Has The Fed Lost Its Head? The Federal Reserve Acts To Pass Off Wall Street Losses To The U.S. Taxpayer
The most recent action by the Federal Reserve is little more than a veiled attempt to foist the losses confronting Wall Street banks off on the American public. Yesterday, the Fed pledged to lend $200 billion in treasury securities to Wall Street banks and accept AAA-rated private label mortgage backed securities as collateral. Sounds reasonable at first blush but there’s a hidden kicker that is likely to cost taxpayers billions.
The real problem is that most AAA-rated private label mortgage backed securities are simply not AAA. To the contrary, many mortgage backed securities currently rated AAA do not meet the criteria of the ratings agencies for AAA securities and should be downgraded significantly. Thus, such securities are significantly overvalued and pose a much greater risk to taxpayers than the Fed would have the public believe.
This situation was well documented in a March 11, 2008 article written by Mark Pittman of Bloomberg.com entitled “Moody’s, S&P Defer Cuts on AAA Subprime, Hiding Loss.” According to Mr. Pittman, none of the 80 AAA securities in the ABX indexes that track subprime securities meet S&P‘s requirements for AAA securities. Mr. Pittman provides several examples of AAA-rated issues which certainly do not satisfy AAA requirements. Mr. Pittman’s investigation concludes that proper evaluation of subprime securities would “strip at least $120 billion in bonds of their AAA status.“ In fact, many experts believe that significant downgrades of many so-called AAA mortgage backed securities are imminent.
Thus the Fed’s recent action is fraught with risk to the American citizen. In essence, the Fed is financing Wall Street banks by providing them with use of highly liquid, highly valuable treasury securities while accepting poor quality, illiquid, low value securities as collateral. This is a recipe for disaster.
