Federal Reserve holds up on buying mortgage-backed securities

Posted Jun 5th 2009 9:40AM by Connie Madon
Filed under: Market Matters, Federal Reserve, Financial Crisis

It seems that the Federal Reserve is doing some back peddling these days. The evidence is there to show that interest rates are rising both for U.S. treasuries and mortgage rates. The Fed was going to buy loads of U.S. treasuries -- a move that would have sparked a rally in the bond market. This did not happen.

Now we have yet another program that is put on hold -- the Fed's program to prop up the market for distressed securities backed by mortgages. The Financial Times reports that William Dudley, who oversees the implementation of the $1 trillion term asset backed securities loan facility (TALF) program, said: "We have not made a final decision on whether it is doable and, if is doable, whether it is worth the cost."

So far the TALF has been used to finance purchases of securities backed by loans to consumers, such as car and credit card loans. Mr. Dudley went on to say: "We're not back yet to the $200bn annual rate of issuance [for consumer loan-backed securities] before the crisis and we don't expect to get there, but we are making a good start."

Now, the Fed has indicated that it wants to extend TALF to include loans backed by commercial property and also purchases of existing mortgage-backed securities. This would be a sticky wicket because the ratings of these securities are not valid and would involve a complex procedure to determine their true value. Also, venturing into the commercial market includes such mortgage-backed securities on office blocks and shopping centers.

So I guess when you look at the overall picture and Mr. Dudley's $1 trillion program, it seems prudent to delay this program for a bit longer.

Should the Fed use the TALF to buy back commercial loans and mortgages?

Tags: federal reserve, inthenews, mortgage-backed securities, talf, William Dudley

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Reader Comments (Page 1 of 1)

6-05-2009 @ 2:18PM

paul s said...

No F#%*&$!@G Way!!

6-07-2009 @ 2:18PM

Zebra365 said...

So your company (Goldman Sachs) and your company's bookie (AIG) are making bets.

You win a bet but your bookie can't pay, so the Federal Reserve Bank comes in and "loans" your bookie the money to pay you and takes anything as collateral for the loan.

Both you and the bookie are taking home part of the bets in salary and bonuses.

So, under these circumstances, exactly when would you stop making bets you can't cover with a bookie who can't pay? I would never stop. And if my bonus increased with the size of the bet, I'd make the biggest beets I could.

Oh, and in the above scenario every party is not only making bets, they are all acting as bookies and taking bets.

BTW, if you think the Government should shut down the derivatives market because it is illegal online gambling? Back when Hank Paulson was the chairman of Goldman Sachs and just starting to invent the derivatives that would eventually pay for all those mansions in Greenwich, CT, a federal law was written that stipulated that trading in derivatives was NOT gambling.

Finally the Fed is rethinking about buying "assets" that are not assets at all. They are running out of family cows.

Our currency (the American dollar) is a non-interest paying note issued by the Federal Reserve bank. Though the bank is not legally ever required to give you anything of tangible value for the note, until a year ago that currency was mostly backed by Treasury Bonds held as assets of the Fed.

Now a year later the Fed has doubled its assets but more than half of those assets are what I call used Kleenex and chewing gum. They are the same toxic assets of the major banks and investment bankers that had and still have no market value.

The Fed has traded the family cow for magic beans. Trouble is, the Fed knew going into the deal that the beans were not magic, they were just beans.

Any wonder why the Chinese and others no longer want dollars (Federal Reserve Notes) or bonds denominated in dollars?

BTW, if you don't understand that our money is a non-interest bearer bond or note of the Fed, just pull out a dollar and read the top line on the front. That is why it is called a dollar "bill" like a Treasury bill.

Buy commodities and hard assets and don't keep your wealth in dollars.