The U.S., as of Sept 2009, has sold $1.517 trillion in debt this year compared with $585 over the same period last year. Barclays forecasts the government will sell $2.1 trillion in debt for 2009 and $2.5 trillion for 2010 compared with $892 billion for 2008.

Congress determines the limit to the amount of debt the Department of Treasury can issue.  The American Recovery and Reinvestment Act of 2009 signed into law on Feb 17 2009 set the limit to $12.104 trillion.  The Treasury currently forecasts it will hit this limit by Nov 2009 and started asking Congress to increase the limit again in Aug 2009, only 7 months after it was increased.

It is obvious the national debt is setting record highs.  This national debt is a promise of repayment to the holders and is backed by the government, which represents the taxpayers.  It is an ever increasing burden for all taxpayers.

US Treasury Debt History – http://joeyconway.com/brq96x

Bloomberg – Negative Bond Returns Converge With Mortgage Miracle - http://joeyconway.com/c85t3z

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

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

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

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

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

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

“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