Thursday, April 1, 2010

End Game (Not April Fools)

Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? (And Are Unhedged)

Interesting article over at Zerohedge. Goes on to discuss a non-hedge position by the Fed in case of MBS and Treasuries. It goes to the heart of the end of the system. Tyler goes on to say,

"Yet that which is truly relevant, the Fed's nearly $2.4 trillion in holdings of MBS, Agency and Treasuries is completely unhedged. Good luck finding the counterparty that would be willing to put on a $200 trillion gross notional interest rate swap with the Fed."

There is no counterparty even close to big enough to handle that trade. This is the end game of the equation. They don't call it a death spiral for nothing. I don't know why this is a big surprise, the Fed is the buyer of last resort, if there were a party larger enough to sustain the loses you wouldn't need the Fed in there buying. I assumed everyone already knew this, they don't call them the lender or buyer of last resort for nothing.

One point I would disagree with is this.

"If rates do go up, and if the System Open Market Account holdings are unhedged, hyperinflation Catch 22 - here we come (oh yes, and the Federal Reserve is now a ticking time bomb)."

The only thing hyperinflating will be graves and funerals, that is the final result of using the equation. I assure you credit will not be inflating, it will be non-existent. You can't feed 7 billion without a credit system, no way Jose. The liquidation process will be long, hard and very deep this time -- it's not going to be a picnic like last time.

Also, the Federal Reserve is not a ticking time bomb, the whole system is. It's been a ticking time bomb since humans came up with this pyramid scheme.


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