Bernanke’s Guaranteed Box Full of Crap

It’s not that I want to keep writing about the tragic irony when life imitates art, but the scenario just keeps coming up.  This will mark the 7th time on this blog (enter “Tommy Boy” in my search box for the others) where I’ve found relevant occasion to use the Tommy Boy quote:
“Because they know all they sold ya was a guaranteed piece of shit. That’s all it is, isn’t it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I’ve got spare time.”
And yes, this time it refers to Federal Reserve Chairman Ben Bernanke – although I think it’s actually Treasury Secretary Tim Geithner’s box of crap – let’s have a look…
A little over three months ago, Congressman Alan Grayson posed a list of aggressive questions for Bernanke to answer following a Committee for Financial Services hearing.   Bernanke has finished responding, and you can view the questions and answers here.  I want to talk about question number two.  As part of the question, Grayson asked: 
“A central bank normally holds sovereign debt, so as to avoid counterparty risk; does the Federal Reserve view mortgage-backed securities as sovereign debt?”
Bernanke replied (emphasis mine):

“The Federal Reserve’s holding of mortgage-backed securities (MBS) are not equivalent to sovereign debt, but they are fully guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and thus pose essentially no credit risk to the Federal Reserve.”
After you’re done LOL’ing at “fully guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae…” we can continue.
Ummm.. They don’t pose credit risk to the Federal Reserve (aka, the left pocket) because that credit risk has been taken by the US Treasury (aka, the right pocket).  It’s kinda like arguing semantics, isn’t it, Mr. Bernanke?  In other words, Geithner’s office stamped the box of crap “GUARANTEED,”  but the Government is eating the credit risk (aka: THE LOSS) no matter how you look at it.  You don’t take the risk – he does.  
So, according to Bernanke, he is buying riskless assets – because even though the guarantors of the MBS have already been proven to be insolvent, his counterpart at Treasury has already taken care of that little issue.  Voila.
This reminds me of another old post I wrote, one of my favorites,  about a hypothetical conversation between Citigroup CEO Vikram Pandit and FDIC Chairwoman Sheila Bair.  Despite being insolvent, the FDIC was still allowing Citi to issue new debt under the FDIC’s TLGP guarantee program…
The boxes full of crap are piling up…
-KD

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