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Now Dat’s What I Call A Racket

Advance excerpt from the next Professional Edition Fed Report

Total MBS on the Fed’s balance sheet fell by $15.2 billion last week; bringing the drop to $29 billion over the past 3 weeks. Between July 14, when the first paydowns hit, and November 3, MBS paydowns totaled $111 billion, equivalent to a monthly rate of $24.6 billion. The pattern of prepayments has been uneven, with none some weeks, and big chunks in others. With higher mortgage rates in recent weeks, the prepayments should soon slow dramatically as refi volume shrivels.

Now, as my boys in South Philly might say, “Here’s da ting. While all of dese better quality loans were getting paid off from da balance sheet of da Fed, where do you tink dose refi’d loans went? Uh, to da banksters. We know dey are better quality because da borrowers could refi ’em. Dat means dat dey had plenty of equity, da vig was good, and da borrowers had nice income and credit. Dey didnneed dere legs busted, yaknowwhaddamean? So dese were good loans, see. Da bad stuff, dat stays wit da Fed and becomes a bigger piece of da Fed pie sheet. So da Fed tries to rectify dat by buying a pantload uh dat high quality Treasury paper. Yeah, da safe stuff. Right. Do you see how dis works?”

“So as dis cash hits da banks, via da Primary Dealer checking accounts, what do da banksters do wit it? Why, dey lend it out to dese good borrowers, package da new loans up and up and sell em to Fannie, Freddie, and FHLB, udderwise known as da Flub. Den dey use da cash from selling dat package to Fannie, Freddie, or Flub, and buy da new Fannie and Freddie MBS from da good loans dey just bankrolled, and now dey get em back wit a gummit guarantee. It all makes perfect sense, see. The circle is jerked. Whatever. Good loans come off da Fed’s balance sheet, leaving da Fed with bad stuff. Banksters add da good stuff, plus dey get a guarantee from Uncle. It’s a perfect scam.

Don’t believe me? Check dis out.”
Dat's No Coincidence

So let me get this straight. Since July 14 through December 1, the Fed has been prepaid on $111 billion of good quality MBS. All of a sudden, in July, the banks started adding Agency MBS like gangbusters. Since the week before July 11, through November 24 the banks have added, oh say, can you see, uh, $111 billion of Agency MBS. I feel so damned patriotic, I could just burst with pride.

At least I can see what drives people to conspiracy theories. I think I’ll join the movement. This is too much.  You got a conspiracy theory? Count me in! I’m mad as hell, and I’m not going to take this any more!

What puts the icing on the cake is that as home values continue to fall, many of these loans will turn from good to bad as well. Loans made in July are already be closing in on wiping out the equity in some cases. Bank balance sheets will hardly be better off. But the banksters will be able to collect another few years of massive bonuses as all of the Fed’s scams lead inevitably to systemic degradation and failure. And because of those guarantees that the Federal Government intimates it will stand behind, the taxpayer– you and I, will be on the hook for not only the bad loans already on the Fed’s balance sheet, and the old bad loans on the banks’ balance sheets that haven’t been marked down yet, but these new ones that go bad on the banks’ balance sheets as well.

Now that’s what I call a racket.
This is an advance excerpt from the Professional Edition Fed Report to be posted Sunday afternoon. Stay up to date with the machinations of the Fed, Treasury, and foreign central banks in the US market in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and get in RIGHT NOW!


  1. Lee Adler

    Well, seems that me and ter are the only ones who get this. Because of that, and by popular demand, I will post a translation on Monday for the South Philly dialectically challenged, which I guess is everybody not from Philly, Jersey, or New York City, which has similarly colorful linguistics.

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