Why Soros Wants "Revolution" in Egypt

Simple: Follow the money.

Following up on RW's post at EPJ central, in which he quotes a WaPo OpEd written by Soros:

I am, as a general rule, wary of revolutions. But in the case of Egypt, I see a good chance of success. As a committed advocate of democracy and open society, I cannot help but share in the enthusiasm that is sweeping across the Middle East. I hope President Obama will expeditiously support the people of Egypt. My foundations are prepared to contribute what they can. In practice, that means establishing resource centers for supporting the rule of law, constitutional reform, fighting corruption and strengthening democratic institutions in those countries that request help in establishing them, while staying out of those countries where such efforts are not welcome.

It's worthwhile recalling that Soros has been a leading advocate of IMF Special Drawing Rights (SDR's),an old global quasi-currency idea from the 1970's that was resurrected during the 2008 panic. Here is what Soros wrote in an FT OpEd on March 22, 2009:

As things stand, the G20 meeting will produce some concrete results: the resources of the IMF are likely to be doubled, mainly by using the mechanism of the “new arrangements to borrow”, which can be activated without resolving the vexed question of reapportioning voting rights.

This will be sufficient to enable the IMF to help specific countries at risk but it will not provide a systemic solution for the less developed countries. Such a solution is readily available in the form of special drawing rights. SDRs are complex but they boil down to the international creation of money. Countries that can create their own money do not need them but periphery countries do. The rich countries should therefore lend their allocations to the nations in need.

Recipient countries would pay the IMF interest at a very low rate, equivalent to the composite average treasury bill rate of all convertible currencies. They would have free use of their own allocations but would be supervised in how the borrowed allocations were used to ensure they were well spent.

In addition to the one-time increase in the IMF’s resources, there ought to be a big annual issue of SDRs, of say $250bn, as long as the recession lasts. It is too late to use the April 2 G20 meeting to agree this, but if it were raised by President Barack Obama and endorsed by others, this would be sufficient to give heart to the markets and turn the meeting into a resounding success.

Soros has major skin in the game of climate change, and has pushed repeatedly for more SDR's to Africa as a form of philanthropy. As the Sunday Times reported December 10, 2010 (emphasis ours):

George Soros, the billionaire currency speculator, has proposed the creation of a $100 billion fund to help the world’s poorest countries to cope with global warming — and he says that it need not cost anyone a penny.

Mr Soros announced his plan today at the Copenhagen climate change summit, at which the issue of how much money the Third World should get and who will hold the purse strings has emerged as a key sticking point in negotiations for a global deal.

Mr Soros told delegates and activists that he had found a way to “bridge the gap” by using foreign-exchange reserves issued by the International Monetary Fund that are lying unused in the reserve accounts of rich nations. He said that the resulting fund would be entirely additional to money already being raised at Copenhagen and would not add at all to national debts.

“Developed countries’ governments are labouring under the misapprehension that funding has to come from the national budgets, but that is not the case,” he said. “They have it already: it is lying idle in their reserves accounts and in the vaults of the International Monetary Fund.”

...

His plan involves using Special Drawing Rights (SDRs), which is liquidity funding issued by the IMF pegged to a basket of major currencies. The IMF issued $283 billion (£174 billion) of SDRs to governments in September this year in response to the global financial crisis, but Mr Soros said that more than $150 billion of that money remained untouched in the reserve accounts of the 15 biggest economies.

The reason for that is that SDRS are essentially a notional currency, giving governments the right to draw down on IMF funds. When they are drawn, they start to incur interest, currently less than 0.5 per cent, but Mr Soros said that the interest payments could be covered from IMF gold reserves.

Mr Soros called it an “off-balance sheet solution” that could be used for for high-impact projects such as reforestation and land-use reforms and which could even become self-financing if it is properly run.

This "off-balance sheet solution" is, of course, nothing more than money printing at the supra-national level. Returning to Egypt, we learn from the WSJ that only last Tuesday, January 28, the IMF was considering another expansion (sic printing) of SDR's:

The board of the International Monetary Fund will discuss a possible expansion of the role of the Special Drawing Right, IMF Deputy Managing Director John Lipsky said Friday.

“One of the options being discussed is to increase the usage and stock of SDRs, and broaden the terms on which they could be used,” Lipsky said in an interview on the sidelines of the World Economic Forum annual meeting.

This year, Davos has been a-buzz with talk of expanding the currency basket that underlies the SDR, a notional currency that at present has only four constituents: the dollar, the euro, sterling and the yen.

Whether or not this was already on the Davos agenda is unclear, but one can imagine the buzz there as Egypt burned. And why let a good crisis go to waste?

Geithner Gone Wild: Treasury Entertains 100 Year and GDP-Linked Bonds to Fill New $2.4 Trillion Demand

Each quarter, we break down the minutes of the Treasury Borrowing Advisory Committee (TBAC) meeting where primary dealers and other members of the investment industry advise various members of the Treasury what the market will bear in terms of debt issuance. There are usually more than a few interesting tidbits as we learn just what's on the mind of those in the business of buying Treasury coupons, holding them for two weeks, and selling them to the Federal Reserve at a higher price. And because the Federal Reserve viz a viz its System Open Market Account (SOMA) is the largest holder of Treasury debt, none other than its two managers, Brian Sack and Joshua Frost, were present as representatives of the world's largest central bank cum [unhedged] hedge fund. The current minutes are shorter than usual, but worth reading as they reveal an emboldened, opportunistic Treasury looking forward to novel ways to fill an ever expanding appetite for US debt, which is all but guaranteed as a result of new, socialized banking regulations.

As we have long speculated, Basel III is nothing more than an elaborate mechanism for artificially increasing demand for sovereign debt and globalizing banking regulation. Indeed, the minutes of the prior TBAC meeting revealed that new regulations aimed at "reducing banks' risk profile" are expected to generate at least $400 billion in increased US Treasury debt alone by 2015. However, this estimate has now exploded and has Treasury salivating (emph. ours):

The member recommended that Treasury develop products that target the needs of three different investor classes, specifically banks, pension funds/insurers, and retail investors. The member estimated that demand from these three investor classes could total $2.4 trillion over the next 5-years, if the right products were offered.

And just where is this new demand coming from? Why, the very markets that have imploded are are teetering on implosion thanks, in no part, to the actions of the central planners:

On the supply side, opportunities to expand the investor base have developed due to market dislocations following the financial crisis. A decline in GSE debt issuance, the wind-down of bank debt issued under the Temporary Liquidity Guarantee Program (TLGP), dislocation in the municipal market, and the contraction of the commercial paper market have resulted in a shortage of high quality assets.

For further evidence that Treasury lusts to crowd out private investment (or is it "crowding in", as Paul Krugman hallucinates--paging Bob Murphy) and become the #1 investment in its citizens' portfolios:

Expanding the Treasury investor base to include more domestic investors by offering new products is desirable and would reduce overall funding risk. The presenting member noted that other sovereigns’ debt (Italy, Japan, and the UK) is largely funded by domestic investors. The member further noted that it was important to avoid cannibalizing the current auction process and that any new products should add to demand.

A dazzling array of "solutions" are then presented to fill the engineered void, in which we find 40, 50 even 100 year bonds, callable coupons, floating rate bills (to reduce rollover risk) and even GDP-linked bonds (because the BLS is so spot-on):

The presentation next discussed a variety of specific securities and debt management techniques that could potentially aid Treasury in achieving its goal of expanding the investor base and financing the government at the lowest cost over time.

The presenting member first discussed “ultra-long” bond issuance, which were defined as securities issued with a tenor of 40-, 50- and/or 100-years. The member noted significant demand exists for high-quality, long-duration bonds from entities with longer-dated liabilities. It was noted that duration tapers off rapidly with maturity and is dependent on the underlying coupon on the bond. As a result, liability-driven investors would likely use the STRIPS market to capture additional duration exposure.

The presenting member then discussed increasing the U.S. Treasury investor base through callable issuance. The presenter noted the emerging gap between demand and supply in this market, driven by less GSE callable debt and MBS issuance. The member added that Treasuries are a relatively close substitute for Agencies, especially in the 2- to 5-year maturity ranges with 6-month to 1-year lock outs. According to the member, accounts that buy callable product include domestic banks, foreign banks, state and local governments, fund managers, insurance companies, pension funds and foreign investors. The presenting member noted that demand may exist for longer-maturity callable paper. This space is currently occupied by corporate names carrying ratings of BBB or lower.

Examining current pricing for Agency product, the presenter estimated it would cost Treasury an additional 18 basis points to issue a 5-year bond callable in 1-year and an additional 8 basis points to issue a 2-year bond callable in 6-months.

While this strategy would give the Treasury additional optionality in managing its debt and potentially increase its investor base, the presenting member remarked that demand for callable product tends to decrease if investors expect interest rates to increase. If market volatility increased or we entered a rising rate environment, the member mentioned that the Treasury would have to offer higher yield enhancements to maintain a regular issuance program.

The discussion then turned to potential demand for new money market instruments. The presenter concluded that new regulations may be creating room for increased bill and callable issuance to fill the emerging gap between Money Market Mutual Funds and issuers. Regarding bonds targeted for individual investors, the member concluded that increasing household ownership of Treasuries has the potential to broaden the investor base significantly.

The discussion turned to floating rate securities with short-dated reference rates such as bonds indexed to the 6-month T-bill rate with a semiannual reset. While such instruments would not protect Treasury against increased debt service costs in a rising rate environment, they would reduce rollover risks. CMT-style floaters, which have a reference rate that is generally on a maturity much longer than the reset period, have had mixed success in other countries due to the complexity of pricing.

GDP-linked bonds were noted to be an interesting product for which more research needs to be done to assess their potential. A discussion ensued about the possible increased demand for TIPS from separating the final cash flow of TIPS into the unadjusted principal and the inflation accrual components in order to create a “pure inflation” component.

The meeting apparently ended with animal spirits getting the best of those in attendance:

An energetic discussion followed regarding the merits of different debt instruments discussed in the presentation. The committee concluded that this topic deserved further review.

Full minutes may be found here.

Fed Prepares for Inflation as Ben's Tool Belt Expands

Though he will have taken eight months to fully implement the $600 billion plus QE2 Treasury purchase program, Chairman Bernanke is on the record as saying he will need only 15 minutes to reverse his mad money printing should things go awry. Among his tools to reign in liquidity is the ability to conduct reverse repos with money market funds. Today, the Fed updated its list of counterparties, adding the following:

Investment Manager	Fund Name
BlackRock Advisors, LLC	Master Institutional Portfolio Master Money LLC Master Premier Institutional Portfolio
BlackRock Fund Advisors, LLC	Money Market Master Portfolio Prime Money Market Master Portfolio
BlackRock Institutional Management Corp	BlackRock Liquidity Funds: FedFund
BofA Advisors, LLC	BofA Money Market Reserves
Charles Schwab Investment Management, Inc.	Schwab Advisor Cash Reserves Schwab Government Money Fund Schwab Money Market Fund
The Dreyfus Corporation	Dreyfus Institutional Preferred Money Market Fund Dreyfus Treasury & Agency Cash Management General Money Market Fund
Federated Investment Management Company	Federated Treasury Preferred Money Market Fund Federated Prime Cash Obligations Fund Federated Treasury Obligations Fund
Fidelity Investments Money Management, Inc.	Fidelity Cash Central Fund Fidelity Securities Lending Cash Central Fund
Fidelity Management & Research Company	Fidelity Prime Fund Fidelity Retirement Money Market Trust Fidelity Treasury Portfolio
Goldman Sachs Asset Management	Goldman Sachs Financial Square Treasury Obligations Fund
Invesco Advisers, Inc.	STIT Treasury Portfolio
J. P. Morgan Investment Management Inc.	JPMorgan U.S. Treasury Plus Money Market Fund
Legg Mason Partners Fund Advisor, LLC	Western Asset/Institutional Cash Reserves Portfolio Western Asset/Institutional Government Reserves Portfolio
Morgan Stanley Investment Management, Inc.	Morgan Stanley Institutional Liquidity Fund Prime Portfolio
Passport Research, Ltd.	Edward Jones Money Market Fund
RBC Global Asset Management (U.S.) Inc.	RBC Prime Money Market Fund
T. Rowe Price Associates, Inc.	T. Rowe Price Reserve Investment Fund
U.S. Bancorp Asset Management, Inc.	First American Government Obligations Fund
Wells Fargo Funds Management	Wells Fargo Advantage Cash Investment Money Market Fund

Will any of Ben's tools actual work when price inflation is the 800 lb gorilla that can no longer be ignored? If nothing else, it's merely another way to subsidize the financial industry with favorable prices and commissions for the primary dealers that operate as counterparties.

CFTC to Track Traders With Barcodes; Admits it Regulates Futures Markets by Fax

We were [half] joking yesterday in our post about the CFTC's budget woes, when we said, "we're sure [Gary Gensler] will get his budget money and finally upgrade the Win98 box used to run the position limits calculator". From Reuters (emph. ours):

(Reuters) - Regulators seeking a barcode-like system to keep track of thousands of traders and millions of swaps contracts face an uphill battle to do it quickly and efficiently, firms that will be impacted by the new framework said on Friday.

The U.S. Commodity Futures Trading Commission is crafting an identification system for the swaps industry -- one that it wants to mesh with similar ID systems under consideration by securities and systemic risk regulators in the United States and Europe.

The numbers and the databases behind them will be a key part of the market infrastructure, and must be accurate and secure, said participants at a roundtable held to collect input from those who would be assigned a ID and organizations vying to collect the data.

"If you launch something, it must be bulletproof from the start," [apt metaphor, with CFTC Commissioner Chilton poised to "pull the trigger"] said Paul Janssens, product manager with the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which records most global money transfers.

Currently, the financial services industry has a hodgepodge of many identifiers that regulators are trying to mesh.

The CFTC sees the ID system as a "crucial regulatory tool" for monitoring risk, preventing market manipulation and enforcing position limits, said David Taylor, part of the rule-writing team that put together the CFTC's proposal, which is open for industry comment until February 7.

Cost is an issue for the regulator, which currently collects some of the data for its oversight of the futures market by fax.

The CFTC is struggling with how to pay for the new staff it needs with its budget frozen by Congress, and may run out of room to store data by October because of cutbacks to its technology budget, Commissioner Scott O'Malia said this week.

Thanks to the computer technology industry being largely unregulated, there has been a 350,000 times reduction in the cost of storage over the last 30 years, costing less than $0.002/MB today.

So, it's virtually inconceivable that the CFTC can't afford an extra hard drive or two. But yes, if you're regulating the markets by fax, telegraph and other assorted eighteenth century innovations, the invoices for filing cabinets can add up (the "C" does stand for "Commodities", right?).

CFTC Puts Gun to Congress' Head: Hand Over More Money or It's 2008 All Over Again

Despite running on budgetary fumes, the CFTC is proceeding at a blistering pace in its effort to rewrite the rule books and avoid another 2008-style meltdown in the multi-trillion global derivatives market. Taking his cues from Hank "Terminator" Paulson, CFTC Commissioner Bart Chilton doesn't hesitate to pull out the tried and true gun metaphor. From Bloomberg (emph. ours):

The Commodity Futures Trading Commission may have to impose “user fees” on traders if Congress doesn’t give the agency enough money to police the newly regulated $583 trillion derivatives market, said Commissioner Bart Chilton.

The CFTC has asked Congress for a budget increase to $261 million from $169 million to implement the Dodd-Frank financial overhaul. The law expanded the commission’s jurisdiction to the over-the-counter swaps market for the first time since the products emerged 30 years ago.

The agency’s request for more money has been delayed as the newly empowered Republican House majority promises to slash spending and Democrats warn that cuts will undermine consumer protections. Lawmakers agreed last month to fund the government at current levels through March 4.

“It’s not my preference, but if the choice is no regulation of these markets or a user fee, then we will have to pull the trigger,” said Chilton, one of three Democrats on the five-member commission, in an interview.

Chilton said a fee would be a “last resort” to pay for staff and technology needed to prevent a recurrence of the 2008 financial crisis. The agency may need authority from Congress to levy such a fee, he said.

Looks like [ex-Goldmanite] CFTC Chairman, Gary Gensler, will be going to Congress hat in hand either way. However, we're sure he'll get his budget money and finally upgrade the Win98 box used to run the position limits calculator. From Reuters (emph. ours):

In a pointed letter, Representatives Frank Lucas and Michael Conaway urged the Commodity Futures Trading Commission to slow down, reorganize its rule-making process, and make sure it knows how much it will cost businesses to comply with its regulations.

"By prioritizing speed over deliberation in writing rules, the CFTC has created an irrational sequence of rule proposals that prevents stakeholders and the public from providing meaningful comments," said Lucas, chairman of the House Agriculture Committee, and Conaway, head of a key subcommittee.

The Agriculture Committee has oversight of the CFTC, and the letter, sent on Wednesday, was a signal that it intends to pay close attention to the details of the system the CFTC is developing to police the over-the-counter derivatives market, worth $600 trillion globally.

The pleas of Congressman Lucas are in fact irrelevant, as the purpose of the CFTC's reg-writing profligacy is to get as many arbitrary rules and regulations on the books as possible to be able to arbitrarily enforce them and protect its most favored players' hegemony. C'mon, did you really think the CFTC was going to clamp down on the Morgue's silver shorts? Not to mention, the ability to engage in price fixing of commodities and, yes, even breaking individual trades on a purely discretionary basis.

Higher fees, irrational regulations...sounds like the folks at the CFTC are creating a perfect storm to drive derivatives trading elsewhere. Already, one major derivatives player, a unit of the IntercontinentalExchange, has withdrawn its swaps-clearing application. Expect more to follow.

The Bernank/Gense tag team hereby gets our new "B4F" designation (Best Friends in Financial Fraud Forever).

[The Gense: Can't we make QE2 a bit bigger?]

US Treasury's $200 Bn Valentines Day Gift to the Markets

We wrote the following in our daily trading letter to clients this morning, and it's worth repeating here:

As we prepare for February, a historically underperforming month for equities, it's worthwhile to consider the liquidity situation. As ZeroHedge recently speculated (subsequently confirmed by Bloomberg), the Treasury will soon begin drawing down its $200 billion Supplementary Liquidity Program. The details will not be available until February 2, but it is estimated that beginning about mid-February, $25 billion per week in additional liquidity will be available as the 56 day cash management bills used to finance the program are not rolled over. Combined with the nearly $28 billion per week of QE Lite plus QE 2, a total of $53 billion per week will be flooding the markets in search of a home. Thus, it's difficult to conceive an intermediate correction developing and any weakness over the next few weeks would likely be an excellent buying opportunity.

We first wrote about Treasury's SFP back in September 2009, the last time it was announced it would be drawn down. We speculated (quite correctly as it turns out) that the additional "stimulus" would lower short term interest rates and would provide more potential market-ramping liquidity (QE 1 Treasury POMO having been nearly completed). At the time (and similar to now) the US was bumping up against its pesky debt ceiling, hence the timing. After Congress raised the debt ceiling, Treasury rebuilt the SFP account to $200 billion from March to April, 2010.

Inasmuch as the Fed's ability to pay interest on excess reserves (which it did not have at the inception of SFP in September 2008) largely makes the SFP irrelevant, we find it curious as to why it was ever refunded. As we wrote in 2009:

Treasury announced special auctions for cash management bills, the proceeds of which were placed on deposit with the Federal Reserve in a special account (as opposed to the proceeds being kept by Treasury to fund the government). This allowed the Federal Reserve to use these funds (which topped out at $558.9 Billion in November 2008) to borrow or buy securities primarily from banks and broker dealers to help “unfreeze the credit markets.” The Fed could have simply borrowed or bought securities with money it printed, but this would have expanded its balance sheet by creating excess reserves in the accounts that banks are required to keep with the Fed [and the funds may or may not have remained as excess reserves].

...

Congress granted the authority to the Fed to pay interest on excess reserves held by banks on deposit with it as of October 1, 2008. This new tool obviated the need for the SFP as the Fed could now simply incentivize banks to not lend against their excess reserves (by paying them interest to keep their reserves at the Fed). Accordingly, in November 2008, Treasury announced it would reduce the SFP, and it has held steadily at $200 Billion for most of 2009.

As yet another illustration of how dramatic liquidity swings by central planners affect risk markets, we find it no coincidence that after the QE 1 spigots were turned off and the $200 billion liquidity drain from the SFP was complete, the May 6 flash crash ensued, wiping out $1 trillion (intraday) in the US stock markets alone. Headlines of debt deflation pervaded the summer and would be used for justification of renewed money printing by the Fed (a/k/a QE 2).

Based on the following White House mid-session budget review published in July, 2010, it was already contemplated that the SFP would be drawn down by September, 2011 (the end of the US' fiscal year), never to be used again.

Which begs the question we echo from ZeroHedge: what liquidity draining method or event lies ahead to be used to justify continued money printing? For the time being, enjoy the ride as the mid-February to mid-April period could see as much as $425 billion ($212.5 billion per month!) in hot money hit the markets. JBTFD indeed.

Sweeps Week at the Morgue; Banking Hits New Carnival Highs[Lows?]

As RW at EPJ central recently wrote:

The U.S. government has so many regulations that it should come as no surprise that some work at cross purposes.

The government continues to increase the rules and regulations under which it can gain access to information about your financial transactions. The surveillance state is obviously growing. Yet, at the same time, other new regulations will drive customers away from using bank services, making those ex-customers much more difficult to track. These former customers are being called the "unbanked".

According to Jamie Dimon, federal limits on debit card processing fees will force banks to charge customers more for services, making accounts too expensive for as many.

Indeed, banks are getting more creative now that the government is setting transaction fees below market rates (though offset, if you're a primary dealer, by the Fed continuing to pay above market rates). Ever wonder why recently, every bank teller experience involves a sales pitch for a savings account (assuming you don't have one with that particular bank already)?

There are no required reserves on savings account deposits. They immediately can be lent out at 100 cents to the dollar. So it's no surprise that banks incentive their customers to put as much of their money as possible into savings accounts. And, with savings accounts yielding a whopping 1% annually, it's only natural that JP Morgan Chase would craft a pitch worthy of Billy Mays or Ed McMahon:

That's right kids: double your money, betting on future bailouts and other assorted moral hazard while we blow your money on leveraged silver shorts and non-creditworthy borrowers (don't worry, we'll sell the 95% LTV loan to Fannie). The free lunch promise parade marches on to the drum beat of fractional reserve banking fraud. Ironic that savings--the bane of Keynesians everywhere--is now one of the large banks' few remaining cash cows.

Fed Ups the QE Ante: $112 Billion Over Next 30 Days; How Much Will Go to the PIIGS?

From the NY Fed:

Across all operations in the schedule listed below, the Desk plans to purchase approximately $112 billion. This represents $80 billion in purchases of the announced $600 billion purchase program and $32 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-January and mid-February.

The $7 billion increase from the prior period is composed of $5 billion as part of QE2 ($80 billion, up from $75 billion for the previous period) and an extra $2 billion as part of so-called QE-Lite ($32 up from $30 billion). We checked, and the MBS portion of the Fed's balance sheet is accelerating its drawdown, reaching an all-time high 4 week rolling drawdown of -$30.5 billion, from December 8, 2010 to January 5, 2010. Curious, as this is in the face of rising mortgage rates, where we would expect refinancing and the resulting prepayments to dwindle. There could be a lagging effect, or we could be witnessing Fannie and Freddie accelerating the modification and payoff of delinquent mortgages (in February, 2010, Freddie instituted a policy of automatic paydown of loans delinquent 120 days).

The extra $2 billion for QE Lite might be justified as business as usual from the perspective of the NY Fed, but why the extra $5 billion? RW at EPJ Central recently raised the question, "Is the Federal Reserve Propping Up Europe, Again?" As of last Thursday's figures, the Fed's liquidity swaps with other central banks went largely unused. Not surprising after the grilling Bernanke got in front of Alan Grayson (see below). However, as the Fed's expanding primary dealer list now includes banks housed in every major money printing hot spot, from Switzerland to Japan, the Fed can shovel money anywhere under the radar through it's "normal" money printing operations.

Oh, and as we pointed out last month, the actual amount of money printing is materially more than the pre-announced POMO schedule suggests, because prices paid are materially higher than the par amount reported. Now that the NY Fed publishes prices paid, we know that instead of $105 billion printed in the last 30 days, it was $110.4 billion, brining the grand total of "extra" money printed surreptitiously since November to $16.8 billion. Every billion counts!

Amateur Hour at the Fed: Fed Buys Billions on Advice of Algo Supervised by NYU Student

File this under "Paging Ron Paul's Subpoena Committee" (applications being taken now).

ZeroHedge comments and links to a NYT article offering a rare glimpse of the wizards operating the Federal Reserve Bank of New York's massive and ongoing large scale asset purchases, and it's every bit as instructive as Toto's little curtain-pulling stunt: (emphasis and brackets ours)

But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easing — QE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm.

...

Each morning Mr. Frost and his team face a formidable task: they must try to buy Treasuries at the best possible price from the savviest bond traders in the business.

The smallest miscalculation, a few one-hundredths of a percentage point here or there, could unsettle the markets and cost taxpayers dearly. It could also embolden critics at home and abroad who say QE2 represents a dangerous expansion of the Fed’s role in the markets.

“We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses.

...

Louis V. Crandall, the chief economist at the research firm Wrightson ICAP, said Wall Street bond traders were driving hard bargains. The Fed has tipped its hand by laying out which Treasuries it intends to buy and when, giving the bond houses an edge.

“A buyer of $100 billion a month is always going to be paying top prices,” Mr. Crandall said of the Fed. “You can’t be a known buyer of $100 billion a month and get a good price.”

Nevertheless, Mr. Frost and his team have been praised on Wall Street for creating a simple, transparent program. Neither the Fed nor Wall Street want any surprises. The central bank is even disclosing the prices at which it buys [though, as ZeroHedge points out, not the prevailing bid/offers].

Mr. Frost and his team work out of a small, beige corner office with arched windows that used to be a library. There, at about 10:15 most workday mornings, one of them pushes a button on a computer. Across Wall Street, three musical notes — an F, an E and a D — sound on trading terminals, alerting traders that the Fed is in the market.

On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.

Mr. Frost and his team drew up the daily schedule for what the Fed calls its Large-Scale Asset Purchase program. And that program is, by any measure, large scale: through next June, these traders will buy roughly $75 billion of Treasuries a month — on top of another $30 billion it is reinvesting in Treasuries from its mortgage-related holdings.

But depending on daily market conditions, Mr. Frost can decide not to buy certain bonds if they are already in short supply.

As offers to sell Treasuries flash on a bank of trading screens, a computer algorithm works out which ones to accept. The computer compares the offers from Wall Street against market prices and the Fed’s own calculation of what constitutes a “fair value” price. [Got that? There are three prices: Wall Street offers, market prices and some Fed black box algo's interpretation of "fair value" which, according to the sentence structure, is distinct from market prices!]

The real work is done by three traders who are referred to during the operation as trader one, trader two and trader three. They sit at a long table against the wall, tapping at seven screens.

On one recent morning, trader one was [current NYU student] Tiffany Wilding, 26. While she reviewed[this is the "real work"?] the stream of offers and then the prices finallyaccepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions [these "decisions" were only the review of the algo's decisions] and trader three, James White, 29, made a duplicate of everything in case the computers crashed [basically, a stenographer].

All the while, Mr. Frost stood behind his colleagues, ready to intervene — and even cancel the Fed’s purchases — at any sign of trouble.

With humans serving as mere spot checkers for the Fed's trading robot, one wonders what trouble might be detected outside of the odd coffee spill on the keyboard. Certainly, we would not expect any alarm bells to sound regarding skewed bid/ask spreads or the like--what with the Fed's own fair value engine cranking out non-market-based prices. Not even the mark-to-myth hallucinations of BlackRock (remember Maiden Lane?) are needed for this endeavor.

For the record, we would like to know just who programmed the Fed's Treasury purchasing algo, their historical affiliations, along with details of [any] competitive bidding procedure used to source the contract for the programming work. If the job were sole sourced or sourced to an industry insider affiliated with any primary dealer, we would like to know on what basis the FRBNY's office of General Counsel approved this.

For that matter, we'd like to know why BlackRock management of Maiden Lane I was sole sourced without a "clear reason", as is implied by the below email to FRBNY [then] Senior VP, Sarah Dahlgren, which we excerpt from the below document presented to Congress, with emphasis and brackets ours:

To Sarah Dahlgren/NY/FRS@FRS

Re: Sole Source

Spent some time with him [Tom Baxter, Jr., FRBNY GC] tonight. (He doesn't understand ML3, and I can't begin explain it either -- so don't needle him! -- and I am going to have [Paul] Whynott [FRBNY VP] spend some time with him tomorrow, BTW, you might touch base with Joyce [Hansen, FRBNY Deputy GC] about her reaction to Sunday's briefing; I think she had some concerns about how ML3 was presented to Geithner, which she expressed to Paul.) He knew that Stephanie [Heller?, FRBNY Asst. GC] was handling the Blackrock contract -- he didn't express any concerns -- and I explained that, in contrast to MLI, we had a clear reason to sole source it this time (that they had already modeled, etc.). So, although I have no worries, yes, probably worth reviewing it with him [Geithner] before taking it to Tom."

For that matter, we'd still like to know why the Fed's web page says, "Outright [MBS] purchases were conducted via competitive bidding to ensure that trades were executed at market rates" when a paper written in part by the manager of the FRBNY's purchase operations, Brian Sack, says, "Because the MBS purchases were arranged with primary dealer counterparties directly, there was no auction mechanism to provide a measure of market supply", as we pointed out in detail here.

Lots of unanswered questions...

Frbny Towns r1 209848 A

Further signs the Fed cannot extricate itself from QE (even though it's not conducting QE)

A theme running through our posts since the termination of so-called QE1 in late 2009 has been the Fed's institutionalization of its large scale asset purchases. That is, far from any suggestion that this period in history will be viewed as an aberration of FOMC policy, it is in fact preparing the infrastructure for the permanent (at least as far as its own existence goes) deployment of Bernanke's wiley money printing schemes. Significant confirmation was made by SOMA Manager, Brian Sack's speech regarding balance sheet targeting in early October. And, today, the NY Fed announced it would employ Fannie and Freddie to aggregate the nearly 44,000 individual MBS securities it holds into groups, with the effect of whittling the list down to 10,000, ostensibly to improve back office management:

Next week, the Federal Reserve Bank of New York Open Market Trading Desk will begin a process to streamline the administration of the agency mortgage-backed securities (MBS) held in the System Open Market Account (SOMA) portfolio by consolidating some of these securities through a service offered by Fannie Mae and Freddie Mac called CUSIP aggregation. Through this process, aggregated CUSIPs are formed by consolidating existing agency MBS with similar characteristics into larger pass-through securities. This process is commonly used by investors, although the scale of coupon aggregation in this case will be large by market standards. No inference should be drawn from CUSIP aggregation about the timing or nature of any future monetary policy actions.

The aggregation process will significantly reduce the number of individual agency MBS CUSIPs held by the Federal Reserve, thereby reducing the administrative costs and operational challenges associated with managing the MBS portfolio. The Federal Reserve currently holds more than 44,000 individual agency MBS CUSIPs in the System Open Market Account. The aggregation process will reduce the number of CUSIPs to less than 10,000. Because all of the payments on the underlying agency MBS flow through to the aggregated CUSIPs, the aggregation process will not otherwise affect the size or characteristics of the SOMA portfolio.

The New York Fed publishes detailed data on all settled SOMA agency MBS holdings on its public website on a weekly basis. As CUSIP aggregation takes place, this weekly publication will include a listing of the individual agency MBS CUSIPs underlying each aggregated CUSIP. In addition, Fannie Mae and Freddie Mac provide information about aggregated CUSIPs, including the underlying agency MBS, on their public websites. Thus, the public will continue to have access to listings of all the MBS CUSIPs that are included in this aggregation effort. For more details on the aggregation strategy, please refer to the frequently asked questions page.

The more detailed FAQ may be found here, and while this will generate some nominal fees for the twin GSE's, we are told not to infer anything regarding future policy. But, how can we not? As ZeroHedge has noted, Bill Gross is once again stuffing his PIMCO funds with MBS securities. And, as mortgage rates are set to surge above 6% in the coming months, given Ben's historically itchy trigger finger, it become a matter of when, and not if, he will restart MBS purchases in line with the long-forgotten third Fed mandate of "moderate long-term interest rates".

Breakfast with Jamie [Dimon]

Want to front-run the Fed? If you're Obama's favorite banker, Jamie Dimon, president of JP Morgan Chase, there's no need to parse FOMC statements or obscure speeches by Fed governors. No need to analyze hundreds of Treasury securities to make an educated guess as to just which ones Brian Sack (of the NY Fed) will buy any given week. Even hiring expert networks staffed with ex-Fed officials is unnecessary.

No, if you're Jamie Dimon, you go straight to the top and break bread with William Dudley, ex-Goldmanite president of the NY Fed. It just so happened that Dimon dined thrice with Dudley over the January 2009 to September 2010 period (plus one conference call), according to a document released by the NY Fed today. And perhaps only coincidentally, these encounters all occurred surrounding major changes in announced Fed policy.

The first meeting took place on February 18, 2009, only weeks after Mr. Dudley's ascension to the bank's presidency on January 27, 2009.

06:30 PM - 08:00 PM HOLD for dinner with Jamie Dimon Location: TBD in midtown

Exactly one month later, on March 18, 2009, the Federal Open Market Committee, under Chairman Bernanke's aegis, announced:

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

This was the first round of quantitative easing (so-called QE1), which would eventually become a $1.75 billion trillion bank largess program. Wouldn't it have been helpful to speak with the NY Fed's top official (who, incidentally, was previously in charge of the Fed's buying and selling)? Or even get in on the decision making?

The second meeting was on April 22, 2009, just shy of one month after the commencement of large scale Treasury purchases. As it's purpose [putatively] was only to see how the front runnin's been going, it was merely a telephone call:

09:00 AM - 09:15 AM Conference Call with Bill Dudley and Jamie Dimon, JPMorgan Chase Location : Bill Dudley's Office

The third official meeting was once again more intimate and took place on January 25, 2010, two days before the FOMC would announce the exact date when the MBS and Agency purchases would terminate:

07:30 AM - 08:30 AM Breakfast with Jamie Dimon, JPMorgan Chase Location : 270 Park Avenue 49th Floor Dining Room (Stop off at Reception Area, then proceed to 49th Floor)

That January 27, 2010 FOMC announcement also signaled the termination of most of the lending programs the Fed had initiated in the wake of the Lehman collapse:

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Thanks for the heads up Dudley! [Who, buy the way, is a permanent voting member of the FOMC by virtue of being president of the NY Fed.]

The next meeting between the two would be on July 14, 2010:

08:00 AM - 09:00 AM Breakfast with Jamie Dimon, JPMC Location : PCR, 10th floor

This was nearly four full weeks ahead of the pivotal August 10, 2010 FOMC meeting, wherein the resumption of Treasury purchases was announced (so-called QE Lite):

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The calendar curiously stops in September, 2010, but we'd be willing to bet crumpets to crustaceans there was an intimate dinner (or breakfast) date between the two cozy bank presidents in early October. This would be about a month's lead time ahead of the FOMC statement on November 3 that announced the gritty details of the Fed's much anticipated, full-blown resumption of its large scale Treasury purchase program (affectionately known to all as QE2, except by Bernanke himself).

Paging Ron Paul's subpoena committee.

Incoming Repub. Sets Sites on Regulators: Keep Your Hands Off My Margin

As CFTC Commissioner Bart Chilton chomps at the bit to get new position limits in place as of...well, yesterday, and Chairman Gary Gensler suggests mid-January 2011 might be too ambitious (but he'll try real hard), incoming chair of the "powerful US Congressional House Financial Services Committee", Spencer Bachus is happy to play obstructionist. And none too soon, as we had finally begun to hear the ominous sucking sound warned of by the Texas entrepreneur cum 1990's presidential candidate. And not with respect to jobs, but of an entire segment of the trading universe, as derivatives traders (including futures traders) are more prone to being agnostic as to their trading instruments and venues. GFS News reports:

In a letter seen by GFS News, Spencer Bachus warns Treasury Secretary Tim Geithner, Securities and Exchange Commission chairman Mary Schapiro, Commodity Futures Trading Commission chairman Gary Gensler and Federal Reserve chairman Ben Bernanke that implementing the Dodd-Frank Act "hastily or without due care" risks badly damaging the US economy.

The Republican from Alabama urges policy makers to reject attempts to force end-users to post margin requirements, to carefully consider swap dealer and security-based swap participant definitions and to ensure that foreign exchange swaps and forwards are exempt from clearing and exchange trading requirements.

"As our economy slowly recovers, we have serious concerns that Dodd-Frank will force American companies, which did not cause nor contribute to the financial crisis, to move billions of dollars in capital onto the sidelines to comply with the law," Bachus wrote in the letter, which is dated last week.

Whether this is mere base-pandering theater that will be dropped over chasers at La Lomita remains to be seen. But, Bachus may have bought a few months for what remains of Mr. Market.

Fed Monetized $11.4 Billion More Than Targeted Last Month; Will Monetize an Extra $97 Billion for Entire QE2 Program

As part of its new scared-shitless-of-Ron-Paul transparency initiative, not only will the first webcast of a Fed meeting take place on December 16, but today, in accordance with a pledge made concurrent with the last FOMC meeting, we get the first look of actual prices paid by the Fed for QE2 Treasury coupons.

Whereas previously, we were only privy to Fed disclosures of holdings on a par value basis, courtesy of ZeroHedge and some number crunching by John Lohman, we know that the Fed is now underwater $2.425 Billion on last month's purchases alone. In addition, because market prices for most issues purchased are materially above par (some by as much as 52%), we learn that the Fed actually monetized $116.4 billion in the last 30 days instead of $105 billion, as was announced on November 10.

Extrapolating this across the entire planned $900 billion in par purchases from QE2 and QE Lite, we can expect actual purchases to be just $3 billion shy of a cool $1 trillion. Good thing Bernanke's not printing any money.

Fed Data Dump Reveals More Contradictions About its $1.25 Trillion MBS Purchase Program

Following up on the new Fed document dump, being covered by RW at EPJ Central, our latest find is an aparent deception by the Fed about its MBS purchases. To wit, the Fed's new MBS page states as follows (brackets ours):

Outright [MBS] purchases were conducted via competitive bidding to ensure that trades were executed at market rates.

Here's what a paper says entitled "Large-Scale Asset Purchases by the Federal Reserve / Did They Work?", written in part by NY Fed SOMA Manager, Brian Sack (emphasis ours):

Because the MBS purchases were arranged with primary dealer counterparties directly, there was no auction mechanism to provide a measure of market supply. Instead, the pace of purchases of each class of MBS was adjusted in response to measures of whether that class appeared relatively cheap or expensive. To avoid buying at excessively high prices and to support market functioning, purchases were increased when market liquidity was good and were reduced when liquidity was poor.

Now I recognize the Fed has the tiniest bit of weasel room here because the terminology is slightly different and, in fact, the Fed is in the business of weasel phrasing, but it seems at the very least disingenuous to now claim that MBS securities were purchased via "competitive bidding" when no "auction mechanism" was used and they were arranged "directly" with the primary dealers.

According to the Brian Sack paper, it was market liquidity itself based on class-wide evaluation that was used to avoid paying excessively high prices (i.e., attempting to execute at market rates), and not any sort of competitive bid procedure (even if it were not an outright auction). Also, note that "high prices" devoid of the "excessively" qualifier might be deemed okay by the NY Fed.

So just what was the nature of this "competitive bidding" process that the NY Fed now says was followed? Perhaps there was merely a fuzzy price discovery process followed by a conference call and subjective award of the transaction at a mutually agreed upon price. Hardly sounds competitive, though.

Here's another thought: the new Fed statement is in the context of outright Fed purchases, so that those "bidding" would actually be the various investment managers acting on behalf of the NY Fed (e.g., Pimco, BlackRock, Wellington & Goldman). The primary dealers (also including Goldman) would be "offering". Thus, it may be that the Fed is imputing it paid market prices based on its own hired managers competing for the MBS assets of the PDs (did we point out that Goldman was on both sides?). That this would result in market prices being paid is facially absurd.

Either way, there are some questions to be answered next time Bernanke gets in front of Ron Paul.

CFTC Attack on Gold/Crude Prices to be Delayed Until Dec 16; Possibly Jan 2011

Engineering the command and control structure for the $600 trillion global derivatives is proving no easy feat, even for ex-Goldmanite Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC). For background, see our previous posts here and here, which explain how the CFTC will attempt to keep Bernanke's mad money printing out of hard assets. The last post alerted the postponement from December 1 to the 7th or 16th. It looks like now it will be December 16th at the earliest, and possibly January 2011. Any later than January 17th, and the CFTC will be in violation of Frank-Dodd. Reuters explains below and, curiously, adopts a shifting stance on just when, exactly, the new position limits will be announced (emphasis ours):

WASHINGTON (Reuters) - The U.S. futures regulator intends to unveil on December 16 its long-awaited revised plan to limit speculative positions held by commodity traders, a source with direct knowledge of the matter said on Monday.

The Commodity Futures Trading Commission is grappling with how to set and police the controversial limits. Furthermore, due to its complexity there could be further delays, said another source closely monitoring the issue.

It would be unsurprising if the proposal was postponed until the new year -- one of several items that may be delayed as the CFTC races to meet deadlines set under the Dodd-Frank financial reform law, the industry source said.

The position-limit rule was supposed to be one of the first items tackled by the CFTC after the Wall Street reform act passed in July.

However, the matter will now be left to the agency's last scheduled rule-making hearing for the year, reflecting the difficulty the CFTC has had in writing a draft regulation.

The CFTC is pushing to release by the end of the year the first draft of 50 to 60 rules required to implement the Wall Street reforms -- a self-imposed timeline designed to ensure it meets July deadlines to finalize the regulations.

But Chairman Gary Gensler has said the agency could fall behind while other commissioners have complained the agency was moving too fast in its deliberations.

POSITION LIMITS "COMPLICATED"

The law required the CFTC to finalize speculative position limits for commodities futures and swaps by mid-January.

"The agency needs to get on with it and put forth a position limit proposal ASAP," CFTC Commissioner Bart Chilton told Reuters.

"We are required by law to move on implementation in January. Getting public comments prior to that time is critical as we finalize a thoughtful final rule," he said.

The CFTC is almost certain to miss the January deadline, however, because the agency will not have data on the size of swaps markets until it puts some of its other new rules for over-the-counter derivatives in place.

Full story here.