Conflicts of Interest at the FED? Shocking!

10/25/2010 Portland, Oregon – Pop in your mints…

Oh my, fellow taxpaying citizen, the world of finance just keeps getting stranger.  From Bloomberg:

New York Fed Faces `Inherent Conflict' in Mortgage Buybacks

You see, the FED bailed out a number of large financial institutions by trading wine in exchange for sewage.  For those of you unfamiliar with the metaphor, the jest is that when you add a spoonful of wine to a barrel of sewage, you get sewage, but when you add a spoonful of sewage to a barrel of wine, you get, well...sewage.

Does the FED's Balance Sheet contain Wine or Sewage?

In this case the wine given to banks by the FED was in the form of US Treasury bonds and/or cash.  The sewage it received from the banks was in the form of mortgage backed securities.  Apparently the New York FED is now beginning to feel queasy and has signed a letter along with other bondholders (the other notable signatory is Blackrock) demanding that Bank of America pump the stomach of the FED, Blackrock, and the other affected bondholders.  In other words, take back their faulty merchandise.

This, fellow taxpayer, is where the bizarreness of the incestuous relationship that the FED, especially its New York branch office, and the banks that it “oversees” (i.e. bails out) begins to hit a crescendo.  The FED and Blackrock want Bank of America to cough up the dough for approximately $47 billion worth of the mortgage backed securities that have gone bad, alleging that the paperwork was not in order (who can be bothered with technicalities in the world of high finance?)  However, Blackrock is the third largest shareholder of Bank of America and the Richmond branch of the FED is essentially charged with keeping Bank of America afloat.  Now the plot thickens.  The demands of Bank of America by the FED and Blackrock amount to both parties shooting themselves in the foot and making of themselves a hilarious public spectacle in the process.  Hilarious, that is, unless you are a Blackrock or B of A shareholder, or a dollar denominated bank account owner or bond-holder (in other words, a FED shareholder).

How long before it all comes unglued?  Your guess is as good as mine but in the end, just like my 1993 Isuzu Rodeo whose odometer stopped working at 142,000 miles, it will likely stay “glued” much longer than anyone expects it to until one day, without warning, it comes completely and gloriously, unglued.  In the case of the Rodeo, yours truly will be out the approximately $1,000 that he has into it.  Needless to say, the stakes in for Blackrock, Bank of America, the FED and ultimately the US Treasury and Dollar are quite a bit higher.

Fellow taxpayer, it is best to buy gold, silver, and perhaps an older Isuzu and above all, avoid drinking the sewage.  Can you say “Counter party Risk?”

More on What is Money tomorrow...

Stay Fresh!

David Mint

Key Indicators for Monday, October 25, 2010

Copper Price per Lb: $3.78
Oil Price per Barrel:  $81.77
10 Yr US Treasury Bond:  2.56%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,332
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,133
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000