[Infowarrior] - Fed Plays Wall Street Favorites in Secret Deals

[Richard Forno]

(The more things change the more they stay the same.  The more transparency is promised the more secrecy is implemented. -- rick)

Fed Plays Wall Street Favorites in Secret Deals

By Jody Shenn and Caroline Salas Gage - Feb 10, 2012

The Federal Reserve secretly selected a handful of banks to bid for debt securities acquired by taxpayers in the U.S. bailout of American International Group Inc., and the rest of Wall Street is wondering what happened to the transparency the central bank said it was committed to upholding.

“The exclusivity by which the process has shut out smaller dealers is a little un-American,” said David Castillo, head of sales and trading at broker Further Lane Securities LP in San Francisco, who said he would have liked to participate. “It seems odd that if you want to get the best possible price that it wouldn’t be open to anyone who wants to put in the most competitive bid.”

After inviting more than 40 broker-dealers to take part in a series of auctions last year, the Federal Reserve Bank of New York asked only Goldman Sachs Group Inc., Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) to bid on the full $13.2 billion of bonds offered in two sales over the past month. The central bank switched to a less open process after traders blamed the regular, more public disposals for damaging prices in 2011. This week, Goldman Sachs bought $6.2 billion of bonds in an auction.

The selectivity has irked firms that weren’t also given the chance to profit from the auctions, and raises the question of whether the Fed got the highest price for U.S. taxpayers, who gave insurer AIG a $182.3 billion bailout. The New York Fed resumed its sales of the assets in January after the market recouped a portion of last year’s losses.

‘Crony Capitalism’

“The purpose should be to get the best price for the taxpayer,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “Anybody knows the more bidders the better, so it’s a little hard to understand why they would essentially pick potential winners and losers. That smacks of crony capitalism.”

Andrea Priest, a spokeswoman for the New York Fed, declined to comment.

The New York Fed announced in March that it would sell the bonds held in a vehicle called Maiden Lane II LLC, created in 2008 to buy holdings that AIG handed the Fed in exchange for a cash injection. The portfolio includes bonds backed by the types of home loans with some of the highest default rates, such as subprime, Alt-A and option adjustable-rate mortgages that helped fuel the housing boom and bust. Those securities, which can be difficult to value, offer a chance for a bigger profit to a savvy investor.

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http://www.bloomberg.com/news/print/2012-02-10/fed-plays-wall-street-favorites-in-secret-bond-deals-mortgages.html

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Just because i'm near the punchbowl doesn't mean I'm also drinking from it.