Fed QE Frenzy Disrupts Derivatives Markets—Close Them Down!
March 30, 2020 (EIRNS)—Schiller Institute President Helga Zepp-LaRouche, so far alone among political leaders, has demanded the speculative stock and bond and derivatives markets be closed down immediately now, so that massive losses can be stopped, Wall Street banks reorganized, and lending banks protected from a crash. Events of the past week further vindicate her proposal.
American mortgage bankers are now demanding that the Federal Reserve stop buying mortgage-backed securities (MBS). The U.S. Mortgage Bankers Association (MBA) wrote a letter to regulators March 29 complaining that the mortgage market is “in danger of large-scale disruption,” because the Fed bought $250 billion in MBS in two weeks, including $183 billion last week. The purchases blew up mortgage bankers’ derivatives—interest-rate swaps—and left them with margin calls into the tens of millions each. The list of large commercial mortgage-financing real estate investment trusts (REITs) which defaulted on margin calls just last week, includes Invesco Mortgage Finance; MFA Financial; AG Mortgage Investment Trust; TPG RE Finance Trust; and ED&F Man Capital. Since commercial mortgage-backed securities are derivatives to begin with, the Federal Reserve in the REITs’ case has blown out their derivatives on their derivatives!
The MBA said: “The dramatic price volatility in the market for agency mortgage-backed securities over the past week ... is leading to broker-dealer margin calls on mortgage lenders’ hedge positions that are unsustainable for many such lenders....
“Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week. For a significant number of lenders ... these margin calls are ... threatening their ability to continue to operate.”
Meanwhile, a first mid-size regional bank in the United States has needed a bailout of its derivatives exposure—and gotten one, of course. The bank is Capital One, headquartered in McLean, Virginia; on paper it has $372 billion in assets. It, too, was hit with large margin calls it may not have been able to meet—i.e., it may have defaulted—on oil-price and interest-rate swaps. So the Commodity Futures Trading Commission (CFTC) stepped in and exempted it from meeting the margin calls! But this came with conditions which, as Reuters reports, may now restrict the bank’s ability to keep lending, so it remains in some trouble. A CFTC spokesman was quoted admitting they had bailed Capital One out: “We have actively encouraged all market participants to identify regulatory relief or other assistance that may be needed to help support robust, orderly and liquid markets in the face of this pandemic.”
The Federal Reserve’s planned new $4 trillion quantitative easing spree—with more trillions to follow—is not for the purpose of “helping U.S. businesses,” as media constantly put it. Even Treasury Secretary Steven Mnuchin and Presidential National Economic Council Director Larry Kudlow are more forthright—it is to “preserve financial markets” and is being backed with $450 billion in taxpayers’ funds to help the Fed do that presently destructive task. Wall Street must be quarantined to fight the coronavirus.