paper about MBS

The rise in prices can relax investors’ financing

Info iconThis preview shows pages 79–82. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: The rise in prices can relax investors’ financing constraints, allowing them to hold with ease other assets as well -- e.g., corporate bonds -- and in turn raise their prices too. 42 In August 2010, the Fed announced its intention to avoid any “passive” unwinding of this program by purchasing Treasury debt with the monies that become available as its MBS portfolio matures due to normal repayments and prepayments. Chairman Bernanke also offered further quantitative easing as 78 its preferred intervention tool in case the Federal Reserve needed to stimulate the United States economy further (given that nominal interest rates are at the “zero bound”). Figure 6-1: Securities Holdings of the Federal Reserve Source: Federal Reserve Statistical Release (Table 3: Factors supplying reserve balances: detail for securities held outright); all numbers in millions of dollars The purchases have more than doubled the Federal Reserve’s balance sheet from August 2007 to August 2010. They are an order of magnitude larger than the Fed’s involvement in the rescues of Bear Stearns, AIG, and Citigroup. To provide a perspective: The Fed owns in its “Maiden Lane” portfolios $80 billion in assets ($30 billion from Bear Stearns and $50 billion from AIG), and it has guaranteed $306 billion of Citigroup’s assets and $118 billion of Bank of America’s. Taking account of the various first-loss pieces that were retained by the rescued institutions (or by JPMorgan Chase in the case of Bear Stearns) and some additional risk- sharing in the cases of Citigroup and Bank of America, the Fed’s net maximum exposure is 79 around $420 billion, of which only $74 billion is on balance-sheet -- that is, purchased in exchange for reserves. While the public ire against the Fed is driven by its actions taken with respect to these private firms, the Fed’s involvement here has been relatively small compared to the role that its balance sheet is playing for the GSEs. In addition to direct purchases of Agencies and GSE-backed MBS, the Fed supported mortgage markets by setting up various emergency liquidity facilities. The Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility, set up in March 2008, lent money to primary dealers, accepting Agencies and MBS as collateral. In September 2008, the Fed added the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility, which advanced short-term funding to banks -- again collateralized mostly by mortgage assets. At their peak, these three facilities provided $350 billion in advances. They were wound down in January 2009, whereas the direct purchases remain on the Fed balance sheet. 6.2. Why involve the Fed?...
View Full Document

{[ snackBarMessage ]}

Page79 / 151

The rise in prices can relax investors’ financing...

This preview shows document pages 79 - 82. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online