Where Did the Quantitative Easing (QE) Money Go?

Over a year ago, the Federal Reserve began QE3 which involved the purchase of Treasury Bonds and Mortgage backed securities. The securities were bought from the mega banks, this is public knowledge and I have written about it before; but, I forgot to ask the next question. Banks had hundreds of billions of dollars in mortgages and mortgage backed securities that were considered "toxic" because the loans that backed up these things will not and cannot be paid by the people who took them out. What I am talking about is sub-prime and other mortgages that were taken out by people who lost their jobs, had anticipated an increase in their house valuations or had loans which started low and increased as their interest rates reset or adjusted up after the first few years.

Having said all that, someone recently brought up a brilliant question. What did the banks do with the hundreds of billions of dollars they received from the Federal Reserve after they sold their mortgages to them? What one person is claiming is that the banks used those funds to buy treasury bonds. When the housing market crashed, a friend and I had a communication with the head of real estate for the Rockefeller organization. The issue involved the purchase of a large number of houses valued at over a billion dollars and the Rockefeller organization wanted to purchase the collection of properties and their stated price was 35 cents on the dollar. The deal did not go through. That dollar amount is what stuck in my head, I concluded that they had a reason for the number had chosen. Now, here is the question, what discount did the federal reserve get when they purchased the same mortgages?

Why is this important? Well, lets start with this, private investors were only willing to pay 35 cents on the dollar. The fact that it was the Rockefeller organization is not surprising as the family had made untold amounts of their income during the depression after buying all the houses and then renting them out to the people they bought them from. It would make sense for the wealthy to buy properties during a down economy; but, they did not because the Federal Reserve did. We must assume that the Federal Reserve paid more than banks would have been willing to pay for the same properties. Why would they pay more than market rates?

Let me simplify. If you owned mortgage backed securities, you would only sell them to the highest bidder, yet, the highest bidder was consistently the Federal Reserve. Are they just suckers and didn't care what they paid for them? What if the Federal Reserve didn't buy them at a discount and bought them at their face value? What would that mean and why do it? Nobody pays a new car price to buy a used car unless that is a collectors car and toxic mortgages are not a collectors item. Why would the Federal Reserve overpay for mortgage backed securities?

This is where the question I had forgotten to ask comes in. Who did they pay and where was the money spent? An example would be JP Morgan. JP Morgan sold billions of dollars of mortgage backed securities to the Federal Reserve; but, where did the money go once it got to JP Morgan? If the person I heard was correct, the big banks used that money to buy treasury bonds. Sure some went to bonuses for bankers and some went out in dividends; but, the amount is miniscule compared to the total. If the person I heard is correct, the banks used that money to buy treasury bonds. This is also interesting as banks are now required to keep more hard assets and cash on hand, I bet that treasury bonds count too.

If we look a little deeper we begin to ask ourselves another question. What happens to the banks if the government defaults on those treasury bonds? A while back I wrote about how a European country (Italy or France as I recall) was selling government bonds with a negative interest rate. At the time it made no sense to most of us; but, the bonds were sold. If we want an example of a government default, all we have to do is look to Detroit. Bondholders got a haircut and pensioners got a 90% reduction in their payments. This is why state governments are looking to cut pensions, this is the game.

If states and local governments bought mortgage backed securities (as Detroit did)that were sold at inflated prices, why should the organizations that sold them to the governments be paid off when the bankruptcies in municipalities continue? If JP Morgan sold your state a billion dollars in mortgage backed securities and they lost 70% their value, while at the same time JP Morgan owned a billion dollars of your state's bonds, be paid for the state bonds at full value? Read that as many times as necessary to understand what I just asked.

JP Morgan sold mortgage backed securities to states, local municipalities and public pensions that it then bet against. They then took that money and bought state and local bonds. They expect the states and municipalities to pay them on the bonds at 100% and not have to pay the states and municipalities for the hundreds of billions of dollars they lost by buying the mortgage backed securities from them. The banks would like to see the difference paid for by raiding public pensions to pay them.

I will move onto other things now.

Yahoo - Reuters - Thirteen billboards, one paint-shop worker helped defeat union at VW plant in Chattanooga. My regular readers should be able to read the article and dissect the lies by themselves; but, I will give a quick shot at it. The title alone tells you the authors perspective, the UAW was defeated by a few billboards and ONE paint shop worker. It doesn't matter that the governor of the state told people that they would lose their jobs if they voted for collective bargaining and contracts with employees, it didn't matter that Volkswagen itself said that they were okay with unionization. Nope, it was someone in the paint shop that is responsible for people voting against having a united say in their salary negotiations. It does not matter if you are for or against unions, the question is whether or not the article and the statements are just garbage and propaganda. You can agree with the outcome; but, understand when you are being lied to.

Business News or Propoganda?

I was watching the is video about a new pizza chain on Fox Business News and I couldn't believe how biased it was. The pizza chain was created by a multimillionaire with experience with franchises, he was the founder of Wetzel's Pretzels and decided he wanted to create a new chain. He started by creating two stores and then expanded to 11 with plans to expand to 45 by the end of the year. He had a good idea, tested, worked it out and began franchising it. That in itself is a good story; but, what is really interesting is how the "reporter" approaches him and the story.

Lets start with this, about 23 seconds in the reporter says that "you can't tell us the economy is so bad". She then says, "so your not blaming the weather and your not blaming the economy, your doing as well as you would like to". After going over the large number of big time people who are looking to franchise the pizza company, the reporter then asks how increasing the minimum wage might affect him.

Fox - The recipe for pizza success.

I really want you to watch the short news story. At some point in time I will probably try the pizza and the owner of the company seems pleasant enough. He certainly has managed to get lots of investors because of his past track record. In fact after watching another article about his company on Good Morning America the number of stores going up is already around 200. That is a pretty good start for any franchise. What was intriguing was how she seemed to want to use the story, not to help his stores; but, to achieve a political view which he smartly chose not to get tricked into.

Having said all that, lets get back to the reporters perspective. She began by saying that you can't tell her the economy is bad because some people are making lots of money. I question who this reporter spends her time with, I am guessing it is with people that have lots of money. That is the saddest part, she may really not understand what life is like for people who make minimum wage. There was someone rich guy recently who complained that the poor in America are better off than 99% of the world's population and needed to stop whining. The person who said that clearly had no idea how bad things are for many.

In Australia, the richest woman in the world (she inherited the money from her father) said that Australians should be willing to work for $2 a day, currently they have a minimum wage of $16 an hour and by and large the country was not damaged by the international economic downturn. This same woman called for sterilizing everyone that makes under $100,000 a year. I guess some of the wealthiest actively want to see the western world become like some 3rd world nation except even more restrictive.