QE isn’t dying, it’s morphing
Monday, November 10, 2014 at 4:05PM A funny thing happened on the way to the ‘end’ of the multi-trillion dollar bond buying program known as QE - the Fed chronicles. Aside from the shift to a globalization of QE via the European Central Bank (ECB) and Bank of Japan (BOJ) as I wrote about earlier, what lingers in the air of “post-taper” time is an absence of absence. For QE is not over. Instead, in the United States, the process has simply morphed from being predominantly executed by the Federal Reserve (Fed) to being executed by its major private bank members. Fed Chair, Janet Yellen, has failed to point this out in any of her speeches about the labor force, inflation, or inequality.
The financial system has failed and remains a threat to us all. Only cheap money and the artificial inflation of asset values can make it appear temporarily healthy. Yet, the Fed (and the Obama Administration) continue to perpetuate the illusion that making the cost of (printed) money zero by any means has had a positive effect on the population at large, when in fact, all that has occurred is a pass-the-debt-ponzi-scheme co-engineered by the Fed and big US bank beneficiaries. That debt, caught in the crossfires of this central-private bank arrangement, is still doing nothing for American citizens or the broader national or global economy.
The Fed is already the largest hedge fund in the world, with a book of $4.5 trillion of assets. These will plummet in value if rates rise. Cue the banks that are gearing up their own (still small in comparison, but give them time) role in this big bamboozle. By doing so, they too are amassing additional risk with respect to interest rates rising, on top of all their other risk that counts on leveraging cheap money.
Only the naïve could possibly believe that the Fed and its key banks haven’t been in regular communication about this US Treasury security shell game. Yet, aside from a few politicians, such as former Congressman Ron Paul, Congressman Sherrod Brown and Senators Bernie Sanders and Elizabeth Warren, the notion that Fed policy has helped bankers, rather than other people, remains largely divorced from bi-partisan political discussion.
Adding more fuel to the central-private bank collusion fire, is the fact that the Fed is a paying client of the JPM Chase. The banking behemoth is bagging fees for holding and executing transactions on the $1.7 trillion New York Fed’s QE mortgage portfolio, as brilliantly exposed by Pam Martens and Russ Martens.
Wouldn’t it be convenient if JPM Chase was also trading this massive mortgage book for its own profits? Or rather - why wouldn’t they be? Who’s going to stop them – the Fed? Besides, they hold more trading assets than any other US bank, so why not trade the Fed’s securities ostensibly purchased to help the public - recover?
According to call report data compiled by the extremely thorough website www.BankRegData.com, nearly 97% of all bank trading assets (including US Treasuries) are held by just 10 banks, led by JPM Chase with 43.80% and followed by Citigroup at 24.51% of all bank trading assets.
Last quarter, US Treasuries were the fastest growing form of security bought by banks, increasing by 26.3% or $72 billion over the prior quarter. As the Fed tapered, banks stepped in to do their part in the coordinated Fed-private bank QE game. In the past year, banks have added $185.8 billion of US Treasuries to their books, more than doubling their share of government debt.
Just seven banks comprised nearly all ($70.5 billion) of this quarterly increase: State Street Bank, Capital One, JPM Chase, Wells Fargo, Bank of America, Bank of NY Mellon and Citigroup. By the end of the third quarter of 2014, Citigroup, with $95 billion, was the largest holder of US Treasuries, followed by Bank of America at $54.8 billion and Wells Fargo at $37.8 billion from nearly zero at the start of 2014. Bank of NY Mellon holds $25.3 billion and JPM Chase holds $15 billion US Treasuries.
This increase in US Treasury holdings reflects another easy money element of our federally subsidized banking system. Banks take deposits from individuals for which they pay close to zero in interest, in fact, charge customers fees for keeping their money (courtesy of the Fed’s Zero-Interest-Rate policy.) They can turn that around to make a cool risk-free 2.3% by parking the money in 10-year US Treasuries. Why lend to Joe the Plumber, when the US government is providing such a great deal?
But, the recent timing here is key. Banks only started buying US Treasuries in earnest when the Fed announced its tapering plans. Thus, not only are they participants in the ZIRP game as recipients of cheap money, they are complicit in effecting monetary policy. As the data analyzed so expertly by Bill Moreland at www.BankRegData.com makes clear, there has been no taper. Thus, the publicized reason for tapering – better job and economic growth – is also bogus.
During the third quarter, Wells Fargo and Bank of America matched Fed purchases of US Treasuries, keeping the total amount of US Treasuries in QE land neutral. With such orchestration to keep rates down and the prices of US Treasury securities up, all the talk about whether the labor force is strengthening or inflation exists or not is mere show. Banks haven’t even propped up the labor market in their own industry. They chopped 11,400 jobs last quarter. In the past two years, they cut 57,236 jobs.
No sucessful candidate in either political party mentioned any of this during the mid-term elections. Yet, our political-financial system has gone from the dysfunctional to the failed to the surreal. Speculation, once left to individuals and investors, is now federally sponsored, subsidized and institutionalized. When this sham finally buckles and the next shoe falls and rates do eventually rise, the stock market will tank, liquidity will die, and the broader economy will plunge into a worse Depression than before. We are not there yet because of these coordinated moves and the political force behind them. But we are on a precarious path to that inevitability.
Bank of America, Ciitigroup, Fed, JPM Chase, Janet Yellen, Wells Fargo 
Reader Comments (27)
Great insights!! The Fed + Obama can say that the taper ending is proof that the economy is strong. They've just moved to a slightly different chess board but are playing the same olde game. It is amazing to me that such a huge lie is never exposed in by the media or by business leaders. Thank you, Ms. Prins, for your thoughtful analysis. This is a very important piece on several levels.
It's good to see you posting again, Thanks.
Ditto
Please learn the definition of comprise before you use the word again.. The whole comprises the parts. The parts compose the whole..
Many Wachovia shareholders lost as a few insiders profited from material undisclosed information.
When Wachovia Bank's stock price last traded at $27.07, the firm borrowed $3.5 billion from the Federal Reserve’s Term Auction Facility (TAF) on March 27, 2008, which was not disclosed to the firm’s shareholders or reported in the company’s legally required SEC securities filings.
If Wachovia had disclosed it had borrowed billions with about $65 billion in "Unencumbered Collateral" representing their credit line, confidence in the company would not have suffered to the extent that occurred, meaning if they had told the truth as was required by law, a whole lot of local shareholders wouldn't have lost so much money.
About six months before the merger with Wells Fargo, Wachovia’s new CEO Robert Steel, formerly the principal adviser at the U.S. Treasury Department on matters of domestic finance under Hank Paulson, purchased 1,000,000 shares of Wachovia’s stock as the company’s TAF borrowing reached an undisclosed $12.5 billion.
$42,672,115,305 of Wachovia's market capitalization disappeared between the first undisclosed TAF loan and the Wells merger.
After not reporting Federal Reserve loans and purchasing shares while in possession of undisclosed material inside information, the Wachovia’s CEO wrote "I, Robert K. Steel, certify that: I have reviewed this Quarterly Report ...of Wachovia ...this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading..."
In 2010, Steel was appointed Deputy Mayor for Economic Development by New York City Mayor Michael Bloomberg, whose news division initially reported the secret loans, but not the insider trading and false certifications. According to Morningstar data, Mr. Steel owned 601,903 shares of Wells Fargo in 2010, which was worth more than $20 million in 2012.
The government threw Wachovia's shareholders under a bus by choosing to not enforce the law.
The biggest reason behind banks increasing government debt has nothing to do with QE. It has to do with Basel III and the liquidity coverage ratios. Banks need to hold more high quality assets. This is total garbage.
James, While it's true banks have to increase the amount of high quality assets they hold, and US Treasuries are of course allowed, under Basel III, it so happens that banks had amassed nearly $2.4 trillion of excess reserves (i.e. as per the Fed's definition: reserves not required,, and Basel III doesn't increase their required reserve amount by anything near that much, over the Fed's requirements). Thus, the timing, and the exact figures, as the data from the banks' call reports shows is such that the amount of Treasuries they have bought recently equals the amount of tapering the Fed has announced. Maybe this precise amount also equals Basel III requirements, but that's a thought-provoking coincidence then.
Nomi
Fernando,
I appreciate your well-intended editorial warnings.
It seems that the Oxford dictionary definition (see usage in the link below) goes both ways:
http://www.oxforddictionaries.com/us/definition/american_english/comprise
Nomi
Somehow, I lost the last letter of my name in my previous comment.
Didn't want to mislead you regarding my nationality, so I fixed it.
So now, Nomi, at least you stand a fighting chance to guess my homeland;-)
"Banks only started buying US Treasuries in earnest when the Fed announced its tapering plans."
I don't reach the same conclusion . . .
http://research.stlouisfed.org/fred2/graph/?g=QIw
Nomi,
Your posts are infrequent but when you do post they're corkers! Super article, thanks.
DavidC
How is it that private bank purchases of Treasuries is the same as Fed purchases?
Dead D - regarding the acceleration in top 7 banks' US Treasury purchases last quarter:
The following table details that just 7 banks made up $70.50 Billion of the total $71.99 Billion 2014 Q3 increase. (The last column is the quarterly purchase percentage increase). For the year (since Fed taper),banks have added $185.80 Billion in the past year which is a 116.35% increase over last year..
Institution UST 2014 Q2 UST 2014 Q3 Increase Perc
State Street Bank 2,780,649,000 10,139,443,000 7,358,794,000 264.64
Capital One 1,223,167,000 4,261,068,000 3,037,901,000 248.36
JPMorgan Chase 6,642,000,000 14,999,000,000 8,357,000,000 125.82
Wells Fargo 18,252,000,000 37,804,000,000 19,552,000,000 107.12
Bank of America 36,093,000,000 54,843,000,000 18,750,000,000 51.95
Bank of NY Mellon 18,525,906,000 25,266,966,000 6,741,060,000 36.39
Citigroup 88,362,403,000 95,067,969,000 6,705,566,000 7.59
171,879,125,000 242,381,446,000 70,502,321,000 41.02
The largest increase is in Wells Fargo.Wells increased holdings 107.12% ($19.55 Billion) this last quarter to $37.80 Billion. Wells never held any significant UST holdings until 2014. Within 9 months, though, it went from $474 Million to $37.80 Billion. Wells and Bank of America combined bought $12.76 billion per month during q3 - these two banks almost matched the monthly Fed purchases.
Nomi
hi nomi,i was unaware of your existence until today when i stumbled across this article and i must tell you how much much your writing means to me.i felt all along that the banks would have to step up when the feds stopped buying and i am shocked and disappointed that this has not been more widely reported.i ask myself who gained the most from QE and who has most to lose from stopping QE. it seems the banks have most to lose and are really the only ones who could fill the void left from the feds leaving.my question is who did the federal reserve displace when they started QE. after all someone was already buying those bonds when the feds stepped in so if the banks were displaced is it not natural that they would come back to the market. again thank you for your comments and i hope they will be distributed on a wide .wide bases for everyone to see because this is important stuff.
Nomi -
US banks have to comply with Basel III LCRs by 1/1/2015. Level 1 HQLAs require no valuation haircut. These include securities issued or guaranteed by the U.S. Treasury. Wells, and others, have talked about this in their public presentations this year.
So is it safe to purchase TLT for the near term?
D - The thing is whether or not you think banks are buying extra UST for Basel III or to make up for the Fed's short-fall, the result is the same, they are keeping up demand for the debt the Treasury is creating, which so happens to be equivalent to the short fall in the Fed's QE program. Aside from which, the Fed pressed for Basel III to exclude certain other high grade securities (that the Fed itself considered high enough grade during its loan facility bailout program in 2009) so that US T would have extra demand, which has a QE effect.
Aside from which, the reg. ratios just don't reflect the volume of US T being bought. Take State Street for example. They have a Call Report Tier 1 Capital Ratio of 16.16% and net loans of $18.4 Billion or 6.81% of total assets. Why would they go from $0 in Q413 to $10.14 Billion in Q314? Basel III is requiring them to hold 55% of their Net Loans in UST? They have a grand total of $38,000 in NPLs.
With so much debt amassed, and continuing, it's only matter of time before other nations start dumping US $. Many of them already have and the numbers are increasing. Hence BRICS, who also recently announced Bank formation. Our 2 political party system has been lobbied by greed, selfishness and deceit, coupled with media misinformation and political denial. The G7 comprises the most in debt nations of the world! When Ron Paul ran for president, pundits avoided him like a plague; he pretty much schooled everyone each time he had a chance to speak. Our leaders have lost common sense (with few exceptions) and the only reason EU is hiding in our wing is because they themselves are debt ridden and have nowhere to go. Our foreign policy is a complete disaster pushed by Neo-Con war/profit machine that has brought US to its knees and FED/with its banks assisted the process by printing them money to fund it. There is always another enemy, another war and problem, to deflect the focus from the root of the problem. Nomi makes a great point, i.e., this ain't going away and it's too late to stop. I sincerely believe that US will once again shine bright as the freedom start its meant to be, but not without much pain and tribulation, that separates the tares from wheat. This nation is meant to be of selfless people that serve that cause of freedom! And by God, it will be so!
Alex
The forced buying of government debt is one of the hallmarks of financial repression. Ken Rogoff and Carmen Reinhart discussed this in their book This Time Is Different.
The rationale for the above is often dressed up as a macro prudential risk management exercise, but the outcome of repressed yields to the benefit of over indebted governments is the same: artificially cheap funding. This comes not just at the expense of the saver class, but of the broader economy as well as suppressed yields leads to a mis pricing of credit and risk, and leads to malinvestment.
Indeed QE is still happening as the Fed is not simply letting it's securities run off at maturity, but is reinvesting coupons and proceeds. In this context, no new net purchases simply means QE at a diminished rate, and the expansion of the Fed's balance sheet marches on.
The taper and faux end of QE reflect the diminished funding requirements of the federal government as deficits shrink. Maintaining the old rate of purchases would have killed the treasury market as the Fed would have eventually ended up purchasing most if not all of the treasury's new issuance. At that point, any pretense of not monetizing deficits would have been gone and the dollar's reserve currency status come under serious reconsideration in global markets.
Thanks for this article, Nomi. I saw you referenced by Paul Craig Roberts.
I'm puzzled. You draw a distinction between the FED & private banks.
I thought that the FED was a consortium of private banks, masquerading as part of the Federal Govt ?
In other words, they're all private bankers, manipulating the US Govt, populace & economy for their own benefit, & not for the benefit of the populace, as you have most clearly shown ?
Thanks.
John D.
The following table details that just 7 banks made up $70.50 Billion of the total $71.99 Billion 2014 Q3 increase. (The last column is the quarterly purchase percentage increase). Best Torrenting Sites of 2014 For the year (since Fed taper),banks have added $185.80 Billion in the past year which is a 116.35% increase over last year..
Thus spoke Nomi, I don't know of anybody who could have expressed it better.
They might be able to pull out one or two more rabbits, but when the economic muscle
is gone, flexing military muscle will not do the trick.
yours looks to me the swan song of a great country
Nomi hi.
Is the Fed a consortium of private banks, issuing currency, at interest, to the US Treasury ?
Cheers,
JD.
JD,
The Fed is technically an independent not-for-profit entity that sets monetary policy without needing federal/congressional approval and thus acts as the US central bank, and is private rather than public. The private banks are members and by law, own shares in the Federal Reserve System's 12 Reserve banks, which are themselves, set up as private corporations. The shares aren't tradable and which give them a 6% annual dividend (not bad, btw)…in practice the Fed and the private banks thus are aligned, and the Fed's actions for the most part historically, have borne that out.
This is from the Fed's site:
The Federal Reserve System fulfills its public mission as an independent entity within government. It is not "owned" by anyone and is not a private, profit-making institution. As the nation's central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve's activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as "independent within the government" rather than "independent of government."
The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized similarly to private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
Thank you, Nomi.
JD.
Thank you for this essay. I found the link posted by a commenter on a MarketWatch article titled "The Fed has boxed U.S. into a tough easy money corner" by Satyahit Das.
I suspected that there must be a secret program when the 10 year rate didn't increase, after the QE program supposedly ended.
As stocks still have no competition from any interest bearing instruments, is it still safe to buy the S&P with new money? I need a home for about 300K which is sitting on the sidelines, but am afraid to jump in.
Also, I'm not sure what to make of the massive corporate share buybacks? Does that put a floor in the market? I mean, how can it drop, if they've taken the market more and more private?
Thanks.