WALL STREET banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparts, officials and industry executives say.
The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying huge amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more than any other party.
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 to the Fed at an inflated price.
The resulting profits represent a relatively hidden form of support for banks, and Wall Street is taking advantage. Barclays e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.
“You can make big money trading with the government,” said an investment management firm executive. “The government is a huge buyer and seller and Wall Street has all the pricing power.”
A former US Treasury official said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket”. – (Copyright The Financial Times Limited 2009)
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