US Treasury Dept Usurping Fed, Fueling Markets

Whenever we discuss some of the darker theories of a conspiracy or market manipulation, I seek to discover a market mechanism that can explain the actions. For example, I was quite doubtful of accusations of energy price manipulation — until Bill King identified the changes in the Goldman Sachs Commodities Index (GSCI). That change led to $6 billion of gasoline futures hitting markets in September and October — and the subsequent 30% drop in gas prices over a few weeks.

Might there be any similar mechanism around impacting equities?

One possible answer comes from John Crudele of the NY Post. Crudele has long been a skeptic of government data; its no surprise he looks askance at some of the actions of ther Fed and Treasury.

And indeed, it is the Treasury Department that comes under his watchful gaze. Yesterday, Crudele wrote:

"FOR the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation’s money supply seems to be confoundingly large.

It might also explain why Washington decided earlier this year to stop publishing M3 money supply figures, the broadest and most popular measure of money in circulation. Repurchase agreements – or repos – have long been used by the Federal Reserve to get money quickly into the hands of financial institutions, which in turn can put the money into circulation in the form of loans.

Last Thursday, for example, the Fed executed $2.5 billion in overnight repos and $8 billion in 14-day repurchase agreements. These were reported on the financial wires. The Treasury completed a $5.5 billion repo operation on the same day
under what it calls the Term Investment Option. There was no mention of
the Treasury operation on the wires. In the Fed’s repo deals, the banks
temporarily turn over securities to the central bank in exchange for
cash. The Treasury TIO program works in a similar way, except the
financial institutions pledge securities as collateral in exchange for
the cash."

What does this mean? Well, instead of the (theoretically) independent Federal Reserve controlling Money Supply, we see the Treasury department has had an "unseen" hand. MZM, M2 and credit growth has been soaring. This has the effect of providing the fuel for increasing the leverage and risk in the system.

"Is this like the repo operation at the Fed? "Kinda’," says a
spokeswoman for Treasury. "But not really." She said the TIO program
only replaced the old way of putting government cash in banks without
making the banks place bids, which gets the government a better deal."

This repo action is not reported by the Treasury Department, and Crudele that "financial institutions have been using it for three years to increase their liquidity." Surprisingly, it is not well known by the investment community.

What’s the problem with this? Crudele notes:

Experts worry whenever there is too much money – liquidity – in the financial system because it can lead to things like price spirals in the housing market and bubbles in stocks. But even more worrisome for the financial markets than too much liquidity would be an inability to track the amount of money being pumped into the financial system.

Unless I find out differently, it looks as if the Treasury has created a way to duplicate the Fed’s power. And that is a disturbing possibility unless it is somehow monitored.

Bill King adds:

"$20B was added to the system last Thursday and Friday.  Where is it going with the economy ebbing?  Of course it goes to the ‘new economy’, which is financial speculation and asset grabbling . . . The astute know that the repo world runs The Street. It is
the lifeblood of The Street, and ‘The Money Desk’ of each big firm is
the heart of the organization.  Other traders garner the headlines and
TV spots but the ‘money desk’ reigns supreme on The Street.  Just ask
the ex-principals of LTCM."

Indeed. The plot thickens . . .



John Crudele
NY Post, November 7, 2006


Thompson Sawyer
Investment Management Division

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