this is getting downright scary ...
(snip)"The same Wall Street rabble that brought you a raging inflation, a trashed US Dollar, a now collapsing debt and credit Bubble of historic proportion, the demise of Joe Ultra Light Six Pack and a massive maladjusted economy, now are trial ballooning a new neutron bomb to finish the job. This one is right out of Dr. Strangelove.
With worsening strains in credit markets threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses — perhaps buying mortgage-backed securities directly. “As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored entities.
I would expect the impact of this on the targeted securities to last about just long enough for the trading desks to mobilize the proceeds into more crack up boom (CUB) trades. This would be mostly be a test of who has the quickest electronic order system than about any special talents. You, me and Aunt Millie can only watch in horror from the ledge of room 1408 if this plays out. This would be like showing slasher movies to four year olds. Indeed the latest reaction of the markets just to this trail balloon is stunning: more parabolic price action in CUBs, and more USD trashing. The obvious question is would this latest scheme just be another dud stupid dog trick, or does Dr. Strangelove really have his finger on the nuclear trigger? The second question: do they sterilize any outright mortgage purchases by selling Treasuries? Even if the later I would still characterize this as a 1945 style nuclear explosion."(snip)
The bottom line behind all of this is that, thanks to a new policy change, the US Fed is now 'trading' US Treasuries for the toxic mortgage paper held by troubled investment banks via a fresh round of loans. The Fed is also letting rumors hit the street that these loans may turn into outright purchases / trades. This of course improves the banks' credit situation and lowers the banks' default risk, but it also implements a de-facto responsibility on the US taxpayer to make good on the toxic mortgage paper bought by the US Fed !!!!!! Obviously, the US stock and commodities markets went crazy today as a result !



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