From John Lohman
How do you hedge the interest rate risk of a $2.5 trillion dollar fixed income portfolio that has a modified duration of 4 and is levered 50 to 1?
Easy if you’re Chairman VaR-be-damned Burnbanke - just tuck a few sentences inside a routine weekly release which make up new (and one might add illegal for anyone without the magic Gutenberg – best of luck to the auditors at Deloitte) accounting rules which effectively transfer the interest rate risk of the entire $2.5 trillion 50-to-1 levered hedge fund to…the U.S. taxpayer. So, the Treasury is borrowing from the Fed, which, when it loses money on those loans, will then borrow from the Treasury, which will probably still be borrowing from the Fed.
How big could the Fed’s losses be? In three short months since the first QE2 session began on November 12th, 2010:
So, as for Ben’s statement in front of the Budget Committee this week…
“at the appropriate time, the Federal Reserve will normalize its balance sheet by selling these assets back into the market”
…it’s just a shame that, amid all of the committee’s discussion of the debt ceiling, no one bothered to ask what impact these asset sales might have on, well, the debt ceiling.