$2 Trillion False Flag Event at the U.S. Treasury, the Fed’s Furtive Filching

by Barry M. Ferguson
Market Oracle

$2,000,000,000,000.00 dollars has been stolen from the US Treasury!! What happened? Who did it? Did they get away with it?

The answers: A ‘false flag’ event, the Federal Reserve, and yes.

The theft was planned. It started with a ‘false flag’ event in 2008. Much like the ‘false flag’ event of 2001 in which two planes somehow imploded three buildings, the false flag event of 2008 was a game changer. As you remember, the big banks had bankrupted themselves with derivative driven debt issuance that could not be repaid. The financial system was in peril. Or, so we were led to believe. We were told by the Treasury Secretary at the time that ‘toxic illiquid assets were clogging up the system’ and preventing the lending process from working. They needed immediate assistance and that assistance could only come from the Federal Reserve. All we had to do was to surrender the Treasury. Our Congress complied and the false flag ruse had worked again. The theft could proceed.

The Fed then proceeded to buy the ‘toxic illiquid assets’ from the big banks. In all, it was about $1,250,000,000,000.00 in MBS (Mortgage Backed Securities) paper – give or take a few hundred billion. Where did they get the money? The Treasury printed it by increasing the debt by virtue of Treasury note issuance. Bear in mind that the Federal Reserve is a for-profit privately owned bank. Now they own a lot of bad paper. How did they complete the theft?

At this time, let me bring in Mr. Brian Sack to the story. Mr. Sack is the executive vice-president of the markets group at the Federal Reserve Bank of New York. He is the manager of the System Open Market Account (SOMA) for the FOMC. Basically, he manages the trading for the Fed. Mr. Sack has a doctorate in economics from MIT. A word of foreshadow and caution. As I have written in the past, it seems that everyone that has served to screw up the economy has been spawned by MIT, Harvard, or U. Cal. Berkeley. I’m not hatin’ – I’m just sayin’! Anyway, Mr. Sack just gave a presentation to the CFA Institute on October 4, 2010. Here is the link if you want the whole speech.

Mr. Sack explains the theft better than me.

‘The initial decisions by the FOMC to expand the Federal Reserve’s holdings of securities came at the height of the financial crisis. Before that time, the Federal Reserve maintained a relatively simple portfolio of between $700 billion and $800 billion of Treasury securities – an amount largely determined by the volume of dollar currency that was in circulation. In late November 2008, in the face of tightening financial conditions and a deep downturn in economic activity, the Federal Reserve announced that it would purchase up to $600 billion of agency debt and agency mortgage-backed securities (MBS). In March 2009, it expanded the program to include cumulative purchases of up to $1.75 trillion of agency debt, agency MBS, and longer-term Treasury securities. The use of the balance sheet in this manner was spurred in part by the inability to ease further using the traditional policy instrument, as the federal funds rate effectively reached the zero lower bound in late 2008.’

What Mr. Sack is telling us is the economy had deteriorated further and zero percent interest rates weren’t helping. They saw a chance to help themselves to a heap of money. Uh, I mean they offered to help us dopes out of our mortgage debt nightmare. But then the Fed found itself with a lot of garbage paper. It had no intention of taking a loss. Continuing:

‘Against that backdrop, an important policy decision regarding the Federal Reserve’s portfolio was made at the August FOMC meeting, when the Committee decided to halt this run-off and instead hold the size of the SOMA portfolio steady. To achieve this, the FOMC directed the Desk to purchase longer-term Treasury securities as needed to offset any principal payments realized on our holdings of agency debt and agency MBS.’

The ‘illiquid toxic assets’ were rotting on the Fed’s balance sheet and they weren’t about to take the losses. Mr. Sack offers that the Fed acknowledges that by buying Treasuries, that action serves to keep interest lower than they would be normally. Duh? I told you he had a doctorate from MIT! He goes on to make this point that the Fed wants to goose the stock market:

That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.’

The Fed buys Treasuries from the big banks. The big banks buy up stocks. Were you wondering why the market rallied in September? Here is where we get a tip that the garbage paper the Fed is holding is not ‘maturing’ through repayment but rather it is maturing through default. In other words, a $100 million dollar traunch of MBS paper that experiences a loan repayment would still leave the Fed with $100 million on the balance sheet. A decline would imply default. Let’s listen:

‘The decline in the size of the Federal Reserve’s portfolio that would have occurred in the absence of the reinvestment program would have amounted to a passive tightening in the stance of monetary policy, as the portfolio balance effect would have gradually reversed.’

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October 14, 2010

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