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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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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