08.04
Hold on to your seats now. This is going to come as a major shocker. Wall Street investment firms are colluding with the Federal Reserve to profit their own businesses:
Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.
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 Feds balance sheet, detailing the share of the market in particular securities held by the Fed.
You can make big money trading with the government, said an executive at one leading investment management firm. The government is a huge buyer and seller and Wall Street has all the pricing power.
Wow! What a surprise! Well, I guess it’s a surprise if you’re from a different planet or something. I mean, come on. This has been standard operating procedure for the Federal Reserve for 90 years now. Are we supposed to think that J.P. Morgan’s people started the Federal Reserve out of the kindness of their heart? Of course not. They created the Fed to be a personal ATM for investment bankers.
Again, everyone knows this:
The growing Fed activity has coincided with a general widening of market spreads – the difference between bid and offer prices – as the number of market participants declines. Wider spreads enable banks, in their capacity as market-makers, to make more profit.
Larry Fink, chief executive of money manager BlackRock, has described Wall Street’s trading profits as “luxurious”, reflecting the banks’ ability to take advantage of diminished competition.
Brad Hintz, an analyst at AllianceBernstein, said he doubted that spreads would ever return to those levels, a development that could be pleasing to the Fed.
“They want to help Wall Street make money,” he said.
Of course they want to help them make money. But, I’d be more specific and say they want to help Goldman Sachs and one or two others make money. Goldman Sach’s competitors such as Lehman Brothers didn’t get much help if you recall. What they got was the cold shoulder.
Critical listening on this subject:
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