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Fed Reserve buys stock in emergency?

  • Thread starter Deleted member 4644
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Deleted member 4644

What does it mean when I read this in the news:

"The Federal Reserve today added $19 billion to the system through the purchase of mortgage-backed securities, then $16 billion in three-day repurchase agreements. The Fed also added money on Thursday.
...

Fears of a shortage of money available to banks meeting demands for funds by investors as they sold assets prompted the Fed to add $24 billion in reserves to the banking system Thursday. "

Does it mean they are basically bailing these companies out or what?
 

senseamp

Lifer
Feb 5, 2006
35,023
5,106
126
Pretty much. Fed is buying junk that noone else would touch to help these companies make ends meet.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
They didn't buy stock. They purchased bonds and also put more money into the market int he form of short-term lending.
 

rchiu

Diamond Member
Jun 8, 2002
3,846
0
0
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
 

heyheybooboo

Diamond Member
Jun 29, 2007
6,278
0
0
The Fed is expanding the money supply.

I'm not an economist but this is really interesting stuff.

Expanding the money supply can led to increased inflation if the expasion is not joined with extended output - economic growth (help me out with this, guys and girls).

I think the question is why. I have no idea what the current reserve requirements are for banks these days but this action by the Fed is clearly meant to capitalize banks.

The pessimist in me says that there must be a bunch of worthless commercial paper out there and banks don't want to touch it when they *trade* with one another. Am I reading this the wrong way?

I'm 50-ish and don't recall a situation similar to this. Banks will supply only as much real *money* as the people want - by that I mean in reserve requiements. I am not aware if there is that big a sell-off on the Street. Don't they *manage* trading to prevent this activity from cascading out of control ???

I think for the short-term this is no where near a problem. If this goes on for the next month - then YES - it is a problem.

More spec - help me out with this - for each dollar the Fed pumps into the economy it 'capitalizes' $5 - money that banks can loan. The secret to keeping inflation down is how quickly and how many times that money moves around in the economy. There are all kinds of formulas and theory on this one.

And that concludes all I remenber from Econ-101 from 1975 . . . :)

I do remember that during the 1970's when inflation went bonkers the money supply was out of control. The Fed really f*cked up back then and current Fed theory is much much more sophisticated and different. (I hope - - - just kidding!)

People blame Carter but it was Nixon's price controls and the Fed which really screwed us up. It seems everything cascaded out of control - including the Arab oil embargo. By the time Carter appointted Paul Volker the damage was done. Volker had no choice but to tighten the money supply to save us - and of course, interest rates went through the roof from the late 70's thru the early 80's.



 

OS

Lifer
Oct 11, 1999
15,581
1
76

supposedly it was a short term loan with MBS held as collateral

 

ponyo

Lifer
Feb 14, 2002
19,180
2,454
126
I remember when Feds pumped money in after 9/11. I also remember Feds organizing bailout of LTCM in 1998. I don't support today's move and was hoping for vote of no confidence from the market today with a big drop even with Feds in US, Asia, and Europe trying to stabilize the credit crunch.
 

everman

Lifer
Nov 5, 2002
11,288
1
0
They did not buy stock, they bought the securities that everyone else is not willing to buy right now. This effectively puts cash in the hands of the owners of those securities (mortgage backed securities, CDOs, not stock), or what is called increasing liquidity in the market.
 

Doggiedog

Lifer
Aug 17, 2000
12,775
1
81
LOL.

I work at the Fed and I work in liquidity at the Fed.

What our Markets group essentially did is called a repo. They will buy back treasuries that banks hold and give them cash in exchange for them. They paid a premium for them which is why the banks are willing to sell them their treasuries. The banks then are flush with cash which improves liquidity in the market. Later on the Fed may sell the bank's treasuries back to them at a loss, again to give them incentive to buy them and taking the excess liquidity out of the market.

It's basically loaning money to the banks and using their treasuries as collateral while helping to improve overall liquidity in the market.
 

dmcowen674

No Lifer
Oct 13, 1999
54,894
46
91
www.alienbabeltech.com
Originally posted by: Naustica

I don't support today's move and was hoping for vote of no confidence from the market today with a big drop even with Feds in US, Asia, and Europe trying to stabilize the credit crunch.
Are you a player?

The market is nothing but a giant monopoly game for the richest players in the world.

Why are you on AT?
 

dmcowen674

No Lifer
Oct 13, 1999
54,894
46
91
www.alienbabeltech.com
Originally posted by: Doggiedog
LOL.

I work at the Fed and I work in liquidity at the Fed.

What our Markets group essentially did is called a repo. They will buy back treasuries that banks hold and give them cash in exchange for them. They paid a premium for them which is why the banks are willing to sell them their treasuries. The banks then are flush with cash which improves liquidity in the market. Later on the Fed may sell the bank's treasuries back to them at a loss, again to give them incentive to buy them and taking the excess liquidity out of the market.

It's basically loaning money to the banks and using their treasuries as collateral while helping to improve overall liquidity in the market.
Wow, first a player and now a post from someone in the Fed reserve?

AT is amazing.
 

ponyo

Lifer
Feb 14, 2002
19,180
2,454
126
Originally posted by: dmcowen674
Originally posted by: Naustica

I don't support today's move and was hoping for vote of no confidence from the market today with a big drop even with Feds in US, Asia, and Europe trying to stabilize the credit crunch.
Are you a player?

The market is nothing but a giant monopoly game for the richest players in the world.

Why are you on AT?
No, I'm just a small fish trying to go with the current and not get swallowed by sharks and whales.
 

smack Down

Diamond Member
Sep 10, 2005
4,507
0
0
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
 

rchiu

Diamond Member
Jun 8, 2002
3,846
0
0
Originally posted by: smack Down
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
Heh, do you even know how mortgage backed security work? Which bank gets the money when FED buys MBS, who did the FED threw the cash at? How is MBS equal to junk bond when it is backed by the ENTIRE pool of mortgage?
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: rchiu
Originally posted by: smack Down
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
Heh, do you even know how mortgage backed security work? Which bank gets the money when FED buys MBS, who did the FED threw the cash at? How is MBS equal to junk bond when it is backed by the ENTIRE pool of mortgage?
It depends on where in the structure the bond is. The lower enhancement the bond has, the lower rated it is. Additionally, where in the watefall the bond is, if it's wrapped by an insurer and other features make it a junk bond.

There are junk bonds created by tranching a pool consisting of 5,000 mortgages with 850 fico, 5% CLTV, full-doc, and .1 DTI.

Do you even know how an MBS works?
 

smack Down

Diamond Member
Sep 10, 2005
4,507
0
0
Originally posted by: rchiu
Originally posted by: smack Down
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
Heh, do you even know how mortgage backed security work? Which bank gets the money when FED buys MBS, who did the FED threw the cash at? How is MBS equal to junk bond when it is backed by the ENTIRE pool of mortgage?
Simple if it wasn't junk they would be able to sell it. The fed threw money at who ever owned the junk bonds it was buying. Yeah so what if an MBS is back by a pool of over priced houses rather then just a single overpriced house. At the end of the day it doesn't make much difference.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: smack Down
Originally posted by: rchiu
Originally posted by: smack Down
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
Heh, do you even know how mortgage backed security work? Which bank gets the money when FED buys MBS, who did the FED threw the cash at? How is MBS equal to junk bond when it is backed by the ENTIRE pool of mortgage?
Simple if it wasn't junk they would be able to sell it. The fed threw money at who ever owned the junk bonds it was buying. Yeah so what if an MBS is back by a pool of over priced houses rather then just a single overpriced house. At the end of the day it doesn't make much difference.
You can always sell something, it just depends on how much money you want for it. The Fed lent them money on the basis of a Repo, the repo ends on Tuesday. The Fed buys it for more than the market and sells it back for less than market to entice the liquidity to free up. It has nothing to do with not being able to sell those pieces, there is plenty of money floating around. However, to get people to move that money around sometimes you have to force movements.

The distinction I make is when you repo Treasuries, as is normally done, and you repo other securities, which shouldn't really be used in this matter. It is up to the banks to gain liquidity through the sale of these tranches, not for the Fed to repo them.

Additionally, your assertion that a pool backed by one overpriced house and several is flat out incorrect. Not all "overpriced" houses will come under payment duress, that's why you pool them for diversification.

I don't think all of the tranches were junk bonds anyway.
 

smack Down

Diamond Member
Sep 10, 2005
4,507
0
0
Originally posted by: LegendKiller
Originally posted by: smack Down
Originally posted by: rchiu
Originally posted by: smack Down
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
Heh, do you even know how mortgage backed security work? Which bank gets the money when FED buys MBS, who did the FED threw the cash at? How is MBS equal to junk bond when it is backed by the ENTIRE pool of mortgage?
Simple if it wasn't junk they would be able to sell it. The fed threw money at who ever owned the junk bonds it was buying. Yeah so what if an MBS is back by a pool of over priced houses rather then just a single overpriced house. At the end of the day it doesn't make much difference.
You can always sell something, it just depends on how much money you want for it. The Fed lent them money on the basis of a Repo, the repo ends on Tuesday. The Fed buys it for more than the market and sells it back for less than market to entice the liquidity to free up. It has nothing to do with not being able to sell those pieces, there is plenty of money floating around. However, to get people to move that money around sometimes you have to force movements.
When you need 100 dollars to meet your obligation being able to sell your assets for 70 dollars is as good as not being able to sell them. Junk is relative, the bonds are junk based on the asking price which the fed is more then willing to meet.

Pooling mortgages many protect the a small investor against an individual mortgage going bad but it is worthless when you have an institution wide problem like current mortgages have. Mainly the mortgage is for more then the value of the underlying assets.
 

elmro

Senior member
Dec 4, 2005
459
0
0
If the government bought these MBS for MORE and will sell them for LESS that means that the government will have spent money on this "stabiliziation", AKA a BAILOUT. Wow I love how my tax dollars are going straight into the pockets of financial institutions.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: smack Down
Originally posted by: LegendKiller
Originally posted by: smack Down
Originally posted by: rchiu
Originally posted by: smack Down
Originally posted by: rchiu
By buying mortgage backed securities, Fed accomplish 2 thing. First it adds more money into the market, second it stabilize the mortgage backed security a little after the sector was hammered by subprime worries the past few weeks.

Fed is not bailing out any body. mortgage backed security is not tied to any company or individual mortgages. They are bonds created from a pool of all mortgages and can have different characteristic based on the cash flow from the mortgages.

This is a move to stabilize the market, not to bail out ppl.
How is buying junk bonds at face value not a bail out. To claim the problem is not about liquidity but is about capital the banks do not have enough money OR assets to meet their requirements so the FED threw a ton of cash at them.
Heh, do you even know how mortgage backed security work? Which bank gets the money when FED buys MBS, who did the FED threw the cash at? How is MBS equal to junk bond when it is backed by the ENTIRE pool of mortgage?
Simple if it wasn't junk they would be able to sell it. The fed threw money at who ever owned the junk bonds it was buying. Yeah so what if an MBS is back by a pool of over priced houses rather then just a single overpriced house. At the end of the day it doesn't make much difference.
You can always sell something, it just depends on how much money you want for it. The Fed lent them money on the basis of a Repo, the repo ends on Tuesday. The Fed buys it for more than the market and sells it back for less than market to entice the liquidity to free up. It has nothing to do with not being able to sell those pieces, there is plenty of money floating around. However, to get people to move that money around sometimes you have to force movements.
When you need 100 dollars to meet your obligation being able to sell your assets for 70 dollars is as good as not being able to sell them. Junk is relative, the bonds are junk based on the asking price which the fed is more then willing to meet.

Pooling mortgages many protect the a small investor against an individual mortgage going bad but it is worthless when you have an institution wide problem like current mortgages have. Mainly the mortgage is for more then the value of the underlying assets.
Being able to meet obligations is not the problem here, people wanting to take risk is the problem, since nobody wants to be holding the hot potato. Junk isn't relative, it's a set standard, anything below BBB is junk and it's not based upon the asking price. The asking price is based upon the status of the bond and the underlying pool along with market perceived risk.

Even with the repricing of securities by the agencies, it is pretty widely known what is junk and what is not. What the Fed purchased was not 100% junk and their price was dictated by the necessity of getting people to loosen up on risk. A Repo is a repo is a repo, it will be repurchased on Tuesday unless the Fed decides to extend the term of the repo.

Pooling of mortgages protects all investors against individual losses. This isn't an "institution wide problem", considering many banks have a lot of liquidity remaining. The mortgage will always have more value than the underlying due to the PV of all of the interest payments. However, if you are referring to the houses underlying being at less than 100% CLTV, then that is a different factor. Even if a house were underwater, not all obligors will default, thus only the lowest of the tranches will be affected. With the WAL of the tranches being at least 5 years and excess spread probably being ~2%, that means that 10% of all defaulting mortgages will probably be reimbursed through excess spread

Additionally, since most of these deals were enhanced with at least 5% OC, from what I could see, then only 5-10% of the remaining bonds will take a hit. Since many subprime bonds were also wrapped, then the insurance providers pay the PI, they are AAA rated with plenty of liquidity and have been making money for decades on this stuff with few payouts.

Overall, your definition of "junk" and your idea of pooling and structuring is limited at best. While I wholly agree that the Fed was completely wrong for putting these securities in Repo, I don't have the same ideas as you do in other areas.

 

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