Implications of Fed Launching Quantitative Tightening

Fed launching quantitative tightening - 1st time in its history

QT era has extraordinary implications for stock markets and gold

“In October, the Committee will initiate the balance sheet normalization program..."

Fed realizes the extraordinary risk quantitative tightening is for QE-inflated stock markets,

so it is starting slow.

Even so, with two-thirds of the US economy driven by consumer spending, it could spiral out of control.

The Fed denied it was monetizing bonds because QE would only be a short-term crisis measure.

That was a lie.

When the Fed acquires bonds, they are added to its balance sheet.

After QE ended in October 2014, $3.6 trillion in bonds were still on the Fed's balance sheet.

That means over 98 percent of QE money is still in the economy.

It remains so high because the Fed is reinvesting proceeds from the maturing bonds and rolling it over in to new bonds.

That's done in order to keep the money working in the economy.

QT will start modestly in Q4' 17, with the Fed taking $10 billion a month in maturing bonds off its books.

It'll start with a mix of $6b in Treasuries and $4b in mortgage-backed securities.

This will gradually remove capital from the economy.

It will accelerate QT where it'll eventually reach $30 billion in Treasuries and $20 billion in mortgage-backed securities.

That represents $50 billion a month in capital taken out of the economy, or $600 billion per year.

It is unlikely it'll ever reach that level, but that's the stated plan.

Why is it doing this?

It knows there will be another recession coming down the road, and it has to reload in order to provide QE for that one. This is one of the main reasons why there should be no central banking in the world.

It's a major reason the Fed creates booms and busts.

What this means for QT is the Fed, by attempting to prepare for the next recession,
could in reality trigger it.

Assuming it goes ahead and implements its plan, it would take three to four years to complete.

Yellen said there is no intention to changing the depth and pace of QT.

Slowing it in response to a stock sell-off would communicate to the market a lack of confidence in the economy. That in turn would produce more of a sell-off.

The Fed has never done this before. Hang on, this is going to get even more volatile in over the next couple of years.

AIG (AIG) Mortgage Offer Rejected by Federal Reserve

The offer by American International Group (NYSE:AIG) to acquire mortgage-related assets held in its Maiden Lane II portfolio has been rejected by the Federal Reserve, according to the U.S. central bank.

Rather than selling the entire group of assets to AIG as a whole, the Fed said they're going to sell the assets in blocks and individually in what they called a "competitive process," which probably points to an auctioning of the securities.

The assets are held by the Federal Reserve as a result of acquiring them at the time AIG was getting bailed out.

The Federal Reserve noted, "In light of improved conditions in the secondary market for non-agency residential mortgage backed securities (RMBS), and a high level of interest by investors, the Federal Reserve believes that conditions are right for ML II to begin more extensive asset sales while taking appropriate care at all times to avoid market disruption."

AIG offered $15.7 billion for the assets, which have a face value of $30 billion.

AIG closed Wednesday at $36.05, falling $0.13, or 0.36 percent.

MFA Financial (MFA) in 65 Million Share Offering

MFA Financial (NYSE:MFA) announced it is making public offering of 65 million shares of its common stock, with a 30-day option to underwriters to acquire an additional 9.8 million shares.

Net proceeds of the fund, according to MFA, will be used to repay buybacks and other purposes for their working capital, as well as to purchase more mortgage-backed securities.

Lower income on the mortgage-backed securities of the company resulted in a drop of net income of 22 percent in the fourth quarter, prompting the decision.

MFA Financial closed Tuesday at $8.30, down $0.19, or 2.24 percent.

Allstate (ALL) Adds BofA (BAC) to List of Banks its Suing

Bank of America's (NYSE:BAC) Merrill Lynch unit is the latest litigation target of Allstate (NYSE:ALL), which has sued the division for fraud over mortgage-backed securities.

The lawsuit claims Merrill Lynch fraudulently sold the insurer close to $167 million in residential mortgage-backed securities.

Allstate is asking for the lost market value of the securities, plus principal and interest payments; the same it is asking a number of other financial institutions.

Allstate said in the complaint, “Because of the systemic abandonment of underwriting standards and the resulting inclusion of toxic, highly risky mortgage loans to back the certificates, most of Allstate’s certificates have been downgraded from the highest possible ratings to junk-bond ratings.”

Other financial institutions sued by Allstate include Credit Suisse (NYSE:CS), Citigroup (NYSE:C), Deutsche Bank (NYSE:DB) and JPMorgan (NYSE:JPM).

Goldman Sachs (GS) Exposed to $3.4 Billion in Litigation Losses

Goldman Sachs (NYSE:GS) said in a filing that they are exposed to up to $3.4 billion in losses in relationship to underwriting securities which they are being sued over for the recovery of losses.

The Wall Street giant disclosed this worst-case scenario to comply with new rules from the Securities and Exchange Commission regarding contingent liabilities. The accounting standard demands that companies state what is less than likely, but has more than a slight chance of happening. These potential legal losses are on top of what companies have already set aside.

Banks face a mountain of lawsuits related to the financial crisis, particularly from investors who bought mortgage-backed securities that later tumbled in value.

J.P. Morgan Chase & Co. (NYSE:JPM) said Monday it faced up to $4.5 billion in legal losses in its own worst-case scenario, the highest estimate of any of the banks reporting so far. Citigroup estimated losses of $4 billion last week, while Bank of America put its worst-case number at $1.5 billion and Wells Fargo & Co. estimated $1.2 billion above reserves.




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Bank of America (NYSE:BAC) Doesn't Get Mortgage Lawsuit Break in Arizona

Arizona's new Republican attorney general won't give Bank of America Corp. (NYSE:BAC) any relief from a mortgage fraud lawsuit filed in the final days of his Democratic predecessor's tenure.

Attorney General Tom Horne told The Associated Press on Monday that he intends to pursue the lawsuit filed Dec. 17, which alleges the lender is misleading and deceiving homeowners who have tried to modify mortgages. The lawsuit accuses the bank of foreclosing on homes after repeatedly assuring owners that their loans were being modified so they would continue to make payments.

Bank of America had criticized former Attorney General Terry Goddard for filing the suit in his last days in office.

Horne said he is willing to settle with the Charlotte, N.C.-based bank under the same terms Goddard proposed but he'll pursue the lawsuit if a settlement is not put in writing.

"There's some basic requirements that Terry had that I don't disagree with," Horne said, including "that the bank assign one person (to each homeowner's case) so you don't have one person egging them on to make payments on the grounds that they'll get a modification, then somebody else comes in and forecloses."




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Bank of America (BAC) Legal Liability Could Reach $1.5 Billion in 2011

Bank of America (NYSE:BAC) legal losses in 2011 could come in as high as $1.5 billion, according to the recent filing of its annual report.

The giant bank gave a wide range of legal liability for the year; from $145 million to $1.5 billion. Those numbers don't include accrued liability, which the financial institution didn't reveal.

The majority of costs related to legal action will in connection to mortgage-securitization lawsuits against Countrywide Financial. A number of other banks are facing similar lawsuits and liabilities, but Bank of America more than others through its acquisition of Countrywide.

Plaintiffs claim the bank hid the weakness of the underlying mortgages that were bundled into securities they invested in, which resulted in massive losses for numerous institutional investors.

Related to the mortgage fiasco is the possibility of Bank of America having to pay out $230 million in fines because of lack of action on the foreclosing of bad residential mortgages.

Wells Fargo (WFC) Expects Fine in Mortgage Probe

Wells Fargo & Co.’s (NYSE:WFC) lending and foreclosure practices probably will draw an enforcement action that may include a fine, the bank said today (Friday) in a regulatory filing.

“It is likely that one or more of the government agencies will initiate some type of enforcement action against Wells Fargo, which may include civil money penalties,” the San Francisco-based lender said in its annual report. “Wells Fargo continues to provide information requested by the various agencies.”

Wells Fargo said the high end of estimated litigation losses could be $1.2 billion beyond the reserve already set aside, according to the filing. The bank, which ranks as the biggest U.S. mortgage lender, said it didn’t expect litigation costs to have a “material adverse” impact on its financial position.

Wells Fargo completed its own review of foreclosures in the fourth quarter and doesn’t believe any unwarranted seizures occurred, according to the filing.




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Citigroup (C), Deutsche Bank (DB) Being Sued by Allstate (ALL)

Allstate (NYSE:ALL) has added banking giants Citigroup (NYSE:C) and Deutsche Bank (NYSE:DB) to the list of financial institutions they're suing. On February 15 they filed a lawsuit against JPMorgan (NYSE:JPM).

All of the complaints against the banks mentioned above center on allegations they fraudulently sold Allstate hundreds of millions in mortgage-backed securities.

Filed in New York state Supreme Court in Manhattan, Allstate is seeking to recover the lost market value of the securities, along with principal and interest payments.

In the complaint Alltate said, “Allstate was made to believe it was buying highly rated, safe securities. Defendants knew the pools were toxic mixes of loans extended to borrowers who could not afford the properties and thus were highly likely to default.”

Allstate said they acquired over $200 million of these securities from Citibank, and approximately $185 million from Deutsche Bank.

The suit filed against JPMorgan was for over $700 million in mortgage- backed securities.

JPMorgan (JPM) Accused of Fraud by AllState (ALL)

JPMorgan (NYSE:JPM) had a lawsuit filed against it in New York State Supreme Court today by AllState (NYSE:ALL), citing fraud.

According to the complaint, mortgage-backed securities sold to them by Bear Stearns, Washington Mutual and JPMorgan were in fact "toxic," while being marketed as highly rated safe securities.

AllState asserted the banks "knew the pool was a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default."

JPMorgan acquired Bear Stearns and Washington Mutual in 2008.

JPMorgan was trading at $48.05, gaining $1.23, or 2.63 percent, as of 1:05 PM EST.