Monday, October 19, 2009

The Debts of the Spenders: Treasury To Buy Fannie and Freddie Loans

I must be getting deja vu because I thought this already happened.

One year ago, then Treasury Secretary Paulson promised these would only be temporary measures. Back then, it was the equity and the bonds. Now, this time. . . .

Well, at least they are cutting out the middlemen this time. When the Fed bought (they never sold) Treasuries and agency backed securities from the Treasury, they were forced to go through the primary dealers, a network of investment banks that profited from their personal connections with government officials.

Actually, you can make the argument that in the prior instance, the Fed prints money through quantitative easing. Here the Treasury is only printing money directly w/the printing press.

Both methods are forms of money printing but the first method is more "efficient" since it benefits fixd income desks at large banking firms like Goldman Sachs.

Some more additional context. Earlier in the same day, the Federal Reserve began testing a series of repo operations. Repos, or reverse purchase agreements, are methods by which the Federal Reserve attempts to withdraw liquidity from the system. Bond traders were temporarily frightened by the prospect of the largest - in some cases - only buyer withdrawing its presence. Bernanke was quick to reassure traders in a public statement that all was well.

Now, he is backing up his words with action from the Fed's sister agency, the Treasury Department.

Here are some more additional sources:
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