The Fed Wises Up, Buys Mortgage-Backed Securities (BLK)(GS)

December 31, 2008 by Douglas A. McIntyre

FedThe Fed will step into the market next year and buy mortgage-backed securities with a vengeance. It has finally dawned on the agency that cutting rates and providing banks with low-cost emergency funds is not moving the economy away from the credit crisis.

None of the Fed’s plans have worked so far because the prices of houses are still falling rapidly. S&P Case-Shiller yesterday reported that home values dropped 18% in October. In other words, the government has done nothing to stop the destruction of the value of residences.

According to Bloomberg, "The Fed’s program is intended to lower rates by reducing the supply of outstanding agency mortgage bonds, boosting their prices and thus lowering their yields." That should help drop mortgage rates, but it should also aid the balance sheets of banks which still hold tons of the bad mortgage-derivative paper. The agency plans to suck up $500 billion of MBS in the first half of 2009.

A few lucky firms will manage the program and make obscene sums of money for their trouble. Those companies include BlackRock Inc (BLK)., Goldman Sachs Asset Management (GS), Pacific Investment Management Co. and Wellington Management Co.

Douglas A. McIntyre