In a world in which all the matters is "scale", the ability to Martingale down on losing bets as close to infinity as possible (something which JPMorgan learned with the London Whale may not be the best strategy especially when one can't print money out of thin air), and being as close to the Fed's Heidelberg rotary printer as possible, it was expected that that "expert" of government backstops and bailouts, the Octogenarian of Omaha, Warren Buffett, would have only kind words for Ben Bernanke. But not even we predicted that Buffett would explicitly admit what we have only tongue-in-cheek joked about [13] in the past, namely that the Fed is the world's greatest (and most profitable) hedge fund. Which is precisely what he did [14]: "Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion. "The Fed is the greatest hedge fund in history,” Buffett told students yesterday at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said.
From Buffett's presentation at Georgetown last week:
The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.
The Fed “is under no pressure, none whatsoever to have to deleverage,” Buffett said. “So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.”
From Bloomberg [14]:
Good thing none of the present had any idea what Mark To Market or what DV01 are, and how, if one actually marked the Fed's balance sheet to reality, the Fed would have already lost [15]nearly $300 billion in the past few months (or 5 times the Fed's own regulatory capital) courtesy of the massive and rapid blow out in rates, driven exclusively by the Fed's own inability to communicate with markets and warn about a taper that never came, because the global market had become unhinged precisely due to fear of a Taper, aka the Fed's Tapering Catch 22 [16].
Which by the way, takes care of Buffett's concerns about Fed deleveraging: it will never come if the merest hint that the leveraging would be reduced by even the tiniest amount, sent the global carry trade into a tailspin. There is a reason why some, such as Zero Hedge, nearly 5 years ago showed that once you set off on a path of bailouts [17], there is no exit until everything ultimately collapse into a handful of dust. And we have Ben Bernanke to thank for proving us right again and again.
Finally, regarding Buffett's claim, he is absolutely correct that when one has unlimited capital to invest, and has no concerns about downside risk, it is easy to quite easy to become the world's biggest and most profitable hedge fund. Well, there is one downside: losing the dollar's reserve currency status of course. And the more incidents that get even Fed presidents to admit that Bernanke is increasingly losing credibility with the markets, the closer we get to having a peek at what the ultimate cost of Bernanke's unprecedented error will end up being.