| | | New Book Takes a Hard Look at How Hedge Funds Have Designed Trades to Tap into the Fed’s Money Spigot
By Pam Martens and Russ Martens
February 2, 2022
As we reported on Monday, there’s a new book out from Simon & Schuster with the provocative title: The Lords of Easy Money: How the Federal Reserve Broke the American Economy. The book, written by bestselling author Christopher Leonard, is sprinkled with eye popping revelations – particularly in regard to how hedge funds have been able to effectively mint billions by designing trades to take advantage of the Fed’s repo bailouts and quantitative easing.
Quantitative easing (QE) is a scheme launched by former Fed Chair Ben Bernanke, beginning in November 2008. QE means that the New York Fed, through its open markets desk, buys up Treasury securities and federal-agency-backed Mortgage-Backed Securities (MBS) from its 24 primary dealers. The Fed’s purchases of tens of billions of dollars a month of these securities creates artificial demand that would not otherwise exist, thus lowering the interest rates these securities need to offer, which also puts downward pressure on the interest rates of other debt instruments. This helps to sustain the Fed’s zero-bound interest rate policy on its benchmark rate, the Fed Funds rate. Bernanke promoted the plan as a way to lift asset prices and get the economy growing again after the debilitating effects of the 2008 crash. It’s been the go-to plan of the Fed ever since whenever Wall Street needs a bailout.
Interestingly, a zero-bound interest rate policy has also bailed out the hundreds of trillions of dollars (notional or face amount) of derivatives that Wall Street’s megabanks have waged with questionable counterparties that might, or might not, be able to pay up on the trades if they went sour.
Unfortunately, the dark side of QE, as cleverly detailed in layman’s terms in Leonard’s book, is that it has created a desperate struggle for yield by American savers, pension funds and other typically risk-adverse investors. The book makes the point that the long-term goal of QE was, in fact, to make saving money and expecting to earn a decent interest rate on it a fool’s errand year after year, thus forcing millions of people into riskier and riskier areas of investment, which has led to the unprecedented bubble in markets that we find ourselves in today – with no reliable exit plan by the Fed.
The Fed conducted all of these QE trades with its primary dealers, the vast majority of which are broker-dealers, meaning the trading houses on Wall Street. Most of the broker-dealers have affiliates that are commercial banks that could actually lend to the real economy, but the broker-dealers themselves are the casinos that are trading with the hedge funds.
The man behind QE, former Fed Chair Ben Bernanke, is the same man who oversaw the secret $29 trillion bailout of Wall Street during and after the 2008 crash, fought the U.S. media for more than two years to keep the details of that bailout a secret, and then took a job at hedge fund, Citadel, after retiring from the Fed.
In describing what was happening behind the scenes as QE ramped up, Leonard writes:
“The primary dealers were not just selling the Treasury bills and mortgage bonds that they happened to have on hand. If that had been the case, it would have limited how much money the Fed could have pushed into the banking system (even the primary dealers only had a finite amount of such assets on hand). Instead, the Fed set up a conveyor belt of sorts, which used the primary dealers as middlemen. The conveyor belt began outside the Fed, with hedge funds that were not primary dealers. These hedge funds could borrow money from a big bank, buy a Treasury bill, and then have a primary dealer sell that Treasury bill to the Fed for new cash. In this way, the hedge funds could borrow and buy billions of dollars in bonds, and sell them to the Fed for a profit. Once the conveyor belt was up and running, it began magically transforming bonds into cash….”
Continued below:
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