Defaulting banks - where will it stop?

[Peter Lemkin]

In economic news, the Financial Times reports Wall Street banks are reaping outsized profits by trading with the Federal Reserve and taking advantage of the Fed’s transparency. The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilize the markets. However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price. The resulting profits represent a relatively hidden form of support for banks. A former official of the Treasury Department and the Fed said the situation had reached the point that, quote, “everyone games them. Their transparency hurts them. Everyone picks their pocket.”