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Fed Puts US in the Breach, Again – Professional Edition

Today I got sick to my stomach when the Fed announced two more alphabet soup du jour programs. One program will involve the direct purchase of GSE and MBS paper by the Fed. that’s another $600 billion that the Fed will add to its books. This action was necessitated by the ending of the FCB subsidy to this market, which they began to pull last summer. I have chronicled this saga for you since 2004 when it first became clear that the FCBs were bailing out Fannie and Freddie and playing prevent defense in propping up the US housing market. I had long postulated that when it became clear to them that their efforts were doomed to failure and loss, and that when they had fewer US dollars to recycle due to US economic weakness, that they would reverse course. I also warned that when they did, the US mortgage market would collapse. In recent weeks we watched as spreads between GSE paper and Treasuries soared because of the FCB reversal of position. No other entities could take up the slack and, as a result, today the Fed stepped into the breach.

Bear in mind however, that the FCBs still hold about $900 billion of GSE debt. The Fed has only offered to buy $100 billion of that paper. There’s still a big problem looming after the Fed takes the first $100 billion of dumpage.

The other program, called the TALF by the Fed, for Term Asset-Backed Securities Loan Facility, will lend up to $200 billion for the purchase of short term ABS. I’d prefer to think of the acronym meaning Terrible Assets Live Forever.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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