Goldman Sachs is still the Fed’s favourite counterparty for buying and selling Treasuries – or at least it was in the first quarter of 2011. The data comes out two years in arrears and we are now at the period when $600bn of QE2 purchases were in progress.
Goldman got twice as much of that business as anybody else, which is mildly embarrassing for the New York Fed, but reflects the pecking order in the Treasury market. If you know what happened to Citi’s business during that period then please explain in comments.
The favourite counterparty of the US Federal Reserve is everybody’s favourite vampire squid: Goldman Sachs. Today saw the release of transaction level data for the Fed’s Treasury dealings in the third quarter of 2010 – including the names of all of its counterparties. This is who got the business:
Goldman Sachs economists have been among the more bearish forecasters on Wall Street, seeing an incredibly sluggish recovery with inflation falling close to zero and unemployment hovering around 10 per cent through the end of next year.
So last night, they released a 32-page paper taking their view to its most logical conclusion. If they ran the Federal Reserve, they might well be contemplating further policy accommodation. “In the short term our model combined with GS economic projections implies that further macroeconomic easing would be optimal to counter stubbornly high unemployment and falling inflation. With the funds rate already at zero bound, additional stimulus would need to come through fiscal easing and/or renewed asset purchases.”
The GS paper goes on to say, to no great surprise, that if the additional easing is carried out on the fiscal side, “it should be paired with legislation that brings the federal budget back onto a sustainable path via a combination of spending cuts and tax increases.”
Instead, if the focus is on asset purchases, GS warns that the Fed would have to be “realistic” about the outcome, since there is a potential problem of diminishing returns.
The political heat surrounding Stephen Friedman, the former chairman of the New York Federal Reserve Bank and Goldman Sachs director, is showing no signs of easing.
Over the weekend, the House oversight committee, led by Edolphus Towns, said it had reviewed internal Fed emails revealing “misgivings” within the US central bank that were ultimately “overruled” about letting Mr Friedman own Goldman shares while serving on the NY Fed board.
Why are people selling Goldman today? I’m not a trader and I would caution against taking any big positions based on policy that still lacks details. But it seems to me at first glance that Goldman and Morgan Stanley could end up benefiting in some ways from the Obama crackdown on the banks.
Goldman and Morgan can simply give up their bank charters and go back to being non-bank financial firms. Yes, they would still be subject to tougher prudential standards under the administration’s wider reg reform plan. Yes, they would lose access to central bank loans.