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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum

GLD 414.48

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Jan 9 4:00 PM EST

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To: TobagoJack who wrote (30579)	3/8/2008 8:17:09 AM
From: carranza2	Read Replies (1) of 219223

It's a bit complicated, but I think Jesse's Cafe got it right: it's a switcheroo with junk serving as collateral for Treasuries. Given the 'we don't care about inflation, growth is the real problem' Fed policy position, it makes no sense to take money out. The difficulty is that the transaction might be misunderstood. We'll find out Monday. The other possible tea leaf worth considering is that the Fed and the banks might be feeling a bit better about things, don't feel they need the TAF 'wahatever' cash anymore and jointly believe it is better put to use on leveraged credit transactions. Two views of this: the pessimistic one which asks "more leverage, are you nuts?" and the optimistic one which says "credit just got easier, mortgage rates might actually fall now rather than go higher when we are cutting rates, it needs a kick-start desperately and the we just gave it one." Jesse's Cafe: blogger.com The Fed has been taking all sorts of collateral from the banks at the TAF window. The banks are going to have to mark this debt to market at some point. We don't know how the Fed is actually valuing it for their repo purchases, since it has no liquid market.In turn, the banks have plenty of short term liquidity. but they need to recapitalize and use that to build their cash flows with a 'multipler effect' which is tough to do with short term monies. The multiplier of a permanent add is 9x. So the Fed, having just lent the banks 'cash for whatever' turns around and sells US Treasuries to the banks in return for the amount of 10 Billion which the Fed has recently lent to them short term (with God knows what for collateral).See the gimmick? The Fed is letting the banks borrow short from the TAF on questionable collateral and get some nice solid long term Treasuries that can be loaned to the Public at 9x the amount or 90 billion. Looks better on the books, gives them some breathing room, and is nice and quiet.If that was too complex an explanation, we'll off the one from our friend Sean in Zurich:They [the Fed] said they were going to neutralize the new TAF/term RP stuff... so banks end up funding their dodgy mtges with Tim at NYFRB and holding bills to compensate.And there you have it. Selectively placed helicopter money.

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