Picking the Fed’s Pocket

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The Federal Reserve is not known for its transparency, but in one area the banking regulator may be a bit too upfront—so much so that Wall Street players are able to parlay this openness into huge profits. The Financial Times explains:

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed…

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

And apparently there’s not much to be done about it, either, since the point of the bailouts was to help Wall Street get back on its feet—even if that means getting robbed by the same firms taxpayers saved from oblivion. “You can’t rescue the credit system without benefiting some of the people in it,” Barney Frank, chairman of the House financial services committee, told the paper. “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”

Fair enough, but is it too much to ask for the Fed (and the Treasury, for that matter) to strike deals that are mutually beneficial, rather than ones that leave the impression that taxpayers are repeatedly getting swindled? Probably.

Follow Daniel Schulman on Twitter.

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