FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields (key, key info)

[stockholmer]

Run time: 12:51 https://www.youtube.com/watch?v=ZnZnkaq8Nf8   Posted on YouTube: April 16, 2011 By YouTube Member: cedec0 Views on YouTube: 5520   Posted on DU: April 18, 2011 By DU Member: stockholmer Views on DU: 1781

 
http://www.marketskeptics.com/2011/04/federal-reserve-is-selling-default-insurance-put-options-on-treasury-bonds-to-drive-down-yields.html

all the supporting docs are at this link
------------------------------------------------------------------------------------------------------------------------------------



Doubling Down To (DXY) Zero: Has The Fed, In Its Stealthy Synthetic Bet To Keep Long-Term Yields Low, Become The Next AIG?

http://www.zerohedge.com/article/did-fed-its-stealthy-synthetic-bet-keep-yields-low-become-next-aig



"...................The missing sequential link in (lack of) logic comes from a report by Market Skeptics' Eric deCarbonnel who has combed through the June 24-25, 2003 FOMC minutes to find what could well explain the ongoing paradoxical flatlining in long-term rates even despite the threat of an end in QE2, which implies the removal of a buyer of some 83.4% of net Treasury securities, as well as the ongoing inflation threat so well described by James Grant earlier. What deCarbonnel has found is that as per then Fed secretary and economist, Vince Reinhart, and SOMA manager Dino Kos, the Fed has explicit authority and has in the past, sold puts on securities in order to bring various parts of the curve in line with "market expectations." The fragment from Dino Kos' transcript which implies that the Fed is likely actively pursuing a derivative feedback loop to keep long-term yields low (and thus prices high), is the following. Below, Kos discussed the "alternative approaches that would involve changes to how the Desk operates" in order to achieve the "conduct of monetary policy at very low short-term interest rates."

To wit:

The alternative approaches that would involve changes to how the Desk operates are summarized in exhibit 4. The alternatives that could be adopted while changing only the composition of the balance sheet are listed in the top panel. These include (1) extending the average maturity of the outright holdings in the SOMA, (2) setting explicit ceilings on longer-term Treasury yields, and (3) using derivative instruments.

As deCarbonnel points out, 1 and 2 have already been either explicitly or implicitly utilized by the Fed in order to prevent the yield curve from exploding, due to the fundamental dichotomy of Fed operations: the Fed can keep short term rates at zero easily, it is the long-term ones that are a key threat to tipping the Fed's unhedged book over.

Which leaves only option 3: "using derivative instruments" to keep LT rates low.

And this is where it gets both interesting... and very disturbing.

Going back to Dino Kos' speech:

The Committee could sanction the use of various derivative instruments on conventional Desk operations as a way to influence longer-term yields, which is outlined in exhibit 8. Options of some form are a possibility, as are forward operations. For example, we could sell a sequence of options on term RPs, covering interlocking time segments that collectively extend as far into the future as desired. In this way, longer-term yields could be influenced and a visible signal of the Fed’s desired path of interest rates could be demonstrated. Forward operations in term RPs could be structured in a similar fashion.

And the stunner:

Alternatively, we could sell put options on longer-term Treasury securities at strike prices associated with desired longer-term yields. Of course, the operating objectives set for the sale of derivative instruments would determine their proper structure and should be carefully formulated first..............................................



------------------------------------------------------------------------------------------------------------------

this is huge, it is illegal, it affects the world ,and the US Federal Reserve consistently lies about this

[Habitual Candor]

1. Selling Puts

Derivatives confuse a lot of people including the narrator. When the Fed sells Puts, it then becomes obligated to purchase the underlying security (treasuries) if the price is below the strike price at expiration. Since the Fed is the one buying treasuries as part of QE1 / QE2, it is no different than purchasing the treasuries out right at the strike price. In this scenario, the Fed collects a premium on the Put for a product (treasuries) that it is willing to purchase at that price already.

This is not the same as when MBS were being offset by a CDO sold in an unregulated market by AIG. Put options have a 1 for 1 buyer to seller whereas the MBS to CDO has 1 to n relationship. The Fed has no incentive to manipulate higher interest rates as it would become obligated to purchase those treasuries for more than its worth.

The video cites where the Fed discusses selling Puts, but then shows the definition of purchasing Puts. Selling naked Puts is as dangerous as selling uncovered Calls, and only an entity like the Fed with an unlimited balance sheet (print money) can get away with it. There are position limits for 99% investors for these Put options, but the CBOE web site says certain parties would be exempt and I assume the Fed would be one.

[2banon]

3. I appreciate you taking the time to explain this..

unfortunately, I personally have absolutely zip knowledge around this stuff. I tried to follow along with the narrator, as soon I thought I was getting the logic of certain procedures/processes, I was immediately disabused of such notions.

I wonder if the Justice Department is as plagued with the level of ignorance as I possess in this field, and therefore is unable to pursue the corruption. Or if they're just corrupt/intimidated by Wall Street as Congress Critters seem to be...

[stockholmer]

5. the Fed cannot buy US treasuries outright(this is illegal), thus the 'primary dealer' strawman fraud

You stated "The Fed has no incentive to manipulate higher interest rates as it would become obligated to purchase those treasuries for more than its worth."

Of course there is no incentive, in fact, this is exactly the opposite of their intentions (they are artificially keeping long term rates LOW).

They will indeed become exposed to collapse when (as you stated)"the Fed sells Puts, it then becomes obligated to purchase the underlying security (treasuries) if the price is below the strike price at expiration".

As pure brute bond market forces drive up the US treasury yield spreads (and thus lower the price), this ponzi scheme will make the AIG debacle look like a walk in the park.

These forces are already in play at multi-variate levels, here is a brand new example:


http://thescotsman.scotsman.com/business/SP39s-US-debt-downgrade-hits.6754108.jp

S&P's US debt downgrade hits

LONDON FTSE 100 CLOSE 5,870.08 -125.93

JUST two stocks were left on the FTSE 100 risers' board yesterday after credit ratings agency Standard & Poor's slapped a surprise "negative outlook" warning on the United States.

Outsourcing specialist Serco and advertising firm WPP were two companies in the black as a sea of red washed 2.1 per cent or 125.93 points off the Footsie, which closed at 5,870.08.

David Jones, chief market strategist at IG Index, said: "Expectations of a quiet week ahead were dashed in the afternoon as S&P said there was a 'material risk' that the US would not deal with its deficit and put a negative outlook on its credit rating.

"Whilst this probably isn't news to anybody, it was maybe something that the markets hoped nobody would actually say out loud................."



----------------------------------------------------------------------------------------

the above mentioned Serco is a wicked firm, btw

http://www.youtube.com/watch?v=vyFkXmx8gxc

Serco is a British-based business services company listed on the London Stock Exchange & FTSE Index. Styled "the biggest company you've never heard of," it performs a range of services in various countries.

It operates light rail systems in England, Australia, Holland, and elsewhere. It operates traffic camera systems in the UK. It runs prisons & immigration detention centers. It runs hospitals. It has defense contracts world-wide. It runs air traffic control in Dubai. It runs hospitals. It runs drivers' licensing centers in Canada. It runs leisure centers, scientific labs, border security, & welfare-to-work programs. It also runs schools, contracts with governments & other providers to inspect schools, and supplies student data systems.


Serco began as an operational division of the Radio Corporation of America (RCA) -- which was itself a creation of General Electric. RCA Service Division was bought by its management sometime after 1969 & renamed Serco.

Serco North America (Serco, Inc) is based in Reston, VA & has 11,500 US employees. It provides professional, technology, and management services to the federal government, especially the Dept of Defense, in keeping with its heritage -- RCA & GE were also big defense contractors.

[truth2power]

2. And we can expect AG Holder to prosecute, when, exactly??...

Oh, I forgot. He has to deal with really important things, like internet poker playing and running down medical marijuana facilities.

I hate these people more every day.

[stockholmer]

6. The US Fed, the BIS, the IMF, the World Bank, ECB, BOE, etc are the most untouchable institutions on

the planet. They, along with the private banks and huge hedge funds own most of the nations (and thus citizens) in the world through sovereign and private debts owed and/or controlled to/by them. Once you have control of a nation's monetary system, you have control of the nation, and thus it's miltary.

Collapse or civil wars are the only ways this control will come to an end, and they control most of the tangible wealth that can be tapped to defend their hegemony.

[Habitual Candor]

8. All for One

I agree with your points, and recommend the documentary "Inside Job" for those that have not seen it. There are no innocent parties involved in the financial mess, and hard to find a single one that has not been rewarded financially.

[Roy Rolling]

4. Incentive

This give the Fed the incentive to keep rates low to help the fact they are printing money to fund the deficit spending. So the Fed is attempting to manipulate the market despite inflationary pressures from other commodities like grains and oil.

As the old line used to be "it's not nice to fool mother nature."

It will come back to bit them on the ass.

[James48]

7. Don't worry. Be happy

and start raising chickens.

People are going to have to eat, you know.

[HolyCity2012]

9. to "put" it simply

I do not understand.

[stockholmer]

10. th Fed is selling naked puts(options that they cant cover if interest rates rise on bonds) on their

own debt, and then lying about this fact. They do this to keep long term bond rates low.

"This is fraud. The Fed is effectively issuing credit protection against itself. That’s like me taking out a $1 million loan and then issuing another $1 million in credit protection against my own default. This is absurd. If I default on my debt, then this means that I won’t be able to make good on the insurance contract either.

snip

At this point, the Fed would be left with two options. 1) it could start to buy up all the options it has outstanding, which would probably cause hyperinflation and thus a break down in the economy or 2) it could default, in which case the entire financial system would blow up. In either case, the outcome would be a total catastrophe the likes of which none of us can comprehend." http://coveringdelta.wordpress.com/2011/04/18/the-great-gamble-is-the-federal-reserve-preparing-us-for-a-derivatives-nuclear-holocaust/



The Fed simply will not be able to unwind these trillions and trillions in leveraged derivative debt when the US treasury bond rates rise. S&P (Standard & Poors, the rating agency) just downgraded (for the first time in 70+ years) US debt to a 'negative' outlook. If the QE (quantitative easing aka pumping money out of thin air into the markets to prop up Wall Street) and US Federal Government huge deficits don't end soon (and they will not) S&P says that they will drop the USA's AAA rating. This will violently force US treasury rates upward, thus creating the put option nightmare scenario.

Look at Greece, Iceland, Portugal, Spain, Ireland, etc, for what the effects of rising bond yield spreads do. They make it so so expensive for a nation to borrow money. Because the Fed is not only going to have to pay trillions in just increasing debt service rates, but ALSO have to cover these puts, a financial tsunami will ensue. A self-reinforcing feedback loop will form, and the dollar, along with the entire US monetary system will be so battered into partial or near-total collapse.

Look at the Fed's 'admitted' balance sheet:

The Fed began to move out of its financing in short-term debt around the beginning of 2008. It shifted to long term debt at the start of 2009. This long term debt is what the naked put options are keeping artificially low.





hope this helps

:hi:

[HolyCity2012]

11. can I say

this thread is awash with knowledge

[Poboy]

12. Thanks for posting.