Now raising intellectual capital

The government owns the MBS market

OK, it’s not a majority owner, but the government has an impressive stake in the $4.5 trillion agency mortgage-backed securities market.  Barclays Capital’s last count, as of July 3, puts Federal Reserve purchases at $621.6 billion since it launched the program in January.  Separately, the Treasury Department has picked up more than $145 billion since the government put Fannie Mae and Freddie Mac in receivership in September. The Treasury data is through the end of May.

The Federal Reserve has pledged to buy up to $1.25 trillion of mortgage bonds guaranteed by Fannie and Freddie and $200 billion of agency debt by year end.

Gloomy employment milestones

There is normally something for both optimists and pessimists in the monthly employment report.

When the payroll figures are disappointing, the unemployment rate is frequently better than expected. This month is no exception. While payrolls plunged by nearly half a million, unemployment barely budged.

It’s a start, but AIG still needs lots of handholding

As part of the government plans to overhaul AIG’s massive bailout package (announced in March), the company said Thursday it would give the government stakes in two of its most cherished assets – American Life Insurance Company, Alico, and American International Assuarance, AIA, – in return for paying down a good portion of its loan with the central bank.

In its press release, the company was sure to say that this is “a major step toward repaying taxpayers,” which is always important to flag to help offset the anger surrounding the bonus snafu and Ben Bernanke’s public blasting of the company.  And reducing outstanding debt on the credit facility to $15 billion from $40 billion gives some comfort that little by little, the government’s AIG entanglement is getting a little less, well, twisted.

Live Fed blog

The Federal Reserve is entering a period of transition as a two-day meeting concludes today. Many questions remain on whether a recovery can take hold and on whether the central bank should start withdrawing from the extraordinary measures it took during the financial crisis. This may also be the beginning of the end of the Bernanke era at the Fed: President Obama must decide by next year whether to renominate the Fed chairman, whose term expires at the end of January.

Today’s statement from the Fed’s policy group, the Federal Open Market Commitee, may show changes in the Fed’s view of the economy and may also give hints of an exit strategy. Starting at 2 p.m. on this blog, Reuters columnists will discuss the Fed, the economy and the Fed statement, due out at 2:15 p.m. Please join us.

All eyes on Fed, though few expect big policy changes

Markets are fixated on the outcome of the Fed’s two-day meeting, with the statement due out around 2:15pm. Few expect big changes on its policy, however, so tweaks on language about the economic outlook and a possible extension of its purchase of $300 billion of Treasuries, which expires in September, would get tongues-wagging if not markets moving.

Andrew Brenner of MF Global Inc. notes that the Dow Jones Industrial Average typically moves 2.5% within 24 hours of a Fed announcement.

Next up for Fed, tackling the $4.5 trillion giant

The Financial Times reports that the Federal Reserve is taking on another mammoth undertaking – reform of the $4.5 trillion repurchase agreement market, which acts as the very plumbing of the U.S. financial system.  And the central bank should. This plumbing is looking creeky after the Lehman Brothers failure exposed some big cracks that had threatened to destabilize global markets.

The New York Fed has already championed an effort to establish best practices to prevent failed repo transactions – ie when a borrower fails to deliver a security in a timely matter – by imposing penalty rates. Failed repos soared in October to record levels amid a spike in demand for super safe securities like U.S. Treasurys and a reluctance to lend agency mortgage-backed securities and agencies.

It’s time to audit the Fed

The centerpiece of the Obama administration’s long awaited financial regulatory reform package is to give more power to the Federal Reserve to oversee any financial institution deemed too big to fail.

Team Obama seems to have decided that the Fed should emerge as the premier financial regulator, even though it has just as much egg on its face as the much-maligned Securities and Exchange Commission for failing to blow the whistle on Wall Street’s excesses.

The BofA sideshow

Pay no attention to the folks in front of the TV cameras. That’s the way you should view today’s Congressional hearing into whether federal regulators pressured Bank of America CEO Ken Lewis to follow through on the bank’s acquisition of Merrill Lynch.

Frankly, it really doesn’t matter whether Fed Reserve Chairman Ben Bernanke and former Treasury Secretary Hank Paulson threatened Lewis to carry through on his commitment to buy Merrill on the eve of Lehman Brothers bankruptcy. Based on the pieces of leaked emails to a select group of reporters, there is evidence that Bernanke and Paulson did do a lot of arm-twisting.