Bill Gross Was Right: Fed Board Member Tarullo Calls For Restart Of MBS Monetization

Tyler Durden's picture

When we first reported on Bill Gross' massive surge in duration and accelerated purchase of Mortgage Backed Securities a week ago, we said, "That's either what is called betting one's farm on Operation Twist, or, betting one's farm that the next thing to be purchased by the Fed in QE3 or QE4 depending on how one keeps count, will be Mortgage Backed Securities." It was the letter. Confirmation that Bill once again frontran the Fed comes courtesy of Daniel Tarullo who in a speech at Columbia University, talking about the labor market of all things, just said the following: "I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets." And there you go: watch as the market rips on the expectation that the US will bail out China all over again. Oh wait, at this point China couldn't care less what happens to the GSEs stack. So unfortunately as can be expected, this is nothing but yet another bailout of US banks, which lately have been buying up MBS like crazy (Gross is not the only one with the hotline), and expecting to flip right back to Brian Sack: after all something has to be done to save the poor things from a total pancaking of the Treasury curve.

The relevant section from Tarullo's just released speech (full thing can be found here).

Within the FOMC and in the broader policy community, there has been considerable discussion of possible additional accommodative measures, from communication strategies such as forward guidance on the likely path of the federal funds rate to additional balance sheet operations. I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets.

In November 2010, when the FOMC initiated another large-scale asset purchase program, only U.S. Treasury securities were involved, in large part because of a desire to return, once the recovery was well established, as quickly as possible to a Federal Reserve balance sheet that did not contain other kinds of assets. A related concern of some was that the purchase of MBS was a form of credit allocation, rather than simply monetary policy that lowered long-term rates for all borrowers. For similar reasons, the proceeds of agency securities accumulated pursuant to the first large-scale asset purchase program were reinvested in Treasury securities rather than in other agency securities.

At the September FOMC meeting, we changed our reinvestment policy so that the proceeds of maturing agency securities will now be reinvested in new MBS. Yields on longer-duration Treasury securities had trended down appreciably in the late summer in response to market demand, safe-haven flows, and diminishing expectations for growth. Even though nominal MBS rates had also declined somewhat, spreads to Treasury yields had, over the course of the year, widened noticeably. Since this announced change in reinvestment policy, spreads on lower-coupon MBS have narrowed, but they remain higher than they were early this year.

A large-scale MBS purchase program has many of the benefits associated with purchases of longer-duration Treasury securities, such as inducing investors to shift to other assets, including bonds and equities. [translated: everyone go into high beta stocks right now] But it could also have more direct effects on the housing market. By increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates. The aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance. Indeed, homeowners who refinance get the equivalent of a permanent tax cut. Concerns about central banks making sectoral credit allocation decisions are understandable in general. But here we are talking about a widely traded instrument in a sector that appears, now more than ever, to be central to the slow pace of recovery.

Now, I should note that the mortgage market is quite segmented. One relatively small group of borrowers has extremely good credit and funds for sizable down payments. That group can readily obtain a mortgage. The other, much larger group lacks one or both advantages, and it faces much greater hurdles in the mortgage market. So there is some chance that the principal effect of renewed MBS purchases would be to allow those in the first group who have already refinanced to do so once again or to buy a new home at a somewhat lower mortgage rate. These outcomes would be helpful, but the effectiveness of an MBS purchase program would be amplified, perhaps significantly, if certain nonmonetary policies were changed.

Proposals for promoting refinancing have been made by many academics, policymakers, and policy analysts. Any proposals that could sensibly and effectively be implemented would increase the effect of an MBS purchase program. For example, action could be taken to bring the benefits of refinancing to underwater borrowers. In principle, borrowers with mortgages that are guaranteed by government-sponsored enterprises (GSEs) such as Fannie Mae and that have loan-to-value ratios of up to 125 percent can refinance through the Home Affordable Refinance Program. In practice, though, numerous obstacles have kept the program from helping many potentially eligible borrowers. Underwater borrowers whose loans are not guaranteed by GSEs are essentially unable to refinance at all. Policy changes directed at this last, larger group of homeowners would have to be carefully designed so as not to transfer credit risk from private investors to the government, and could well require legislation.

Needless to say, though, an MBS repurchase program will not cure all that ails the housing market, much less fill the whole aggregate demand shortfall. There is a host of other problems, including continuing issues in mortgage servicing, uncertainty as to when house prices will have bottomed out in local markets, ambiguity about the scope of putback risk for securitized mortgages, and the substantial part of the underwater mortgage problem that cannot be solved by refinancing. But I believe that MBS purchases are worth considering as a monetary policy option precisely because they carry the promise of addressing the feature of the current aggregate demand shortfall that differs from typical recessions and recoveries.


Look for Bill to have bought much more MBS when the October TRF update is released. The good thing out of all this: Jan Hatzius can finally shut up about Nominal GDP targetting, a topic so stupid we have been ignoring it on purpose. Instead, the Goldman economist can now redouble his efforts on pitching MBS monetization as the one greatest thing to save Goldman bonuses for 2012 (2011 is a screatch), er... we mean, tax-break for the middle class.

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AldoHux_IV's picture

I wonder how many shares of XLF that weasel Tarullo owns.

anynonmous's picture

MBS is just part  1, here's the second leg of Campaign 2012 under the heading free houses for all:

 from the above above "if certain non-monetary policies were changed...For example, action could be taken to bring the benefits of refinancing to underwater borrowers "



Quixotic_Not's picture

And all the OWS sheeple shouted hooray!!!

Little pink RMBS slips for you and me...

max2205's picture

Somebody please check the serial #'s on these MBS. Holy fuck, how many times can the fed buy the same thing. This is out of control

macholatte's picture

I want to buy some. How do I do it?

macholatte's picture

Is this bullish for Freddie & Fannie?

eureka's picture

Yeah, right - and if only China had the balls - it would dump it holdings of US garbage paper, cash and bonds on the world market - and destroy US empire in a day

they're gonna get fucked anyway, so why don't they... - are you reading this, China?

which brings me to RE "expectation that the US will bail out China all over again"... WTF...?  The whole world has been bailing out the US Empire Elite Fuck-Scum for the past two generations... get the facts straight, Tylers - US doesn't bailout anyone, rather it takes from, and gets bailed out by, everyone else - all which, of course, only benefits the US EMpirial Elite, and not the 80% of US'ians, who make the US domestic slaves.

knukles's picture

That very proposition was outlined on the front page of the WSJ several days ago.
Actually mentioned that it might not be any too fucking popular with folks still paying their mortgages....

centerline's picture

Funny how the divide and conquer comes back to haunt them.  Now, whichever way they turn, there is moral hazard and a pissed off group of people with the power, if motivated, to fuck things up pretty bad.  Nothing would be more spectacular that a mass rejection of debt by the millions upon millions who are still paying and finally get confirmation that the golden ticket is "not" to pay.


WatchnSee's picture

That is the plan Steven Lerner (former SEIU, now OWS rabblerouser and Obummer marxist) layed out a year ago. Only a matter of time now.

eureka's picture

NO NEED FOR TPTB TO DIVIDE AND CONQUER - US'ians were never unified - rather, they hate each other - ref.: "the culture wars", the ideological divide between liberals and right wingers, between old-cons and neo-cons, isolationists and globalists, hegemons and producers... etc etc etc

the cult of individualism gone icon-worship... versus aimless collectivist consumption... and gone is classical values, classical education and classical morality - i.e. any real consciousness... because the US itself is too big to fail and thus needs to be bailed out by the rest of the world - and for that, one has Empire, that is to say, The Elite has Empire - and the 80% mass of US domestice slaves follow blindly and serve their masters, while squabling over the insignificant symbols of division....

it is - your own fault, US'ians - for being so fucking, pathetic nitpicking, knucleheads...


SwingForce's picture

Is Kassie back to $13 yet? "BUY MY BOOK! Back to Under, I'm Jim Cramer Buy Bank of America at $14"


Widowmaker's picture

None, because not one lying cheating sack of Chinese shit saw it coming.

Snidley Whipsnae's picture

"And there you go: watch as the market rips on the expectation that the US will bail out China all over again. Oh wait, at this point China couldn't care less what happens to the GSEs stack."

Lest we forget: China decided to dump GSEs when the US Gov refused to put "Their Full Faith and Credit" behind them. I know, it seems like ancient history now... But this CRS Report was issued Sept 12, 2008... Page CR5 contains these less than crystal clear observations...

"Who Invests in the GSEs? There is little information available about who

holds GSE stock, bonds, and MBS. The Fed reports statistics for combined

ownership of government agency and GSE debt and GSE MBS. At the end of 2007,

non-United States investors held $1.479 trillion of $7.397 trillion. Other large

investors were U.S. commercial banks ($929 billion), life insurance companies ($388

billion), state and local government retirement funds ($317 billion), mutual funds

($566 billion), asset-backed securities issuers ($378 billion), and the GSEs

themselves ($710 billion).

?Full pdf link here... Lots of interesting misinformation tucked away in this link.


sgt_doom's picture

Great timing re: the content of this posting:

BOMBSHELL -- Massachusetts Supreme Court Rules That Most Foreclosure Sales From Previous 5 Years Are Void

No need to convince me......

doomz78's picture

QE to infinity and beyond..   They are putting make-up on Courtney Love.  But it's still her.  With the red lipstick all over her cheeks.  Maybe she just needs more. 

Shirley Wilfahrt's picture

No Banker Left Behind


ragequit's picture

Muad'Dibernak: LET THE SPAM FLOW

Killer the Buzzard's picture

He who controls the Spam, controls the universe.

Piranhanoia's picture

Betting on MBS, but going long!   HAHAHAHAHAHAHAHAHAH

knukles's picture

If one wants to add duration, one does NOT fucking use Mortgage Backeds for 2 very important mathematical reasons.
1.) The average MBS's duration is so far short of the duration space of a long treasury that they don't even make apples and used condoms comparisons.  Black and white.  Not even a Kettle and Pot Black Relationship.  So if it was a decline in long rates Billyboy was looking for, he'd a bought 30 years.
EOC (as in end of conversation)
2.) The math of MBS is such that they have a mathematical characteristic known as Negative Convexity, which means that as rates move, the greater the move, the duration effect is actually defeated by other mathematical principles.  MBS's best world is one of rising rates, not falling.

So.... Billyboy didn't buy this shit in anticipation of Operation Twist.  (As in "do the twist" would have excluded the ownership of Mortgages and in fact demanded a barbell portfolio for any given duration target... barbell like cash and 30's....
My own opinion, guess, hunch is that Pimpco has an inside track with TPTB (as this just goes to further sort of enshrine) and they knew that was gonna be a topic discused and floated.
Talk about having Somebody Big Fucking Time Charlie Talk Your Book For You. 


SwingForce's picture

Or buy their own fund ZROZ.  They are shaking the Eurozone tree.

riley martini's picture

 Full  Front page of Barrons today in bold type "BUY THE BANKS " all of them. Looks like Bill isn't the only inside fascist.

centerline's picture

Bill has his lips wrapped around what?  What a shock.  LOL.  IMO, the catestrophic blow will come when the pension funds are wiped out.  Keeping Bill in the game keeps the lid on things - for now.

Henry Chinaski's picture

communications strategies = more lies

buzzsaw99's picture

By increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates...


They love to say shit like that.


By increasing demand for MBS, such a program should increase the price on those MBS, which in turn would hand the front-running banks an easy profit thus ensuring bigger bonuses...


Fixed it.

SwingForce's picture

And yet banksterz STILL not issuing new mortgages!


knukles's picture

"They" just do not fucking undersatnd that we are in a liquidity trap in the classic of the classic economic sense and that the only way out is regardless of how much money one jams into the system, people aiont' gonna borrow until they see an opportunuity accompanied by an increase in confidence.  Which is not a component of monetary policy...
That's a Job for Suoerman and the Daily Planet
(pretty good analogy to the PTB and media....  LOL... best of luck, don't lie in the sun too very fucking long..) 

JustObserving's picture

Was Twist QE3 and this will be QE4? Luckily for the Fed, the number set is infinite.  The Debt monster is insatiable.

nyse's picture

What is the point of even counting them anymore? 

Belarus's picture

They can't announce LSAP until Europe explodes, right?

Manthong's picture

If they let Europe detonate and the US market tank 30-40 per cent, they could do anything their evil, little hearts desire.

Tic tock's picture

Or, the purchase of MBS is a cheap way of buying the other Bank assets, in the fairytale where they once implode...

bogey4's picture

Bill Gross is so good at front-running that his Total Return Fund has underperformed his benchmark by 460 bps this year to date and underperform 90% of comparable funds.

How's that for "front-running?" 



Tyler Durden's picture

At $245 billion in AUM? Pretty damn good.

kito's picture

i thought one was only as good as his last trade? 

disabledvet's picture

i thought he had a trillion aum? I guess things really are shitty. During the biggest bond rally relative to equities since "the 19th century" no less. Perhaps if he hung of picture of Queen Victoria on his wall that would help "channel the correct vibes."

buzzsaw99's picture

Ever since Bill Gross said this:


he hasn't done so well. Like J. Paulson, once the criminal collusion stops they perform worse than average.



Snidley Whipsnae's picture

Right you are BuzzSaw99...

And if one reads about the life of Keynes, one finds that the same happened to him when he lost contacts in high places... Like most, Keynes did not see the crash of 1929 coming and lost a fortune...

"Ten Great Economists from Marx to Keynes" Joseph A Schumpeter

I like this book because it was written in 1952 and filled with the prejudicies of that era... not the current prejudices


ReactionToClosedMinds's picture

will eventually go out and buy then read this on your highlight just now.   Schumpeter is one of the great unheralded minds of the 20th Century

lizzy36's picture

Even better Fed mouthpiece Hillsenrath (WSJ) just announced this being considered:

Federal Reserve officials are considering a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly in this direction.

The idea would be to target any new efforts from the central bank at the parts of the economy that are most severely impeding a recovery--the housing and mortgage markets--by working to push down mortgage rates.

Lower mortgage rates, in turn, could encourage more home buying and mortgage refinancing, and help the economy more broadly by freeing up cash for consumers to spend on other goods and services. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.

In the dictionary beside the defination of insanity is the FEDERAL RESERVE crica 1990-2012.

Tyler Durden's picture

In other words, Hilsenrath just did what he always does: pitched verbatim what Tarullo said, with an article ready to go as soon as the embargo was lifted, with the data in hand weeks earlier, and in the meantime may or may not have told friends and neighbors of just what was happening.

jdelano's picture

If this happens I will join ows.

NotApplicable's picture

Where you will find them dancing in the streets at their "win" for the little people. So, you might as well smack yourself upside the head now, and get it over with.

In other news, our local occupation is down to a couple of people guarding all of the stuff that's beginning to pile up.

jdelano's picture

Id be a little less cavalier about mocking ows, unless it's because it scares you. It certainly worries me a bit. Right now ows is in it's adolescence--still ungainly and awkward, but when highly intelligent, established folks start joining their ranks the movement will evolve, producing a Trotsky or a Lenin, factions will grow and radicalize like some recursive virus, and when it starts to get really ugly out there you'll look back and curse yourself for a fool asking "how did I not see this coming?"

Quixotic_Not's picture

the movement will evolve, producing a Trotsky or a Lenin

No worries, it took 19 years from the Marxist Russian Social Democratic Labour Party formation to the October Revolution, so I'd say we've got at least 19 months (extrapolating for advances in technology, and the proliferation of sheeple in 'MeriKan culture) before the next Clinton, Dubya or Obummer show up...

With that in mind, the trend remains solidly in place:  TBTF/TPTB will continue exponention growth of ALL debt until economic collapse...

Trade/prepare accordingly - Do not believe rumours that ANYTHING will *STOP* CBs on the quest for the Holy Grail.

Everything else is just smoke, mirrors and braking wind!

B9K9's picture

Yep. Everything else, including the daily profusion of articles, debates, analyses, et al (ZH being one of the chief culprits), is all noise. All one has to understand is that the debt-money system will be defended down to the last clueless soldier in service of their true masters.

My advice has been fairly consistent: stay long the Empire, while preparing for its eventual demise. Attempting to short the PTB before it is time is suicidal. Discard obsolete sentiments like the 'rule of law', or that old chestnut "representative republic" and focus on what's really happening.

When its apparent the wheels are about to come off, then it's the time to finally get out of Dodge and bet long sustainable regions. Whether BC or TX, the name of the game is to avoid the rampaging FSA.