Fed May Buy Mortgages Next, Treasury Investors Bet

Source: Bloomberg

"March 24 (Bloomberg) -- Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.

Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.

The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk."

The issue of moral hazard is something for the fed to definitely consider. The bigger problem is that investors such as Bill Gross is primarily the reason why we had subprime lending in the first place. Now Bill Gross wants to trade in the securities bought at cheap prices for a full dollar paid by the tax payer - the difference would help make Mr. Gross richer by that much. I'd say if anything the fed should buy the subprime mortgage backed securities dirt cheap from these investors (may be 1 cent on the dollar) to help prevent them from going bankrupt if at all. Does that fly well for you Mr. Gross? I'm sure if they agree the true value of these bad debts to be complete write offs, even 1 cent is definitely going to be a good deal. It's time for the cash at the federal reserve to be king and not slave!