QE Raises Risk of Loss With Political Cost Leads to Fed Anxiety Rises

Fed Anxiety Rises as QE Raises Risk of Loss With Political Cost (Bloomberg)

According to Bloomberg,

The longer the Federal Reserve continues its bond-buying stimulus, the higher the odds it will face a year without any money to give the U.S. Treasury after taxpayers received a record $88.4 billion profit in 2012.

The Fed’s financial-crisis actions — from acquiring debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc. to three rounds of quantitative easing — have led so far to the record payments. Now, the prospect of a stronger economy and rising interest rates means the value of the Fed’s bond holdings will fall at the same time its funding costs climb because the central bank pays interest on the excess reserves it holds for banks.

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“Dude, I owe you big time!… I’m opening a bottle of Bollinger”: The Rotten Heart of Finance?

As the mystery of LIBOR begin to unmask, it aroused more and more attention from the public. Expert from the Economist.com gives a detailed report today on this specific topic.

THE most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. “Coffees will be coming your way,” promised one trader in exchange for a fiddled number. “Dude. I owe you big time!… I’m opening a bottle of Bollinger,” wrote another. One trader posted diary notes to himself so that he wouldn’t forget to fiddle the numbers the next week. “Ask for High 6M Fix,” he entered in his calendar, as he might have put “Buy milk”.

What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

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Volcker Rule Stirs Up Opposition Overseas

As reported by Andrew Ross Sorkin from DealBook, usually, it is the banks that are fighting efforts to impose new regulations on the industry. Now, it is foreign governments fighting against bank regulations in the United States.

In the halls of last week’s annual meeting of the World Economic Forum here, Wall Street’s top bankers found a curious ally in their battle to end — or perhaps water down — the Volcker Rule, that part of last year’s Dodd-Frank financial regulation law that says that banks are not allowed to participate in “proprietary trading.” Translation: Banks can’t make risky bets with their own money. The idea, rooted in ending the too-big-to-fail phenomenon, is to separate the risky casino element of Wall Street from the utility role of helping finance the economy.

Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary, who made the rounds in Davos on Thursday and Friday, about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks — and possibly certain foreign banks that do business in America — would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.

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