US Treasury and Federal Reserve Pt. 1
From Dimce Giogief
Big banks created mortgage backed securities (MBS) either on their own or through Fannie Mae (FNM) and Freddie Mac (FRE). FNM and FRE also created their own securities.
All was sold into the marketplace extending worldwide. All are considered AAA rated even to this day. Nobody wants to admit all of it is garbage.
The Federal Reserve Board or the Fed decides it needs to step in and relieve the pressure from its member banks. Not all banks on the Federal Reserve System, this is how you can tell who owns the Fed. The Fed buys the toxic assets (buzz word for this crisis) from the big banks and spends $2 trillion. Now the Fed is stuck with a huge balance sheet of toxic paper that it paid 100% face value for worthless paper.
That means it has given the big banks $2 trillion so the banks can use for their reserve requirements. In the fractional reserve banking system, they can lend out at least $20 trillion. So if it was a liquidity crisis, $20 trillion is approximately 150% of the entire US GDP.
One problem, the big banks, the Fed and the UST are lying through their teeth at the scope of the problem. Everyone forgot to mention the off balance sheet “Special Investment Vehicles” or SIV most banks have.
I could never understand why a Fannie Mae CMO that was selling for $1M with a face value of $1B didn’t sell on the spot. Then I realized that it had to be paper from the SIV off balance sheet at the banks. THEY COULD NOT SELL THEM WITHOUT ACKNOWLEDGING TWO SETS OF BOOKS.
Then we have the announcement at the link above. The UST would continue the Supplementary Financing Program. The SFP is designed to help the Fed manage its huge balance sheet. In other words, the UST will take funds created through the SFP, up to $200B. Then buy from the Fed the toxic paper, which will be coordinated with FNM.
FNM announced on February 12, 2010 that it intends to buy mortgages that are delinquent 4 months or more. They will spend $200B; remember that one December 24, 2009 the UST said it would provide UNLIMITED support to FNM and FRE for a period of three years.
If you are confused, don’t worry, that was the whole point, so the average person would get frustrated and get back to his TV. They always try to confuse the people so you don’t fret and get back to what you were doing before, most likely looking for a job.
As usual, I have a plan…
Check out this link:
http://www.marketwatch.com/story/treasury-to-expand-supplementary-financing-program-2010-02-23-12180