5 ms·

I don't understand this point of view, sorry Warren. The fed is generating revenue for the government in a certain sense, yes, but saying it is a successful hed

by gfodor 13y ago

I don't understand this point of view, sorry Warren. The fed is generating revenue for the government in a certain sense, yes, but saying it is a successful hedge fund is like me saying that if I hold a bunch of bonds in my portfolio throwing off some interest that is a successful hedge fund. The entire question is what are they going to be able to sell those bonds back to the market for. If they end up having to sell them at a massive loss, which is likely, then all that revenue they've been throwing off in interest better offset those losses. I might have this wrong but it seems to be very odd to characterize the fed's QE programs as a success when it is literally an experiment in progress.

hkmurakami 13y ago
The Fed bought toxic assets at way below par value. These bonds are giving off interest, but their underlying value is going up as well. They also bought equity in companies like GM and AIG (iirc) for fractions of what they are worth today. I think Buffet used the term "hedge fund" for dramatic effect rather than strict accuracy (since most of the public sees hedge funds as the epitomy of the investing money making dogma), but you can definitely draw parallels between the Fed's investment decisions and those of a long-only hedge fund (rather than the algo or long-short variety)
- dxhdr 13y ago
  "their underlying value is going up as well" How can you tell? These are illiquid bonds that have no market. The Fed could say they're worth anything and there's no way to prove or disprove it. The only way to know is to offer them for sale and obviously that's the opposite to what the Fed is doing.
  - deleted 13y ago
    [deleted]
  - jessedhillon 13y ago
    In the case where those toxic assets are mortgage-backed securities, the underlying is a house -- so we can tell by observing the housing market.
    - jonnathanson 13y ago
      Many of the mortgage-backed securities were so byzantine, so many orders of derivatives removed from the underlying houses, as to be nearly impossible to tie directly to housing. But that's a side point. The real point is that a lot of the mortgages originally packaged into those securities no longer exist, and hell, a fair number of those houses probably no longer exist. Yes, there's a huge supply of housing once again, and real estate is doing well across the country. But mortgages represent specific financial obligations, made in specific slices of time, between specific parties. The mortgages themselves are not fungible, and never could have been. They were bundled into individualized tranches, whose bases have probably evaporated by now. (We must keep in mind that the troublesome MBSes circa 2007-8 comprised subprime mortgages, and most of those subprimes went belly up).
cremnob 13y ago
The Fed can hold them to term. They are under no pressure to sell.
- dxhdr 13y ago
  The Fed has no choice but to hold them to term. The Fed's whole game is to continue keeping rates at zero by buying everything under the sun to the tune of $85 billion! per month. Selling, or even slowing the rate of purchasing, would do the opposite and raise rates.
  - cremnob 13y ago
    They have choices. They have complete flexibility. They are under no pressure to do anything that isn't explicitly their goals. They want to control inflation and increase employment. If the economy starts to heat up and inflation starts to rise above their 2% target they will then have the option of selling bonds or raising the federal funds rate, the latter of which is more likely. I'm not really sure what you're trying to get at with the last comment. He doesn't know the exact number off the top of his head. The exact amount remitted last year to Treasury is $88.4 billion.
    - dxhdr 13y ago
      They are under extreme pressure to continue purchasing treasury bills from the government and mortgage backed securities and derivatives from banks. Even hinting that they'll start tapering these purchases has caused the equity markets to drop and rates to rise. Actually tapering will in short order throw the country into a recession. I'd be hard pressed to call that "complete flexibility."
  - preempalver 13y ago
    Agree, selling will be problematic. The fed's probably going to use reverse-repo to exit. See http://www.voxeu.org/article/exit-path-implications-collateral-chains http://www.voxeu.org/article/exit-path-implications-collater... and http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-the-zlbrepocollateral-scarcity-solution-weve-been-waiting-for/ http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-t...

by gfodor 13y ago

hkmurakami 13y ago

The Fed bought toxic assets at way below par value. These bonds are giving off interest, but their underlying value is going up as well. They also bought equity in companies like GM and AIG (iirc) for fractions of what they are worth today. I think Buffet used the term "hedge fund" for dramatic effect rather than strict accuracy (since most of the public sees hedge funds as the epitomy of the investing money making dogma), but you can definitely draw parallels between the Fed's investment decisions and those of a long-only hedge fund (rather than the algo or long-short variety)

dxhdr 13y ago
"their underlying value is going up as well" How can you tell? These are illiquid bonds that have no market. The Fed could say they're worth anything and there's no way to prove or disprove it. The only way to know is to offer them for sale and obviously that's the opposite to what the Fed is doing.
- deleted 13y ago
  [deleted]
- jessedhillon 13y ago
  In the case where those toxic assets are mortgage-backed securities, the underlying is a house -- so we can tell by observing the housing market.
  - jonnathanson 13y ago
    Many of the mortgage-backed securities were so byzantine, so many orders of derivatives removed from the underlying houses, as to be nearly impossible to tie directly to housing. But that's a side point. The real point is that a lot of the mortgages originally packaged into those securities no longer exist, and hell, a fair number of those houses probably no longer exist. Yes, there's a huge supply of housing once again, and real estate is doing well across the country. But mortgages represent specific financial obligations, made in specific slices of time, between specific parties. The mortgages themselves are not fungible, and never could have been. They were bundled into individualized tranches, whose bases have probably evaporated by now. (We must keep in mind that the troublesome MBSes circa 2007-8 comprised subprime mortgages, and most of those subprimes went belly up).

cremnob 13y ago

The Fed can hold them to term. They are under no pressure to sell.

dxhdr 13y ago
The Fed has no choice but to hold them to term. The Fed's whole game is to continue keeping rates at zero by buying everything under the sun to the tune of $85 billion! per month. Selling, or even slowing the rate of purchasing, would do the opposite and raise rates.
- cremnob 13y ago
  They have choices. They have complete flexibility. They are under no pressure to do anything that isn't explicitly their goals. They want to control inflation and increase employment. If the economy starts to heat up and inflation starts to rise above their 2% target they will then have the option of selling bonds or raising the federal funds rate, the latter of which is more likely. I'm not really sure what you're trying to get at with the last comment. He doesn't know the exact number off the top of his head. The exact amount remitted last year to Treasury is $88.4 billion.
  - dxhdr 13y ago
    They are under extreme pressure to continue purchasing treasury bills from the government and mortgage backed securities and derivatives from banks. Even hinting that they'll start tapering these purchases has caused the equity markets to drop and rates to rise. Actually tapering will in short order throw the country into a recession. I'd be hard pressed to call that "complete flexibility."
- preempalver 13y ago
  Agree, selling will be problematic. The fed's probably going to use reverse-repo to exit. See http://www.voxeu.org/article/exit-path-implications-collateral-chains http://www.voxeu.org/article/exit-path-implications-collater... and http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-the-zlbrepocollateral-scarcity-solution-weve-been-waiting-for/ http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-t...