The Fed reports that it has fully recouped, with interest, the more than $70 billion in loans that it made to support the 2008 sale of Bear Stearns to J.P. Morgan and the bailout of AIG (shown on its balance sheet as “Maiden Lane” investments). This brings to a close a contentious chapter in the central bank’s history. It means that the Fed made a wise decision back in 2008, much wiser than all of the private investors who shunned these securities, right? Well, not exactly.
You see, the Fed bought $12 billion in 10-year Treasury bonds back in April, driving yields below 2%. The vast majority of mortgage rates in the U.S. are based on a spread above 10-year Treasuries (some really big commercial deals are based on the LIBOR). Consequently, rates on 30-year residential mortgages are about 3.7%, leaving mortgage investors with meager returns. Chasing anything that glitters, investors are willing to wade through the mortgage-backed securities swamps that they previously avoided, looking for lost change.
So, by driving down mortgage rates the Fed has managed to create a market for mortgage-backed securities. It’s a cool trick but, like most magic, it’s simple once the secret is revealed.
Doug McKnight has been a commercial real estate appraiser for 23 years. He previously served as a director for the national appraisal firm Marshall & Stevens. He is currently the managing director of CapStruc Advisors and is working on a book on the value of assets.
[...] to dump toxic assets made in a housing bubble it made to replace the .com bubble it made. #Ponzihttp://dailycapitalist.com/2012/06/18/how-the-fed-manipulated-interest-rates-to-profit-from-maiden-l… Link excerpt: The Fed reports that it has fully recouped, with interest, the more than $70 billion [...]
So the Fed created a bond bubble to dump the toxic assets created in the housing bubble the Fed created to replace the .com bubble the Fed created?
I guess any sufficiently advanced ponzi is indistinguishable from magic.
[...] How The Fed Manipulated Interest Rates To “Profit” From Maiden Lane Bailouts. Actually, the whole thing sounds like a ‘risky’ ‘prop trade’ with ‘their own money’ to me. With market dominance/manipulation in the mix as well. I eagerly await the Congressional hearings on whether the Fed is violating the Volcker Rule law (which hasn’t been written yet) and microanalysis of their risk management. [...]