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The Federal Reserve sharing a $5.8 trillion portion as of September 25th 2009. The following table provides details on the announced limit of the capital committed by the Federal Reserve and the current amount used.

All data provided by Bloomberg.

Bloomberg – Fed’s Strategy Reduces U.S. Bailout Pledges to $11.6 Trillion – http://joeyconway.com/rpyqmf

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Overall Functions of the Federal Reserve:
Monetary Policy
            Goals and Guides
            Implementation
Foreign Currency Operations
Supervision, Regulation and Consumer Protection
U.S. Government Payments

FRB – The Federal Reserve System Purposes and Functions – http://joeyconway.com/mddn2k

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North America’s biggest gold conference, Denver Gold Forum, is being held from September 13-16 in Denver Colorado.

In the keynote speech at the conference, Jeffrey Christian, managing director of CPM group says central banks are expected to buy 6 to 10 million ounces of gold annually due to currency uncertainties.  He goes on to say this project is extremely conservative.  According to a metals consultancy, GFMS, central banks are set to become net buyers of gold this year.  Net official sales are forecast to drop to less than 20 tones, the lowest level since 1988. 

Emerging countries which have been building up foreign reserves in currencies are now diversifying into gold due to volatility in the dollar and other major currencies.  China has signaled growing interest in gold and other commodity based assets rather than stockpiling their currency reserves in more US dollars and dollar-denominated assets.

Reuters – Central banks seen becoming net gold buyers – http://joeyconway.com/nwtqqx

FT – Central banks set to be net gold buyers – http://joeyconway.com/ryv9re

Denver Gold Group 2009 Forum – http://joeyconway.com/sw94kb

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There are a few strict limits imposed on BofA when using this loan facility: executive compensation must be submitted and approved by the government, dividends on common shares cannot exceed $.01 per share per quarter for three years without government approval, $4 billion of preferred stock with an 8% dividend rate along with other fees are to be paid to the government, and any material disposal of the risky assets in the pool by BofA has to be approved by the government². 

As of July 2009, the overall confidence of the economy has picked up and BofA has never used the funding provided by the government loan backstop. Both sides, the government and BofA, agree the accord was never signed, but the government wants BofA to pay fees in the range of $2-4 billion for having the implicit government guarantee and potential access to the loan facility³.

1. Bloomberg – Bank of America Posts Quarterly Loss After Bailout

2. Treasury – Summary of Terms

3. Bloomberg – Bank of America Said to Balk at Paying Backstop Fee

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Around $14.7 billion in eligible asset-backed securities were sold by American Express, Bank of America, General Electric, Nissan, Ford, and GMAC Inc.’s Ally Bank this round.

In August, $6.9 billion was borrowed and $5.4 billion was borrowed in July by Investors through the TALF program.

The TALF program essential subsidizes investor’s purchases of these assets through artificially low interest rates and non-resource structure, Fed takes bulk of the loss if loan goes bad.

CNNMoney.com – Investors Apply for $6.5 Billion in Loans – http://joeyconway.com/xn5sf9

Reuters – Investors Requested $6.4 bln under Fed – http://joeyconway.com/yaxvzs

Financial Times – Fed lends $6.5bn for securities buys – http://joeyconway.com/tmyrvr

AP – Banks borrow more from emergency Fed loan program – http://joeyconway.com/9qqeh5

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 The Manhattan Chief U.S. District Judge ruled against the central bank saying the central bank “improperly withheld agency records” by “conducting an inadequate search” after Bloomberg News reporters filed a request under the information act.  The Judge gave the Fed 5 days to locate the documents and turn them over.

All the Federal Reserve’s actions have been taken, in their opinion, in the public’s interest.  If the Fed’s actions are the public’s interest and the public’s money is being used, the public is entitled to know.  Perhaps, if the Fed had known last year, using the public’s money in the public’s “best interest” would compromise their secracy, they might have been more stingent with their lending standards or more transparent about their process.

Bloomberg Article: http://joeyconway.com/3t9zev

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There are two parts to TALF.  One provides loans for market participants to purchase newly issued commercial mortgage-backed securities (CMBS) and the other provides loans for other asset-backed securities (ABS) and CMBS issued before Jan 1^st 2009.  The portion of the program covering newly issued CMBS was extended from Dec 31^st to June 30^th while the portion covering other ABS and older CMBS was extended from Dec 31^st to March 31^st.

The Fed originally started TALF with a capacity of $200 billion and was backed by $20 billion from Treasury’s Troubled Asset Relief Program (TARP).  They later announced it could expand to a capacity of $1 trillion.  The commercial real-estate industry and 41 House members including Barney Frank have requested the Fed extends the program deadline until December 2010.

Even though the capital markets are improving and recovery is slowly bur surely taking place, the Federal Reserve is going to continue helping consumer lenders with tax and printed money.  The Federal Reserve has now extended the TALF program which will continue providing cheap government financing to investors until the Fed decides otherwise.

Bloomberg – Fed Extends TALF Program for Commercial Real Estate: http://joeyconway.com/978hsh

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 There are two types of Liquidity Swaps the Federal Reserve by way of the Federal Open Market Committee has established: Dollar Liquidity Swap Lines and Foreign-Currency Liquidity Swap Lines.

Dollar Liquidity Swap Lines

A few months after the credit crunch first began, December 12^th 2007, the Federal Reserve established agreements with 14 other central banks to provide them with US dollars in exchange for the equivalent amount of their currency for a period of time ranging from overnight to 3 months.  The equivalent amount of their currency is determined by the Foreign Exchange (FX) rate at that point in time and when the swap reaches maturity (overnight to 3 months), the currencies are exchanged at the original FX rate.  Another words, if any of the markets regulated by the other 14 central banks needed US dollars, their central banks would be able to obtain them directly from the Federal Reserve at a fixed rate and for a fixed period.  The Federal Reserve charges a “market-based rate” to the foreign central bank in exchange for this product.  The goal is to assist the other 14 central banks in providing US dollar liquidity to their respective markets.  The 14 other central banks with access to US dollars through this program are: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank.  The FOMC has set this program to expire on February 1^st 2010.  The current amounts of dollars drawn by other banks from the Federal Reserve are reported on their weekly Thursday 4:30pm EST published balance sheet.

Foreign-Currency Liquidity Swap Lines

A year and 5 months after the Dollar Liquidity Swap program, April 6^th 2009, the Federal Reserve announced foreign currency liquidity swaps with 4 other central banks.  Essentially, this allows the Federal Reserve to exchange US dollars for foreign currency at a fixed amount for a fixed period.  In a way, this is exactly opposite the original dollar liquidity swap program.  The goal is to provide the Federal Reserve with sufficient liquidity in the foreign currency for U.S. institutions and markets.  The 4 central banks in this program are: the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.  These swap lines will extend until February 1 2010.

Federal Reserve Liquidity Program Detials: http://joeyconway.com/5pvp5v

Federal Reserve US Dollary Liquidity Swap FAQ: http://joeyconway.com/m2kxpy

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Yesterday, Aug 12th, it announced it will extend the Treasury purchase program until October and keep the current limit of $300 billion.  By extending the deadline for the Treasury purchase program, the Federal Reserve keeps the possibility open it might want to expand the program, if it determines necessary.  As of Tuesday, Aug 11th, it has aquired a total of $252.7 billion out of its $300 billion goal in US Treasury debt according to its balance sheet.

Bloomberg article on $2.7 billion purchase: http://joeyconway.com/zzkb62
Bloomberg Fed Treasury Purchase Ticker: http://joeyconway.com/rffndg
Federal Reserve August 11th Purchase Announcement: http://joeyconway.com/pkzbky

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The majority of monetary policy programs stayed the same.  Fed Funds rate will continue to be held at a record low of 0 – 1/4% for an “extended period.”  The programs to purchase up to $1.25 trillion of agency, GSE (Freddie, Fannie, etc), mortgage-backed securities and up to $200 billion of agency, GSE, debt will continue until the end of 2009 as originally stated in the March 18th announcement.

There has been a change in the program regarding the $300 billion of US Department of Treasury Debt to be purchased, essentially debt monetization.  “…the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.” 

The purchase of $300 billion Treasuries was originally planned to end by September, but now will be extended an extra month.  They word the addition of one month to the Treasury purchase program as follows, “the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.”

The statement then ends with the usual reassurance the Committee will continue to monitor and evaluate its actions based on the changes occurring in the markets and will adjust accordingly.

Federal Reserve Open Market Committee Monetary Policy Announcement Aug 12 2009: http://joeyconway.com/hcrgt6

Bloomberg Article: http://joeyconway.com/w87vt8

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The Financial Times says, The New York Fed plans to raise the number of employees in its markets group to 400 by the end of then year, compared with 240 at the end of 2007.

The market for employees is limited resource.  Most finance companies are currently cutting back on employees because the market demand has decreased.  But the Federal Reserve is expanding and “becoming one of Wall Street’s most active recruiters” says CNBC.  There are now fewer employees in the market for private companies to hire because they are now employeed by the government.

CNBC: http://joeyconway.com/fy7bvv

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For an overall comprehensive list of all the bailout programs by Congress, Treasury and the Fed: http://joeyconway.com/73da87

List of 650 banks, so far, which have received bailout money: http://joeyconway.com/7rz83r

List of 94 failed banks, so far, which the FDIC has taken over:  http://joeyconway.com/rvtaxw

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Essentially, the Fed is stating, market participants, without this government program, would not be able to meet the credit needs of households and small businesses.  In simple economic terms, the demand for credit from households and small businesses would not be met with a sufficient supply of credit from market participants.

There are many different ways to approach this situation.  This should be the most straight forward and simple explanation.  Market participants, who are businesses required to turn a profit or they will go bankrupt, will supply credit to these households and small businesses until it becomes too risky resulting in unprofitable loans.  If there is not a sufficient supply of credit in the market, it most likely means supplying credit is not profitable or the risk outweighs the return.  The main risk facing the market participants is that the households and small businesses will default on their credit and the market participants will not make a profit, potentially going bankrupt.

Through this Loan Facility, the Federal Reserve has taken on the role of subsidizing market participants, banks and large investors, thus eliminating some of the downside risk that households and small businesses will default.  Since some of the downside risk has been mitigated by the Fed, the market participants are now in turn willing to supply more credit, make more loans.  The downside risk of potential default by households and small businesses has been transferred from the balance sheet of banks and investors to the Federal Reserve’s balance sheet which is funded through our tax dollars and the Fed’s ability to print dollars. 

CNN Money – Breakdown of TALF Program: To TALF or not to TALF http://joeyconway.com/663n2a

Federal Reserve Definition TALF – http://joeyconway.com/mn5zbc

Federal Reserve TALF F.A.Q. (34 pgs) – http://joeyconway.com/ehnrkp

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Situation: The Federal Reserve is one of Wall Street’s biggest customers.  There are many markets but for the mortgage-backed securities (MBS) market, the Fed purchases more bonds in this market than any other party.  In fact, as of last Thursday, the Fed claimed to hold $542 billion on its balance sheet in MBS.

Regarding the Federal Reserve’s role as a player in the markets, from the FT article, “A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them (the Fed). Their transparency hurts them. Everyone picks their pocket.”

Now in response to this, from the FT article, Senator ”Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system. “You can’t rescue the credit system without benefiting some of the people in it.”

Now to help clarify the justification Barney Frank provides, from the FT article, “…another official familiar with the matter said the central bank “has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.”

At the very least, we are told, policy goals override any other considerations implying we shouldn’t be concerned if one group of people benefit at the expense of another.  We are told, one group of people may benefit  (profiteering) from the federal government’s intervention, but it is justified because the end goal is to stabalize the financial system. 

Can the financial system be stabalizied without profiteering?

Financial Times Article: http://joeyconway.com/s5nd6c

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“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

Essentially the Federal Reserve has announced its forcasted purchases for 2009 which will expand its balance sheet.  It has forecasted for 2009, purchases of up to $1.25 trillion in agency mortgage-backed securities and $200 billion in agengy debt.  It has forecasted from March to September of 2009, purchases of up to $300 billion of longer-term US Department of Treasury securities.  All these forecasted purchases for 2009 will result in a total $1.75 trillion increase of the Federal Reserve’s balance sheet over 2008.

The Fed will need to fund itself in order to purchase all of these securities and debt from the markets.  The Federal Reserve has three methods of funding: the Fed can borrow the funds, the Fed can ask the Treasury to borrow funds, or it can print money/credit commercial banks’ reserve balances at the Fed.

Federal Reserve Press Release on March 18 2009: http://joeyconway.com/krxy8n

US Budget Watch Summary of Press Release:  http://joeyconway.com/94kebt

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• $695.758 billion – U.S. Treasury Securities
• $105.915 billion – Federal Agency Debt Securities
• $542.888 billion – Mortgage-backed Securities
• $274.085 billion – Direct Bank Lending (Loans through Discount Window and similiar programs, plus lending through term auction credit)
• $104.347 billion – Bailout Funds for Bear Stearns and AIG
• $87.783 billion – Central Bank Liquidity Swaps
• $68.106 billion – Commerial Paper/Money Market Facilities
• $30.422 billion – Term Asset-Backed Securities Loan Facility (TALF)

Grand Total – $1.9 trillion

WSJ – Federal Reserve Balance Sheet, graph and breakdown: http://joeyconway.com/4y3pwm

Federal Reserve’s Latest Data, released every Thursday: http://joeyconway.com/phze7r

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Monetizing Debt is essentially the Federal Reserve buying government debt, bonds, issued by the Treasury with money the Fed has printed.

The overall picture: One branch of the government, the Treasury, is borrowing money from the public and then the public is being paid back with printed money by another branch of the government, the Fed.  The net result of buying government debt with government issued money is an increase of the money supply which can cause inflation. 

General concepts and Step by Step breakdown of the debt monetization process  found in this article – http://joeyconway.com/4dbrk5

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