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Wall St. is Profiting Big From Trading With the Fed and Taxpayer Money

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system.

“You can’t rescue the credit system without benefiting some of the people in it.” Still, Mr Frank said Congress would be watching. “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”

Fed Chief, Ben Bernanke Doesn’t Know Where $500 Billion in U.S. Taxpayer Money Went

Federal Reserve Chairman Ben Bernanke ventured to the Hill this week for his semi-regular beating at the hands of freshman Rep. Alan Grayson (D-Fla.).

Grayson’s Fed exchanges have become small sensations online; a May grilling of the Fed inspector general approaching a million views on YouTube and roughly another million on other video players.

The swaps represent a radical intervention by the Fed in the global money supply but have barely been covered by the media. They are done without approval from or oversight by the Congress or the White House.

Bernanke, asked by Grayson what the central banks did with the U.S. money, replied: “I don’t know.”

Grayson, in an interview with the Huffington Post, said that the lending program represents a startling amount of decision-making authority vested with one man.

He put the $500 billion-plus lending program in perspective. “I see all the time, still to date, actual recorded votes on $100,000-dollar elements on these actual appropriations bills. Now compare that to the fact that the Federal Reserve handed out $500 billion dollars, which is literally five million times as much…and they don’t even know who ended up with the money,” he said.

“Was the money used to buy U.S. treasuries and prop up the dollar? They don’t know. Was the money used to bail out European automakers? They don’t know. He literally doesn’t know what happened to $500 billion dollars,” he said. “I find that extremely disturbing.”