Thursday, September 9, 2010

The Fed, The US Treasury, Treasury Bonds, Wall St / Primary Dealers and the "F" word

Is the Fed not just boxed in but about to get itself, the US Treasury and its Wall St bankers in a stew whose broth is made of the "F" word? What's that F word? Just fiduciary duty - as may be contemplated in the nascent Dodd Frank Act.

It seems that Wall St - scuse me - now banks (Bank Holding Companies) - are not doling out cash for new loans but are amassing more and more cushion; that only cash can provide. See recent Huffington Post article here
Nov 8, Updated and confirmed by this Bloomberg report that banks are buying ever more record amounts of US Treasuries - met with frustration by Mr Bernanke; is this a surprise? Past (parties, people, peformance) as they is prologue.

Cash, in the eyes of these bankers, appears has certain advantages. Their concerns are helped little by the when-not-if financial fire storm that will likely take place when the first sovereign or US state, city or county et al "formally" defaults; in the parlance walks away. That event seems the spark for the firestorm only LOTS OF EXTRA CASH on the balance sheet (and on deposit) can withstand. Said another way - these bankers - and for that matter most of the rest of corporate America have voted. And their vote is that they DO NOT BELIEVE IN THE ECONOMIC RECOVERY and/or
perhaps it's really because they are not long BBI - see Bernanke Believability Index blog here

Alas it's been a long wonderful mutually beneficial relationship. When the gummint needs cash it rings up the group of 18 Primary Dealers and presto - there's a bid for the latest US Treasury issuance. In return, the 18 PD's enjoy and continue to enjoy that underwriting monopoly. It's not that there's a lot of money to be made - but when an investor wants US Treasury's in size - they have to go to one of the 18 PD's; and lately investor demand is the MOST robust in HISTORY.

See there's this little thing - that's come up - the 18 PD's are torn now, just now, never a worry before. When the authors of Dodd - Frank inserted that F word thingy; it may have dawned on the 18 that underwriting, distributing aka "selling" US Treasuries may NOT necessarily (any longer) be IN THE BEST INTERESTS OF THEIR CUSTOMERS. Perhaps US Treasuries with longer than let's say 5 years maturity or maybe even 3 year bullets have a question mark - may not be best for customers? We'll see.
When fiduciary duty applies it requires the HIGHEST commercial standard of care.

The F word has burdened the 18 PD's - prospectively - as well. Fiduciary duty has this thing called due diligence - before and after selling - scuse me - recommending an investment. Accordingly, faced with 1) the extra work load, 2) the surprises which may pop out of the Fed's "200 stories tall" $2T plus balance sheet chock full of you know what the details of which the deceased Mark Pittman instigated a lawsuit against the Fed and Bob Ivry and Bloomberg can't wait to get their hands on and 3) the undeniable UNFUNDED, ON balance sheet past promises at Treasury - not to mention 4) the OFF balance commitments - let's just say that the devil may care attitude of the past - is - scuse me all F'd up. Thus far, ONLY the Fed, US Treasury and here's the source of potential entanglement otherwise known as information asymmetry definitions here, certain parties, of whom the 18 PD's are believed a subset to the extraordinary suite of relief KNOW what may be on the Fed's balance sheet - which merely makes it a matter ultimately of questioning the currency. Let's hope there's no rain in the forecast - as there seems little to no dry powder left for such contingencies.

Not wanting to see their little stash of cash evaporate in defense of their sales
of US Treasuries
to certain if not most customers - the 18 PD's just may continue to fight the F word.

Ending the siesta on the US taxpayers dime - one little easy to read blog at time.

When you need to know exactly what a BFD* looks like - call McFid, the fiduciary expert.
* BFD means breach of fiduciary duty.

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