Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.


The Twist in essence reduces to a bank subsidy. How?

1) Banks are taken out of levered long duration Treasury paper at cycle lows
2) Banks increase their net holdings in the short end on a levered, positive carry basis (by repo-ing purchases of short paper with the Fed)

Is the Fed’s solvency at any lesser or greater risk? NO.

1) Despite the duration extension of the Fed’s balance sheet, there is no incremental risk
2) The Fed must now, however, be THE BID for the long end
3) Real risk to bondholders, regardless of duration, is dollar devaluation (real risk), not rising interest rates (nominal risk)

So, in the near term, banks win, Fed breaks even, dollar and unlevered bondholders risk of devaluation is escalated.

Where from here?

1) Incremental QE is no more or no less needed as a result of The Twist
2) Incremental QE is ABSOLUTELY still necessary to shrink the unreserved debt to base money stock ratio
3) Future QE may very likely require the Fed to bid out through the long end to defend yields across its holdings maturity spectrum

In sum, this is a move to help recapitalize banks under the guise of supporting the housing market and any wealth effect that might flow from that outcome. This is all about the banks income statements. Future and imminent QE will be about their balance sheets (dollar devaluation which then boosts nominal asset/collateral pricing).


Lee Quaintance & Paul Brodsky
QB Asset Management Company, LLC

Category: Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Thoughts on the Fed’s Twist”

  1. gordo365 says:

    Also increases debt service. Selling low yield to buy high yield = pay more interest monthly. The US can then borrow more money to pay that higher interest.

    Lather, rinse, repeat.

  2. dead hobo says:

    Thanks for cheering me up. Agree strongly they will have to go long in a big way on long term debt to fix their balance sheet from this kludge. Bank recapitalization via stock pump and dumps and other uses for low rates and lots of free money have always been a part of my belief structure for QEx. In the recent(ish) past, they always delivered new ink when things looked bleakest. This will probably happen again. I will be waiting for a big dip in a couple of months then, cha ching. The economy won’t benefit, but I will.

  3. MikeDonnelly says:

    Operation Twist a pathetic attempt to do something. Fed gets credit not bowing to political pressure, but Twist does absolutely nothing to get economy moving.

  4. streeteye says:

    Yikes. If I had a printing press that made dollars, I wouldn’t lose much sleep about solvency. It would have no meaning.

    The Fed’s balance sheet is best viewed as exogenous to the financial system. It might as well be God buying bonds and making it rain cash. The only difference balance sheet management makes is if they do a good job Wall Street rips them off less and more Fed profits flow to the Treasury.

    The Twist should be renamed the Stomp, given the flatness of the yield curve, or the Worm or the Snake maybe. Saying the Fed is just extending duration is a bit of misdirection. They’re already pegging the short end at zero, committed to buy as much as it takes to keep it there. Saying you’re going to sell short paper you’re committed to buying back, and swap it for long paper just means you’re now going to buy long paper too.

    It’s basically just taking the easing to the next level up the yield curve and couching it in the mandatory obfuscatory fig leaf.

    The effect of Twist/Stomp/QE3 is a balance sheet bailout to the banks, taking risk assets off their balance sheets and making the ones left more valuable. Resulting flattening is a hit to banks’ future income, since they borrow short and lend long. Basically brings bank income forward and borrows it from the future. Going forward, banks should have better reason to lend, since they have better balance sheets and somehow need to reach for yield.

    Don’t know if making banks a bit less insolvent will do much near-term, but eventually, Ben will graduate to helicopters, or people will start buying and investing before it comes to that, if for no other reason than negative real rates.

  5. Jojo says:

    The FED is just twisting in the wind to steal from that old Nixon era quote.

  6. Bill in SF says:

    Bennie and the Fed, to the GOP; “Twist and Shout.”

    or better yet; “You’re Breakin’ My Heart.”

  7. Frilton Miedman says:

    MikeDonnelly Says:
    September 21st, 2011 at 4:38 pm

    “Operation Twist a pathetic attempt to do something. Fed gets credit not bowing to political pressure, but Twist does absolutely nothing to get economy moving.”

    To add to the irony, the Fed is only acting in the face of a lack of political fiscal action….the GOP even tried to get the Fed to do nothing in a letter they sent yesterday to the Fed, it’s all about the “one term” agenda, screw us, screw the economy, just do everything possible to make Obama a one term president.

    It really is completely ridiculous.

  8. GregP says:

    I don’t agree with QB about the bank subsidy. That’s just the first order effect, and not the main effect.
    Most banks are asset sensitive.
    Meaning, a curve flattening (mortgage rates down) will decrease their interest rate spreads.
    Ergo, earnings down.

  9. Citizen38 says:

    Too me, at the end of the day its “much ado about nothing. Or bullshit now, bullshit aleways.

  10. sangfroid says:

    This move will diminish the delta between long rates and short rates which the banks have been using for easy earnings, so maybe this will spur them to do something more risky with their money (M&A, high-yield)?

    But wouldn’t this also make lenders esp. long term lenders even more sensitive to inflation such that any whiff of increasing inflation will make them demand higher interest because Op. Twist has distorted and obfusicate the true picture?

  11. carleric says:

    Maybe I am just a bit slow but if a steepening yield curve is good for the economy, what does a flattening yield curve do? Just saying,……

  12. louis says:


  13. alexanderdelarge says:

    I’m not in a position to question the review from QB Partners, but if this is a marginal win / betterment for the banks, why were they down so much more than the market today ?
    Even setting aside BAC & WFC, the rest got knocked hard….
    Just wondering. Thanks.

    Ticker XLF % Weighting Day Change %
    WFC 8.75 -3.89
    JPM 8.44 -5.92
    BRK.B 8.24 -3.59
    C 5.28 -5.24
    BAC 4.7 -7.54
    GS 3.48 -4.63
    AXP 3.44 -2.11
    USB 3.11 -5.11
    SPG 2.36 -5.92
    MET 2.21 -6.57
    PNC 1.77 -4.98
    BK 1.67 -5.39
    PRU 1.6 -6.64
    MS 1.51 -8.6

  14. DeDude says:

    It’s actually a gift to “we the people” and our government. The increasingly large national debt will be easier to service when rates go down. It may even be possible to put a lot more of the debt onto 30 year bonds and ensure that there will be very little if any real interest to be paid for all that lending. Does anybody really think that inflation over the next 30 years will be below 3% on average – if not then the money borrowed now will be interest free.

  15. ToNYC says:

    When the Bernank & members get through “Twisting” all the drivers within his grasp; we will be completely Screwed…as if ripping Grandma’s savings income’s lungs out with his ZIRP attack wasn’t enough already!

  16. machinehead says:

    ‘Is the Fed’s solvency at any lesser or greater risk? NO.’

    BULLSHIT. Based on what? Show your work.

  17. MayorQuimby says:

    This fucks future banking profits royally. I don’t what this guy is smoking but it must be the good stuff. Enjoy the suspension of usury hahaha.

  18. stonedwino says:

    When it comes to lending banks are on their way to becoming irrelevant for most people…1/3 of Americans have totally killed their credit and cannot borrow, another 1/3 even with good credit cannot qualify to borrow at today’s bank standards and the lats 1/3 is either still de-leveraging or just plain old don’t want to borrow.

    The Fed can recapitalize the bank balance sheets all they want…I am back to growing my business organically, with no bank help at all. Screw the banks…

  19. DrungoHazewood says:


    It really is completely ridiculous.

    Its just now getting ridiculous? Where in the name of Zeus’s butthole have you been for the last few decades?

  20. leeward says:

    “2) The Fed must now, however, be THE BID for the long end”

    To what extent is this the case? Can anyone elaborate?

  21. gman says:

    Qbamco..bullish most commodities in the spring. As they sell off, forget most commodities and focus on gold claim it is going to $20,000/oz.
    Claim operation twist will help banks. Operation twist is trying to flatten the yield curve. Banks stocks have traded in line w/ yield curve steepness for months i.e. curve flatten and banks getting crushed into there “bailout”!

    I find Qbamco stuff interesting..but they can out there!

  22. takloo says:

    Don’t understand how this is a bank subsidy? Can anyone explain how or post a link to how this would work?


  23. [...] Thoughts on the Fed’s Twist | The Big Picture (tags: federal-reserve monetary-policy banks subsidies) [...]

  24. urbandigs says:

    I dont get it? Were the banks so heavily levered with 30yr treasuries? And how does a flatter yield curve help the banks? Its an interesting view, but so different than the fed engineered bank recap environment that was manipulated for the last 2+ years

  25. [...] the FOMC meeting yesterday, no special measures were taken. There was no QE3 to announce. The “twist” (selling shorter duration Treasuries for longer duration Treasuries; buying mortgages) is the [...]

  26. [...] are some additional perspectives. First, Paul Brodsky & Lee Quaintance from TBP: In sum, this is a move to help recapitalize banks under the guise of supporting the housing market [...]