Only minutes before today's auction was scheduled to complete (while most, if not all, offers from the primarily dealers were presumably in), the European Union’s energy commissioner warned of ‘further catastrophic events’ at Japan’s stricken nuclear power plant. Shortly thereafter, the NY Fed cancelled the POMO--to our knowledge, an unprecedented act. According to Tyler Durden of Zero Hedge, Reuters reported the cancellation at 10:57 or 10:58 am.
In the minutes that followed, equities and other risk markets tumbled, while the very 5 and 7 Year Treasury Notes the Fed would end up buying surged in price over 50 bps (0.50%). At 11:24 am, after prices had settled a bit (though were still materially higher than before), the NY Fed restarted the POMO, which finally closed at 12:04 pm. It would end up purchasing a total of $6.580 billion in Treasury securities (reported at par), with a heavy concentration in the 5 Year tenor at $5.089 billion (of which $3.209 billion had been issued by the Treasury in the last two months).
Using 5 Year Note futures as a proxy, we have calculated the difference in average price between what the NY Fed would have paid had it not cancelled the first auction versus what it actually ended up paying: $15.7 million ($12.1 million for the 5's and $3.6 million for the 7's). This amount was simply pocketed by the primary dealers and is now a liability of the Federal Reserve, and putatively the US taxpayer.
The below chart illustrates the sequence of events with the 5 Year Note futures (click for large image).
It is now incumbent upon the NY Fed to issue an explanation detailing its decision making process today. Just why did it cancel the auction when prices were starting to move in its favor (against the dealers)? If Mr. Frost, who supervises the purchase operations at the NY Fed, was telling the truth when he told the NY Times, "We are looking to get the best price we can for the taxpayer", then why did the opposite occur today?
Indeed Zero Hedge has chronicled how the Fed serially purchases the richest spline in its operations, to the benefit of the primary dealers (see here, here, here, here, here, and here). We also reiterate and incorporate herein our previously expressed concerns regarding the NY Fed's black box computer program that virtually runs the Fed's daily auctions. Just who programmed it, and how does it assess "fair value"?
As is usually the case with the Federal Reserve, there are more questions than answers.
Update: Reuters has backtracked with the following:
EU Energy Commissioner did not say a catastrophe was going to happen, he just expressed his fear - spokesman
Uhmm Tyler Durden is a character from Fight Club, and Tyler Durden's avatar from Zero Hedge is a picture of Brad Pitt (from Fight Club). Is that a credible reference?
ReplyDeleteEnglish Bob is a fictional character from a Clint Eastwood movie. Looks like you're surrounded, Pilgram.
ReplyDeleteGood one, English Bob!
ReplyDeleteOh, and by the way Anonymouse #1: Tylder Durden always posts links to his sources, so when it says Reuters said it, Reuters said it. Dumbass.
ReplyDeleteLOL. Maybe Bob English's avatar should be a picture of Gene Hackman in a cowboy hat, just to keep readers on their toes.
ReplyDeleteAs for finding the trading (ahem) irregularity: Nice sleuthing.
So, would David Andolfatto or Stephen Williamson care to explain how the extra $15.7m will be neither inflationary nor tending to impose an inflation tax upon the rest of us? After all, $15.7m is just a nit in comparison to $6.580b, and everyone knows that the money multiplier is a hoax believed by first year econ students only.
In fact, maybe Andolfatto and Williamson would like to proclaim that both neutrality of money and superneutrality of money are fully consistent with POMO no matter how much is bought by the FRBNY, no matter how much and how fast deposits expand as a consequence of QEn, and no matter in how few hands the ownership of the new deposits is concentrated.
Finally, are any commissions paid to the FRS employee(s) who help to make sure that the FRBNY's customers--I mean vendors--are satisfied with their trades? And if so, who would do the paying? and when? and how? And what about court intellectuals like Andolfatto and Williamson? Do they, too, get commissions for doing their part to rationalize the interesting operation? Or must they be content with the satisfaction of a job well done while others rake in millions?
So many questions. Must follow the links in search of answers.
liabilities of the federal reserve are not, in my understanding, liabilities of the taxpayer. as the federal reserve bank of NY, Ostensibly The Fed, is privately owned by the boys/banks.
ReplyDeleteis the author confuse or am I?
Congratulations, Anon 3:37 pm. You're the first to call me out on this phrase, which I literally inserted in the last minute of authorship. Prior to changes in Fed accounting procedures in 2009 (which I will soon detail as violating the Federal Reserve Act), reserves would be liabilities of the FR banks. It is now possible for them to become literal liabilities of the US Treasury, and by extension, the taxpayer. Stay tuned.
ReplyDelete