The Fed Prepares for Battle (Oops, There Goes the Exit Strategy off the To-Do List)

No one can say if the Fed is actually under attack right now but it's starting to look that way. I combed through a bit this weekend and as usual, few media sources are actually daring to suggest that something evil is brewing. Sure, maybe the Fed just wanted to have an emergency post-Easter egg hunt at 20th and Constitution. I'm sure that's it. If I'm right on this, good thing for the Fed they've got an extra day to waste plotting their contingency plan. If an exit strategy ever existed, that's hitting the back burner while the Fed slips into the Kevlar and hopes like hell it can defend itself. Just my $0.0000002.

Even Fodor's gets the Fed's deepest darkest secret:

This imposing marble edifice, its bronze entryway topped by a massive eagle, was designed by Folger Library architect Paul Cret. Its appearance seems to say, "Your money's safe with us." Even so, there's no money here (the Fed sets interest rates and thereby seeks to keep the economy on track).

Hahaha, who writes this crap?

Anyway, funny that such a historical building of tremendous importance to the United States is not listed with the other landmarks (even the World Bank shows up) on Google Maps. Also, Google, can you please get your shit together and edit your Federal Reserve listings? "US Government" and "San Francisco Fed" do not mix.

I digress. While I'm worrying about how the Fed will fend off attacks from around the world as a result of its detailed Maiden Lane release last week, Zero Hedge is wondering why the fuck they are putting so much effort into a $25 billion Maiden Lane MBS portfolio when it's got $2.4 trillion just hanging out unhedged and, presumably, exposed.

Fair enough - we now know that the Fed is paying Blackrock (NYSE:BLK) with our money to manage the interest rate exposure on its Maiden Lane I positions, just so JPM could get a steal on Bear Stearns (oh yeah, and Jamie Dimon is furious today that the Fed not only bailed him but gave him Bear on a silver platter). This means that the Fed paying Larry Fink several million a year to put on some interest rate hedges and some various futures. And for what - to avoid a blow up in a $25 billion portfolio?

What about the bigger picture?

As Jefferies points out today:

One has to ask why the SOMA is spending all this effort with Blackrock to hedge interest rate risks in a $25 billion MBS portfolio when it’s holding $1.25 trillion of MBS assets, plus a trillion of long dated Agency debentures and Treasuries. There is a billion dollars a basis point of interest rate risk in the SOMA.
You read that right, while the Fed is pretending to care about interest rate concerns in an increasing rate environment and is hedging ML1, it has one billion DV01 risk for its house bailout package. This is a stunning number: the second rates commence creeping higher, you can kiss all that profit on TARP and what not not only goodbye, but the losses on the SOMA books will likely destroy America. And yes Virginia, it is negatively convex: once rates start creeping wider, they will accelerate faster and faster until everything escapes the control of Ben Bernanke.
Does this also explain Treasury delaying its currency report?

I used this song for an alternate purpose not too long ago but it's actually fitting. I assume Janet Yellen is about to get bitch-slapped and hard if she takes Don Kohn's old job and has to help Bernanke steer this thing right into the line of fire. Looks like I'll get my Yellen bitchslap bounty after all.

And so it begins...
Countdown, it's the time of the season
but you're the man around town 


Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.