (750% increase)


Ireland $5 B --->  $19 B  ---> $125 B

Belgium $28 B -->  $13 B  ---> $257 B

Luxemburg <$5 B-> $60 B --> $134 B

TOTAL    $38 B                         $516 B  (1350% increase)


Germany $54 B ---> $50 B ---> $67 B

Italy      $20 B   ---> $14 B ---> $30 B

Netherland $13 B-> $15 B ---> $37 B

France   $27 B  ---> $10 B ---> $54 B

Spain    $20 B   ---> $<5 B ---> $23 B

TOTAL   $134 B                   $211 B  (57% increase)


"Carribean banking centers"

        $      35 B ---> $68 B  ---> $291 B

Switzerland $18 B> $34 B  ---> $175 B

HK       $39 B --->  $52 B  ---> $159 B

Singapore $30 B->  $30 B  ---> $86 B

Ireland $5 B --->  $19 B  ---> $125 B

Belgium $28 B -->  $13 B  ---> $257 B

Luxemburg <$5 B-> $60 B --> $134 B

TOTAL    $160 B                    $1227 (767% increase)

Stackers's picture

"and perhaps the senior ones—by assuming a certain amount of loss."


in other words. Bail-in from account holders.



James_Cole's picture

Part of the problem here is the language, if these guys spoke in plain language I bet it'd be a lot harder to stomach all this bullshit. 

If they just came out and said straight that the banks are far too concentrated, the solution proposed (or at least accepted by the public) wouldn't likely to be to backstop them to infinity. 

Like Greenspan mumbling along incoherently, if he spoke plainly I doubt people would've taken him half as seriously. 

Orwell talked a lot about it well, but Carlin nailed it:

akak's picture

Central bankster Greenspanking means never having to say you're sorry.

NoDebt's picture

Old joke, new twist:  What's green and smells like Miss Piggy?  The Fed.

(If you don't know the original joke this probably doesn't make much sense to you.)

fonzannoon's picture

Belgium makes sense. They seem like a PD for the ECB

Ham-bone's picture

Ok - Belgium, bout the rest???  How bout the trend?

Divided States of America's picture

Well trust me, everyone will be lining up to buy TSYs when a global war is about to break called safe haven securities...i know thats not the case, but many many sheeps out there think they are. Its all about which country's military will be the last man standing...and the USA is the favorite...again, wish that wasnt the case.

LMAOLORI's picture



If No Bail Outs then No Bail Ins  

Works for me.

Nobody For President's picture

Maybe some of that money is from Chinese oligarchs sending their kids to Belgium and Singapore and all the hell over to buy real estate and 'safe' storage of funds - in California they buy real estate (Chinese Wineries anyone?)

But $5 trillion is a lotta bonds, all righty...a shadow Fed is not beyond reasonable doubt.

smokin' hot printers

ThroxxOfVron's picture

HamBone: I fully agree.

I have been convinced that the FED implemented a full monetization of ALL United States Treasury debt.

The sheer variety and astounding size of even the official publicly reported bailout numbers, and the total lack of accountability, the incredible financial repression unleashed: just never made any fucking sense if the system had not gone critical, kaput...

I would hazard that the policy of full monetization was officially/secretly implemented either as early as the date of the electronic run on the money markets: Sept. 11 2008; or sometime in the spring of 2009 when Kanjorski and Co. suspended mark-to-market account rules and Obama came out to urge the citizenry to buy stocks.

Likely the fix had been in place for months and the banks were playing the FED/Treasury and ( naked ) shorting the shit out of the markets and each other hoping to absorb one another Bear Stearns/Wachovia style in the chaos before the Government got the picture and gave in to a full-on get-out-of-jail-free/presidential cuff-links and reflation/monetization regime to stop the Banksters from running amok.

disabledvet's picture

Put the boot to the neck of Lehman "and that's still not good enough in these here parts."

That's the only "dead muppet" i see.
Just put the word "Lehman" on that thing you morons.

I'm gold and the "bi polar medal" goes to the moon to start the year and i'm supposed to be short treasuries? REALLY?

what's the spread between dollar and yen right now? 20%?
that looks like a funding currency...not a "carry trade."

and the Yuan still is traded only internally?
What if that really is a huge bubble in China..."but it really doesn't matter."
here comes the recovery!

here's Kermit's take:

Fix-ItSilly's picture

Big foreign Treasury holding increases in money laundering countries and corporate tax evasion countries (with oligarch thievery being a subset).

And what's with the swaps initiated by the Federal Reserve? That is market manipulation. It is also a legal violation of authority and responsibility - The US Treasury is legally responsible for currency exchange and trade.

Mercuryquicksilver's picture

There is no way to validate your "theory" until the Fed is audited. Muliple ponzi schemes all in collusion. I can't just tell you that I agree.

lewietheparrot's picture

When things get out of control
Lies are told
I don't think that it is necessary to deconstruct your thinking----pretty rational line of thought, to me.
Why would you expect a nation that lies about everything not to lie when they completely lose control of a situation?
You have read today's transcripts of the Fed meetings from 2008---you have noticed all of the laughter-----does this not seem like pure hysteria to you? It does to me---these are not competent human beings----not even adults.
After all, what can be done with leaders who have spent an amount on war equal to the nation's debt? What can be done with that nation?
The Machine lies in ruin----------
Thank you for a great post

Urban Redneck's picture

Bankster speak = Matthew 23 + The Book of CYA

Jumbotron's picture

3 card Monty.  With 1 QUADRILLION DOLLARS at stake.

NOTaREALmerican's picture

What's good for the top 10% is good for Merica!

Shizzmoney's picture

We always knew in the end that bitch Miss Piggy (TBTF institutions) kills Kermit (The Fed)


NOTaREALmerican's picture

There's really no comparing the intellect of those running the Fed and those running the TBTF banks.

The Fed might be run by sociopaths, but they're just another group of dumbasses to the sociopaths running the nation's banks.  

Survival of the fittests, bitchez!

dellievan's picture



  what is green and smells like pork  . . . wait for it . . . Kermit's finger

CaptainSpaulding's picture

Jim Henson attorney on line 2.. Stat!!

LMAOLORI's picture



Everyone has to take a hit lol talk is cheap 

El Vaquero's picture

Because it needs repeating: Fuck The Fed!

Joebloinvestor's picture

They played with it like a fucking schoolyard toy without instructions.

Dr. Richard Head's picture

Holy shit!!! If the sheep would be able to read, let alone understand what was said on that blessed day, they would be in the streets.  Alas, beer and basketball take precedence.  'sigh'

SDShack's picture

When was Glass-Steagall abolished, and by who? The Great Recession was put in motion long before 2008. The sheep have had lots of opportunities to read and learn, but they always fail the test. Their masters have engineered it so.

all-priced-in's picture

Are they wearing togas? 

Cursive's picture

I like the "receivership and intervention" idea, but it looks like LSAP and the BernanQEllen put won.

fonzannoon's picture

I have a question that no one can seem to answer. What's up with gold? Seriously...we have all sat here for years now and we all agree the market is rigged right? How many more 3:30 ramps do we need to see? How many more nanex illustrations? So fine, the market is rigged. Gold is rigged right? I mean do I even have to get into it? The 8:30am smash downs etc. etc. etc. The paper market is still wagging the physical dog.

So they spent the last two years breaking the correlation of rising gold and rising market and just beat gold to death. They made it (remember I'm talking paper here, it still exists) an asset class that was all risk, no reward, and you were clearly fighting a manipulated market and the fed...

But now all of the sudden gold continues to lead the commodity complex higher, it looks like this is being done on purpose. The move up in gold looks as fake as an 8:30am smashdown to anyone seeing reality. This seems very much against what the tptb would want, and they are still in control.

So seriously, what's up with gold? Is this just a setup for another massive smashdown? Anyone?

Cursive's picture


I belong to the group that doesn't view gold as an "investment," but as a store of value when societies are in distress.  But I do think the dollar price of gold is going to fall along with everything else.  Remember, I said "dollar price."

fonzannoon's picture

I hear you man, I'm just trying to find an explanation for the move that has been and continues to take place. I'm pretty sure i will mush it just by asking the question, but whatever....

edit - I love that someone junked me asking a question, says a lot.

kito's picture

i dont take the view that gold is manipulated to the extent its long term price trend is pulled on strings. i believe the fed and others attempt to pull the reigns one way or another-and that may affect its short term pricing--but gold prices will work its way higher as we head into the next leg of this crisis next year. remember that gold manipulation is a tad more complicated for TPTB because there is the physical aspect to its supply/demand. there is a limit as to what they can do when underlying fundamentals in the physical market completely contradict their attempts to paint it "unwanted". 

Ham-bone's picture

Seems the price of gold can go down no futher - demand is far in excess of supply (Jan SGE demand @ new records), as follows

ETF's were banged up to offload 40% or 900 tons of their holdings last year (GLD from 1350 to 790 maintain the 560 ton supply to the market, GLD would end '14 @ 230 tons, an additional 70% drawdown...but the price of gold would need to collapse to facilitate this)

Miners are at the marginal cost of production...prices taken down any furrhter only reduce supply from it's current 2300 tons/yr

Scrap supply is falling since '09 now down to 1400 tons/yr (from 1800 + in '09)...lower prices only furhter reduce scrap

That's it...price decreases only reduce supply from here...and create the short covering rally

kito's picture

yes, the tipping point has been reached. that is my belief.

Solon the Destroyer's picture

Demand for Gold is far in excess of its supply?  I haven't seen any long term backwardation in the Gold Market.

Doubt the miners have little effect on the price of gold either.  The stock of gold overwhelms the annual flow from mines.  And they can adjust their production by grade, and also hedge the price.

For discussion on what affects the price of gold, please read:

Also: A Veil is Lifted in Zurich

According to a recent report by the Neue Zürcher Zeitung (NZZ), the Swiss government has decided to finally publish Switzerland's gold trading data, which have been kept secret for 33 years.

Ham-bone's picture

Demand for gold @ this price is in excess of supply @ this price.  If global demand was 4500 tons last year and 900 tons were supplied by ETF's off-loading...but ETF's don't seem to be off-loading anymore but demand is still increasing...@ this price there is a shortage of 900 tons/yr.  Stock of gold is not moving @ these prices...price is set on margin of what is sold.  Mining, ETF offloads, scrap seem to be the only supply @ these prices much as the COMEX is showing w/ record low deliverable...not record low gold but just not deliverable at these prices.

However, if CB(s) determine to secretly be net phyzz sellers (although they are openlynow net buyers)...phyzz supply and demand are recoupled @ this price.  But that's a big delta to cover and end game isn't so far off.

kito's picture

solon what makes you think the undercurrents of physical demand issues are going to show up in the paper market until its too late? most physical delivery isnt taking place in paperville.....

NOTaREALmerican's picture

I think it's the random -1 junker who flys through occasionally.

Winston Churchill's picture

Diid you really think they were going to let all the gold in COMEX get liquidated ,by anyone

but them that is. From watching the price action it looks like someone is testing levels they can

get away with to dampen down withdrawls.

Just my $0.02

ForWhomTheTollBuilds's picture

"I love that someone junked me asking a question, says a lot."


It does say a lot about the kind of culture we are living in doesn't it?  In a previous life I used to try to use the technique of asking questions to get people to think for themselves about a statement like "deflation hurts the economy", or "Inflation should be 2%".  I had already given up making the counterarguments and thought I would try leading the horse to water instead.


Didn't work.  I got the kind of result you just got, only the msm sites are frequented by people who get personally offended when you question the bozos running the show or the way the show is structured.

StychoKiller's picture

Re:  the question you asked.  A person can lie to you that they have an answer, they can even lie to themselves and pretend that they know the answer; but that lie will slowly eat a hole in their cortex until they admit the Truth.  The question becomes like a splinter in your mind!  Keep asking the question(s)!

HyBrasilian's picture



You'll RARELY hear me talking about this [because, as you say, it's all a 'rigged PONZI']...

However ~ I actually do believe that a rigged PONZI behaves according to natural laws... I've made MOCKERY [in the past], about 'Elliott Waves' & other such 'TA' bullshit [as ~ in the end ~ it has PROVED to be to be 100% predicated upon a, destined to be, FAILED SYSTEM]...

Notwithstanding ~ [& admitting all that]... It would occur to me that... Even the creators & perpetuators of a PONZI SYSTEM, would, in the end, make a valid attempt to engineer the COLLAPSE of the system according to the same 'PATTERN DESIGNS' that they'd made a RELIGION out of for the past century [& convince the 'sheep' to believe in, as technology permitted the INFORMATION AGE to allow more universal access of]...


Even in a FAKE market... REAL NATURAL RULES would evolve [as 'fractals', or 'FAKE FRACTALS', as the case may be]... IOW2 ~ With nothing left to loot or ponder, they'll simply follow the script...

So ~ How this applies directly to socalled 'COMMODITY MARKETS'... Why not just 'put in a bottom' the way it's always been done...

FIBONACCI will become a household name in the process...


CHEERS! [With a Bloomberg Terminal] :-)