By now we are all intimately familiar with the kind of group psychosis that creates price bubbles. You can hear the irrational exuberance crackling in voices surrounding the subject. You can feel the earth shake from the stampede as people scramble to get in on the latest surefire way to get rich.
…..And then there’s the Treasury bubble…..
The US Treasury has sold more than $3.74 Trillion in debt in the last 24 months, which I can only describe as unbelievable. It took almost 8 years for the world to digest the previous $3.7 Trillion. But this time around, the enormous surge in supply has been met with an even bigger surge in demand, that has pushed prices to nosebleed levels. It has all the earmarks of a bubble, except one. Identifiable buyers. I mean, the whole concept of a bubble is predicated on a glut of buyers, isn’t it?
For quite some time now, I’ve been trying to figure out where the never-ending supply of nit-wits lining up to buy ultra-low yielding paper comes from (don’t they understand how bonds work?). I have no answers. I can tell you that despite all the recent TV chatter about the popularity of US treasuries, mutual funds sold more than $100B in 2009 and the holdings of the US saving bond program have been drifting lower since 2006. So don’t go blaming this bubble on ordinary Americans. It’s not China either.
As I discussed in Candy from Strangers, the fastest growing group of buyers for Treasuries is known to us only as “Other Investors.” Don’t get me wrong, I love a good conspiracy theory as much as anyone, but the notion that fantastically wealthy entities are emerging from the shadows to snap up Treasuries at ridiculously high prices sounds more like a fairy tale to me, and I just can’t let this go. On the advice of the founder of The Daily Bail, it was decided that asking some questions directly to Treasury would be a reasonable way to proceed.
I’d like to thank the readers and staff at both Zerohedge and The Daily Bail for all the help and advice they offered. This was truly a group effort, but what would be the point of all of us ending up on some “enemies” list? Anyway, what follows is a list of 15 questions, exactly as submitted to Treasury via snail mail (Treasury has no public email). The United States Postal Service has promised delivery by 3:00 pm Monday August 23. I have no idea what kind of response to expect, but I’ll keep you posted.
Dear Treasury Secretary Geithner,
In perusing the 2010 Q1 Treasury Bulletin, released June 11, 2010, I am left with many questions concerning the ownership of US Treasuries (Table OFS-2). What follows is a list of specific questions I submit to you on behalf of the American people. Please be advised that your responses (or lack thereof) will be made public.
Question #1 – Why is the table incomplete? Treasury has more than 70 days to compile data from Q1, yet table OFS-2 does not include data for more than 62% ($287 Billion) of the Q1 National debt. The Federal Reserve released the flow of funds data referenced on table OFS-2 on June 10; The bulletin was released June 11.
Question #2 – Why is Treasury dependent on data from the Federal Reserve and is communication so poor that Treasury is unable to obtain data from the Fed prior to public release?
Question #3 – Why doesn’t Treasury update table OFS-2 when the Fed data is released?
Question #4 – Is this right? I have attempted to parse the Fed data and complete Table OFS-2 for the benefit of all Americans. I used data from the Fed flow of funds (Table L.209). Please feel free to comment on the accuracy (my calculations are highlighted).
Question #5 – Why does Treasury fail to more clearly identify “Other Investors”? Approximately $200 Billion (43%) of Treasuries purchased in Q1 were bought by entities only identified as “Other investors”. Treasury defines this group as:
Individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.
The Fed flow of funds identifies the purchase amounts of several of these sub groups:
GSEs – $38.2 Billion in Q1
Brokers and Dealers – $8.4 Billion in Q1
Why are these groups hidden as “other investors”? The vast majority of “other investors” fall into the Fed’s Household Sector ($148 Billion) which includes Domestic Hedge Funds. Does Treasury include purchases by Domestic Hedge as “Other Investors” on Table Bulletin? If so, why are they not specifically identified as “other investors” in Table OFS-2?
Question #6 – What was the total dollar amount of Treasuries purchased by Domestic Hedge Funds in Q1?
Question #7 – What was the dollar amount purchased by Individuals in Q1? Treasury limits the purchases of securities by individuals to $5 million per auction, so treasury must keep records of individual purchases. If this information is not available under the FOIA, please explain why.
Question #8 – How could the GSEs possibly have been responsible for purchasing more the $38 Billion in Treasuries in Q1? I am under the impression that the GSE are a taxpayer liability, yet the Fed Flow of funds (Table L.209) claims the GSEs purchased more that $38 Billion in Q1 (see chart). How? And specifically, which GSEs?
Question #9 – Is the $66.8 Billion of Treasuries purchased by Commercial Banks in Q1 the direct result of the Federal Reserve’s Zero Interest Rate Policy (ZIRP)? More than 40 commercial banks were taken over by the FDIC in 2010 Q1, so I am puzzled by the 32.5% increase in Treasury holdings in Q1.
Question #10 – Are there any regulations to prevent banks from borrowing money at zero percent from the Fed and purchasing Treasuries? The Fed will exchange Treasuries for cash through various programs, so in reality purchases made with money borrowed from the Fed are actually “stealth” Fed purchases, unless there are rules to prevent this kind of systemic abuse. Are there?
Question #11 – Are TARP recipients (like Citigroup) allowed to take free money from the Fed, purchase Treasuries and collect interest from taxpayers? This kind of behavior should be prohibited for obvious reasons, please comment on any restrictions.
Question #12 – How are the holdings of the Primary Dealers accounted for? Most are members of the Federal Reserve, as well as Depository Institutions, and “Brokers and Dealers.” Please explain how they are accounted for on Table OFS-2.
Question #13 – What percentage of the debt issued in Q1 was purchased by entities not insured in any way by the FDIC, or any government or government agency, and who do not have access to any Treasury or Federal Reserve programs? In other words, what percentage were purchased by entities who bear the full risk of sovereign default. It is my estimation that no more than 50% of the Q1 Treasury purchases could be classified in this manner.
Question #14 – Why does Treasury issue debt in excess of deficit? This has been an area of some speculation recently. Is this merely the effect of rolling over maturing debt? If not. What happens to proceeds from surplus issuance?
Question #15 – Does Treasury provide information on maturing debt? The US has run deficits for 22 consecutive months as of this writing and issued more than 3 Trillion dollars in debt during that time. Unless drastic changes in policy are made, that $3 Trillion will need to be rolled again, along with any other maturing debt. If the Treasury tracks maturing debt schedules, would you please direct me to that information?
Thank you for reviewing these questions. The Emergency Economic Stabilization Act (US Title 12 Chapter 52) granted the Secretary of Treasury extraordinary powers, but requires “public accountability for the exercise of such authority.” Under that authority, I humbly request answers to these questions on behalf of all Americans.
I hope you understand that without clarification the public will be left to speculate about the veracity of Treasury’s auctions. It would seem that either the owners of hundreds of billions of Treasuries are being hidden to disguise free transfers of taxpayer money to major banks, or being made by entities that do not wish to be identified, thus raising questions about other potential “exchanges” (influence over policy, weapons, military intervention, etc.).
You have the power and obligation to provide the transparency Americans deserve regarding our future. I urge you to seize this opportunity.