Has Back Door Debt Monetization Already Begun?
by John Galt
The answer to the title is “yes” but it is not back door and should have been obvious to any observer of the markets as early as last October. What if the United States Treasury under Hank Paulson set up a policy for the banks that received government financial assistance to ask them to use their offshore affiliates to purchase U.S. Treasury instruments to keep 10 year yields and thus mortgage rates artificially low? As implausible as this seems, back on March 18, 2005 Rob Kirby penned a fantastic editorial at Financial Sense Online titled “Pirates of the Caribbean” which hinted at this type of skulduggery. A brief revisit of the activities of the “Caribbean Banking Centers” and their role from the TIC report by the Treasury some four years later might be worth a sneak peak.
Of course little things like Paulson’s Reighstag Fire on September 18th, the collapse of AIG, Merrill, WaMu and Wachovia sort of distracted us from seeing this, but the brilliance of the Federal Reserve knows no bounds and ethics is just a word to a bankster.
The Capital Purchase Program (CPP) which was authorized as part of the Troubled Asset Relief Program was designed to allow and encourage healthy financial institutions to absorb or acquire the weak sisters who are creating some of the distortions we are witnessing in our capital markets. While all of this was being passed at a lightening fast pace, the obvious should have been seen but I missed it and I wonder how many others did also. When the government essentially nationalized AIG by acquiring a 75% controlling stake they also acquired this:
That’s right. They got the US Treasury portfolio for AIG. Which means they also obtained other assets they could sell off and use AIG to buy more Treasuries essentially monetizing those debt purchases via their proxy corporation. But this is not the only company possibly being used for this purpose as it would appear the TARP was engaged for the same cause.
Primary Headache
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York
BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
From: Federal Reserve Bank of New York 2/23/09
Notice anything about this list? It is a lot smaller than it was on January 1, 2007 when Bear Stearns, Wachovia, etc. were primary dealers of U.S. Treasury instruments. The smaller the number of dealers, the less ability to obtain distribution and sales outlets for their paper, or so one would think. Of course if the U.S. had a controlling interest in several major financial institutions like oh, say AIG, Citigroup, etc. there is an automatic ready made market for government debt and obviously willing buyers. Of course if you have an extensive network of Caribbean hedge funds operating out of the Bahamas, Caymans, Barbados, Aruba, etc. then your ability to distribute the Treasuries expands exponentially as does the risk to the parent company. Unless a full public audit with reporting back to the American people is undertaken, we will probably never know the extent of such activities nor just which companies are partnered up with their Wall Street brethren to move the paper offshore to these islands.
......................Dec.....Nov.....Oct.....Sep....Aug....Jul......Jun.....May.....Apr.....Mar......Feb......Jan.....Dec Country 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2007
Carib Bnkng Ctrs 4/ 213.3 220.8 219.3 185.1 148.7 133.4 122.2 104.5 117.4 108.7 103.9 109.2 117.4
If you look at the TIC report from December of 2008 from the US Treasury that I have posted above for the Caribbean Banking Centers you will note two months where holdings were extraordinary low, February and May of 2008, then right as the world began to implode a sudden surge from August until December. The funny thing is that as soon as money started flowing to the banks in late September and October, the pace of purchases by the Caribbean Banking Centers (CBC) accelerated dramatically as demonstrated in the graph below:
Funny thing is that Mr. Kirby in his original article was probably on to something but when you look at this chart you have to wonder as since he posted that article the holdings of the apparent hedge funds in the Caribbean, most of which are subsidiaries of companies that did in fact receive TARP and other government handouts, have more than quadrupled their total holdings but why and under who’s direction? It would make sense to launder the money via the Caribbean to insure that the Fed can still proclaim to world markets and uphold confidence in our markets that direct monetization of our debt has not begun. Using Treasury alternatives via Primary Dealers and their Caribbean subsidiaries along with other handout recipients does provide an almost bulletproof deflection of what appears to be the obvious. It is also a logical method to insure that mortgage rates remain artificially low and calm the markets down to prevent drastic resets of Option ARM mortgages and other adjustable rate instruments which are not just impacting the residential markets but the commercial real estate arena now also.
The other important note is that the largest TARP recipients, Citigroup, Bank of America (plus Merill Lynch now), Goldman Sachs, Wells Fargo via Wachovia acquisition, Goldman Sachs and Morgan Stanley all have one thing in common; all are or were (in the case of Merill and Wachovia) Primary Dealers of Treasury instruments. Perhaps the TARP never really had anything at all to do with stabilizing the banking system and acquiring more capital so the weaker banks could be purchased by their bigger brothers.
Just maybe this was to protect the long end of the curve just in case the foreigners elected to dump their 10’s and 30’s and buy the short term Treasuries only. We may never know until a historian digs through the archives and reveals just what the meetings with the Federal Reserve and Treasury were
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