Monetizing the Debt: My Response to Zero Hedge 16 comments
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The Zero Hedge blog composed a very fine piece on the composition of the Open Market Desk purchases of Treasury coupon securities and the time frame relative to the recent auction that the purchase was made.
I discovered this pattern early in the process on March 27 and then again on April 2 and posted about it each time.
So I agree with ZH regarding the fact that the Federal Reserve has purchased large blocks of recently auctioned issues.
I vigorously disagree with that blog’s implication, intimation or assertion that there is collusion between the primary dealers and the Federal Reserve in which the Federal Reserve backstops the dealers and guarantees the primary dealers that purchases of auction bonds will not produce a loss.
The conspiracy theory which that blog so desperately wishes to promulgate breaks down with a common sense analysis of the elements which would be necessary for such a scam to be successful.
I believe that there are currently 17 primary dealers. How does the Open Market Desk communicate to the dealers that they cannot lose money on a trade? Do they call Jamie Dimon at JPMorgan (JPM) or Ken Lewis at B of A (BAC)?
How does the CEO of those companies communicate to the trading desk that it will be participating in a fraudulent enterprise?
And then one must believe that this call from the Federal Reserve happened not once or twice but seventeen times and that seventeen rich and powerful men would acquiesce to participate in such a lawbreaking enterprise. It strains common sense and the credulity of reasonable persons to believe that not one solitary CEO would have reported such activity to Barney Frank or Chuck Schumer or Eric Holder.
The scheme make even less sense at the actual point of execution. In my experience, when primary dealers offer bonds to the Federal Reserve one person is the point person on the transaction. At the larger primary dealers there can be many traders offering bonds to the Federal Reserve. Benchmark Treasury issues are used by mortgage desks, swap desks, agency desks and corporate bond desks to hedge positions.
Suppose the head trader at a large dealer is coordinating the offerings to the Federal Reserve. How does that head trader handle the offerings of his colleagues who desire to sell bonds to the Federal Reserve? Does he tell them that they must sit this one out because all of the primary dealer community is involved in an illegal enterprise?
And what about mid level employees at the Federal Reserve who process the transaction? Are they told to stay home that day because the hierarchy is conducting an illegal operation?
Every securities firm also has a bevy of operations personnel who process tickets and ensure that securities are delivered and money is transferred between counterparties properly. They are not market persons per se but there are some savvy people in that crowd who are cognizant of the machinations in the market. Successful completion of the scam would require that everyone one of those pros should be either hoodwinked or complicit.
What is my point here? My point is that a legion of people at every level at numerous organizations would need to be complicit in order for the Zero Hedge scenario to play out successfully.
In my nearly three decades on Wall Street I met too many very honest people who would be repulsed by the suggestion and such a plan would be dead on arrival.
It is a great story for a blog to tell but it is virtually impossible that anyone in the real world would posit such a scheme and it is even less likely that it could succeed.
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Zero hedge very good blog but relax.
I think you need to take a look at the "Mandated Mission" of "The Presidents Working Group On Financial Markets" and "Consider How It Carries Out Its Mandate".
Your assumption "goes out the window" in times of "Financial Crisis".
To Assume Benevolence Is Foolish.
On Aug 10 03:16 PM ryshay2 wrote:
> I'll bet you thought that the rumors about Paulson twisting Ken Lewis's
> arm to merge with Merrill were conspiracy theories too, didn't you?
> Some conspiracy rumors turn out to be conspiracy facts (but not all).
> Try to keep on open mind.
Dishonesty has now gone on so long in the reporting and makeup of our economy that it seems that we have extremely well-practiced half-truths, lies and coverups in all mainstream accountings.
Or, most of the powerful elites are acting in good faith and there is nothing to report. That I don't believe.
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
But of course, the record of vigorous and successful prosecution of those who have undertaken whitecollar crime is sufficient to deter wrongdoers, and a nod and a wink between those intimately involved together in the conduct of the financial affairs of the banks, investment houses and nations is inconceivable.
There is a bit of incongruity to this line of argument that there is "no collusion" between 17 primary brokers and the Federal Reserve.
By American jurisprudence's standard of legal proof, conspiracies are extremely difficult to prove and rarely done so in a court of law in America.
Cases of price fixing are, for the same reason, difficult to prove because it is virtually impossible to prove that a specific meeting occurred with the intent and the act of agreement to set prices.
However, in the real world, outside of legal standards of proof beyond a reasonable doubt, it is widely known that price fixing, collusion, and conspiracies happen regularly.
In fact, it is impossible to be in a senior position of ANY industry or trade group without knowing about the tacit agreements and "codes of conduct" that are, for all practical purposes, collusive behavior.
Look at the cases which are public:
It is standard operating procedures that financial institutions who purchase securities from each other have "repurchase" agreements that are triggered if the securities did not perform to expectation. These agreements are both formal, as well as informal and is standard with virtually any dealer on Wall Street.
Such agreements do not have to be "public" - especially if a party is so big and powerful that the other party cannot be without their business. The very threat of a cut off of future business is sufficient to enforce a "repurchase" when things go sour regardless of whether a formal agreement or conspiracy exist.
While it is a huge leap to go from this to suggest that the Federal Reserve have a "repurchase" agreement with 17 primary dealers --- which Zero Hedge may have claimed, it is not beyond reason or common sense to see that the feds and the 17 primary dealers are mutually dependent on each other --- and on the Treasury. There is every incentive and logic to have these parties "scratch each others' backs".
In fact, given the tightness of linkages between the Feds, Treasury, and the Dealers --- a time honored relationship between the sovereign and its financiers that predate the founding of the United States ---- it would be fantastic to suggest that such closely knit, mutual aid understandings do not exist.
I would go so far as to say that it is the exception, rather than the norm, for a relatively responsible large sovereign to not have such a close and mutually beneficial relationship.
Sure, relations can sour between an irresponsible regime (e.g. Zimbabwe) and its bankers, but between a major OECD nation and its banker? Or between the United States and its bankers? Not likely.
IIf the presumption is that such a close, mutually beneficial and dependent relationship exist, then it is not a far stretch to see the Federal reserve coming in to backstop their primary dealers ---- regardless of whether a formal agreement, a priori, exist.
Indeed, a series of precedents where the Feds have come in and backstopped the primary dealers would have created such an expectation, without the primary dealers and the Feds or Treasury every meeting and discussing such a thing either formally or informally.
The question still becomes: did this occur? And if it did, what was the reasons it did?
That is a question for economic historians, perhaps 50 years in the future when the issues are sufficient remote and the participants willing to break their silence.
Unless a "Mark Feld", or deep throat were to emerge.
But we can not rule out the evident fact that it would not take a genius to notice that it would be complementary, or workable, to do some further trading between the parties. I mean the boys did not just meet yesterday, did they?
But what likely happened was the parties knew the vulnerabilities of each other and it fell together "naturally". No conspiracy involved, but the most probable outcome between sensible parties.
Having prosecuted several strange coincident on Wall Street and New York City I am convinced it has something to do with the air. Anyway no "signaling" is required.
As to: ryshay2's comment:
" I'll bet you thought that the rumors about Paulson twisting Ken Lewis's arm to merge with Merrill were conspiracy theories too, didn't you?"
That can happen on a one-on-one, or even with a small circle of intimates, and without a plan, and no need to follow a scheduled sequence of events. Does it show manipulation, influence, arm twisting? Yes, hmm human nature to some extent. But conspiracy - no.
Conspiracies -- such as proposed happened here -- are more complicated and this one would require cooperation and knowledge of the plan by more diverse players and a need to follow a plan and be executed within a specified period of time, step by step.
But there will always be believers that both government and Wall Street, or a President X, the CIA or whoever, are capable of much more power to conspire and control people and events, than is possible in our fairly open society. The Knights Templar, the Masons, and the Da Vinci Code -- they ride forever in some places. They might in a more closed, more centralized social and political system, like Russia's or China's, but rarely, and not for long and not very easily, here.
"Implicit backing" for holding up my Wallstreet Company is enough to do the trick.
Of course, who can proof such bold statement. Surely not me.
Will the Fed purchase more than their stated intention of $300bb? Possibly. If our UST auctions aren't going well, it's not much of a stretch to think that this $300bb can be "calibrated differently" to use an Obama-ism.
While I appreciate Mr. Jansen's long history of contributions to SA and the thoughtful commentary on the bond market, I think he is going overboard in his criticism of ZH. Mr. Jansen doth protest a bit too much, methinks.
These is no massive conspiracy involving 17 dealer banks, front & middle office personnel, etc. But to think that there is not ongoing dialogue between buyer (Fed) and seller (Pimary Dealers) is also wrong. Conspiracies don't tell the story - - the real story is simply how much the Fed is willing/able to prop up our UST debt with well-timed purchases.
He spent nearly three decades working on Wall Street where it is "normal" to lie, cheat and steal as much money as you can from clients and everyone else.
We are far far removed from the era where the main expression of corruption was nefarious deals in smoke filled rooms and suitcases of cash changing hands. Nowadays the most egrigous fleecings of the public occur with all sides claiming their actions are saving the world. Kudos to Treasury the Fed and Primary Dealers to creating a perfectly legal but morally corrupt framework whereby its in all their interests to have the most recent issues snapped up as they have been.
A final point on this, wouldn't it be in the taxpayer's interest (regardless of what makes sense from a liquidity standpoint for the dealers) for the Fed to buy older Treasuries with higher yields?
Good luck and good trading
Dave