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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

$2 Trillion False Flag Event at the U.S. Treasury, The Fed’s Furtive Filching

Interest-Rates / Quantitative Easing Oct 10, 2010 - 08:00 AM GMT

By: Barry_M_Ferguson


Best Financial Markets Analysis Article$2,000,000,000,000.00 dollars has been stolen from the US Treasury!! What happened? Who did it? Did they get away with it?

The answers: A ‘false flag’ event, the Federal Reserve, and yes.

The theft was planned. It started with a ‘false flag’ event in 2008. Much like the ‘false flag’ event of 2001 in which two planes somehow imploded three buildings, the false flag event of 2008 was a game changer. As you remember, the big banks had bankrupted themselves with derivative driven debt issuance that could not be repaid. The financial system was in peril. Or, so we were led to believe. We were told by the Treasury Secretary at the time that ‘toxic illiquid assets were clogging up the system’ and preventing the lending process from working. They needed immediate assistance and that assistance could only come from the Federal Reserve. All we had to do was to surrender the Treasury. Our Congress complied and the false flag ruse had worked again. The theft could proceed.

The Fed then proceeded to buy the ‘toxic illiquid assets’ from the big banks. In all, it was about $1,250,000,000,000.00 in MBS (Mortgage Backed Securities) paper - give or take a few hundred billion. Where did they get the money? The Treasury printed it by increasing the debt by virtue of Treasury note issuance. Bear in mind that the Federal Reserve is a for-profit privately owned bank. Now they own a lot of bad paper. How did they complete the theft?

At this time, let me bring in Mr. Brian Sack to the story. Mr. Sack is the executive vice-president of the markets group at the Federal Reserve Bank of New York. He is the manager of the System Open Market Account (SOMA) for the FOMC. Basically, he manages the trading for the Fed. Mr. Sack has a doctorate in economics from MIT. A word of foreshadow and caution. As I have written in the past, it seems that everyone that has served to screw up the economy has been spawned by MIT, Harvard, or U. Cal. Berkeley. I’m not hatin’ – I’m just sayin’! Anyway, Mr. Sack just gave a presentation to the CFA Institute on October 4, 2010. Here is the link if you want the whole speech:

Mr. Sack explains the theft better than me.

‘The initial decisions by the FOMC to expand the Federal Reserve’s holdings of securities came at the height of the financial crisis. Before that time, the Federal Reserve maintained a relatively simple portfolio of between $700 billion and $800 billion of Treasury securities—an amount largely determined by the volume of dollar currency that was in circulation. In late November 2008, in the face of tightening financial conditions and a deep downturn in economic activity, the Federal Reserve announced that it would purchase up to $600 billion of agency debt and agency mortgage-backed securities (MBS). In March 2009, it expanded the program to include cumulative purchases of up to $1.75 trillion of agency debt, agency MBS, and longer-term Treasury securities. The use of the balance sheet in this manner was spurred in part by the inability to ease further using the traditional policy instrument, as the federal funds rate effectively reached the zero lower bound in late 2008.’

What Mr. Sack is telling us is the economy had deteriorated further and zero percent interest rates weren’t helping. They saw a chance to help themselves to a heap of money. Uh, I mean they offered to help us dopes out of our mortgage debt nightmare. But then the Fed found itself with a lot of garbage paper. It had no intention of taking a loss. Continuing:

‘Against that backdrop, an important policy decision regarding the Federal Reserve’s portfolio was made at the August FOMC meeting, when the Committee decided to halt this run-off and instead hold the size of the SOMA portfolio steady. To achieve this, the FOMC directed the Desk to purchase longer-term Treasury securities as needed to offset any principal payments realized on our holdings of agency debt and agency MBS.’

The ‘illiquid toxic assets’ were rotting on the Fed’s balance sheet and they weren’t about to take the losses. Mr. Sack offers that the Fed acknowledges that by buying Treasuries, that action serves to keep interest lower than they would be normally. Duh? I told you he had a doctorate from MIT! He goes on to make this point that the Fed wants to goose the stock market:

That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.’

The Fed buys Treasuries from the big banks. The big banks buy up stocks. Were you wondering why the market rallied in September? Here is where we get a tip that the garbage paper the Fed is holding is not ‘maturing’ through repayment but rather it is maturing through default. In other words, a $100 million dollar traunch of MBS paper that experiences a loan repayment would still leave the Fed with $100 million on the balance sheet. A decline would imply default. Let’s listen:

‘The decline in the size of the Federal Reserve’s portfolio that would have occurred in the absence of the reinvestment program would have amounted to a passive tightening in the stance of monetary policy, as the portfolio balance effect would have gradually reversed.’

Okay, now the Fed has $2,000,000,000,000.00 in bad paper. How do they ‘exchange’ the bad MBS paper for Treasuries? They certainly can’t sell the paper and if the paper matured with payment, there would be no need for further indebtedness. However, there is another alternative. They create the electronic money, and buy Treasuries from the shill banks who sold the Fed the garbage MBS paper. They can’t just plop down $2t so they have to do a little at a time. Listen:

‘To implement this directive, the Desk has been purchasing Treasury securities on a monthly schedule. In particular, we announce a plan around the middle of each month for the purchase operations to take place through the middle of the following month, once we know the principal repayments that will be received over that period. We are running at a pace of $27 billion in purchases this month, and we expect that pace to bump up to around $30 billion for the next several months. Looking further ahead, we currently project that the cumulative amount of principal payments on agency debt and agency MBS through 2011 will be somewhat higher than the estimates provided at the August FOMC meeting.’

Mr. Sacks just explained the Fed’s POMO (Permanent Open Market Operations). They are only buying shorter term maturity Treasuries.

‘The reinvestment strategy, of course, also involves a reallocation of our portfolio from agency debt and MBS into Treasury securities.’

I suppose one man’s ‘reallocation’ is another man’s theft. Maybe we should change the term ‘bank robber’ to ‘monetary reallocater’!

Now Mr. Sack intimates that we are being scammed. Listen:

‘Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.’

In other words, our wealth is an illusion perpetrated by the Fed. It is, inflated. But didn’t Bernanke say he was worried about ‘deflation’? Oh, the mendacity! Thank you, Mr. Sack.

Maybe I’ve got this all wrong but here is the way it seems to me. Going into 2009, the Fed had $700 billion to $800 billion on their balance sheet. The holdings were mostly Treasuries. Through the early months of 2009, they bought $1.75 trillion dollars of ‘toxic illiquid asset’ debt from America’s biggest banks. Where did the Fed get the money for the purchases? The conjured it from our Treasury, of course. So now the ‘toxic illiquid assets’ are ‘maturing’ or defaulting. If the garbage is maturing, the original notes are getting paid and the Fed is accumulating cash in place of the notes. If the garbage is defaulting, the Fed is losing money. If the Fed is getting repaid on the garbage, and they got the original money from the Treasury in the first place, shouldn’t they then return the money to the Treasury so the US government can pay down debt? If the Fed is losing money, isn’t that the chance they took? I guess that’s not the way a ‘stick up’ works!

What have we learned, kids? Well, the Fed has perpetrated this heist and they are going to get away with it. They are now engaged in QE2 that appears to be an exercise in laundering the garbage for Treasuries. Instead of returning any money back to the Treasury, they are exchanging the garbage for Treasuries. Thus, the Fed’s balance sheet will remain in the $2,000,000,000,000.00 range and they have effectively pulled off the most successful heist in history. And to make it worse, we are going to have to pay them interest on the looted Treasuries! Seems Nancy Pelosi and her crew are about as competent as Asa – the old bank guard on the Andy Griffith show. History should always be recorded properly.

Barry M. Ferguson, RFC
BMF Investments, Inc.
Publisher of Barry's Bulls newsletter - Subscriptions at $120/yr 12 issues
Advisory services offered through BMF Investments, Inc

© 2010 Copyright © 2010 Copyright J.D. Rosendahl - All Rights Reserved
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Jack Mullen
11 Oct 10, 14:49
$2 Trillion False Flag Event

Unfortunately the author of this article has the most important half of this story completely wrong. He is right that the Fed's purchase of Treasuries inflates stock and commodity prices. He is wrong about all of the rest. You need to read about this subject yourself to understand what is going on.

Shelby Moore
12 Oct 10, 00:45
Mortgage payments funneled to TBonds?

Barry, are you saying that the Fed is funneling all the mortgage payments into Treasury bonds, from the mortgages it obtained during the crisis?

So are you saying it tries to renegotiate mortgages so people can keep paying, and it tries to re-inflate the housing market (even indirectly via the wealth effect of re-inflating stocks as the banks deposit Tbonds with the Fed and earn an interest and banks are earning a huge interest rate differential now to on deposits), so people can sell and pay off their mortgage?

14 Oct 10, 02:25
$2 Trillion False Flag Event - Not correct

Firstly, the FED doesn't fund its open market operations with money from the Treasury. Secondly the FED doesn't make profits or losses in the traditional sense. That's not how it works.

When the FED buys assets such as Treasury securities or MBSs or any other kinds of debt, it simply prints the money out of thin air. The FEDs balance sheet expands, and the newly created money the FED spends then becomes part of the monetary base (currency and commercial bank reserves). So if the FED buys debt (ANY debt) the monetary base increases and so does the money supply. Buying debt is a way for the FED to increase the money supply.

If debt the FED owns is paid off, the money that comes into the FED is simply destroyed. If the FED does nothing to purchase more debt, its balance sheet shrinks, and the monetary base shrinks, as does the money supply.

If the FED wants to prevent the money supply from shrinking, which it almost certainly wants to do, it has to buy new debt (in this case Treasuries) in order to offset the old debt it owns (including MBSs) that's constantly being paid off, thereby maintaining its balance sheet. This it does by either returning the money it receives back into circulation, or, if necessary, printing more.

In actuality, it's even simpler than that, since the money isn't even printed. It's simply a keystroke on a computer screen, but the effect is just the same.

Seth Barani
14 Oct 10, 06:11
Yes, Fed reinvests $ from mortgage payments

Here is the link:

"Federal Reserve officials decided to reinvest principal payments on mortgage holdings into long-term Treasury securities, making their first attempt to bolster growth since March 2009 to keep the slowing U.S. economy from relapsing into recession. "


In a sense, the first QE didn't work properly since money simply came back to Fed from the banks, therefore, Fed realizes that the money needs to go into the economy through better spending channels (instead of bank-locker channels). Thus, the QE2 is essentially QE1 recycled, and the recent mania over QE2 is not fully based on reality.


The Federal Reserve Bank DOES MAKE PROFIT, even though it is operated like a community credit union and its management doesn't give themselves a hefty bonus and the reported profit goes to Treasury (perhaps to retire some T-bills). Nevertheless, they facilitate the enrichment of the management and CEOs of its constituent banks, thereby creating a legal avenue to divert the heist. The Fed Profit is a classic diversion tactic to keep the simple minds away from the big money looting. Barry isn't talking about looting the reported profits. He is pointing out the fact that useless paper from banks (known as toxic assets) got exchanged into Treasury bills at the end and therefore, it is an asset-laundering scheme by which banks got rid of losses up to $2 trillion. The taxpayers lose.

Audit the Fed! Support Ron Paul and anyone else who wants accountability of the Fed. That will expose its skeletons in the cupboard.

14 Oct 10, 11:34
It's just the same old scam

I'm NO fan of the FED. The FED certainly operates a scam, but it doesn't work as Barry describes. The scam comes about because of the FED's ability to print unlimited amounts of money out of thin air. In this way it can act as a "lender of last resort", bailing out anyone it wants at any time it wants, whether it be the government or the commercial banks, and buying up anything it wants, whether it be Treasuries or MBSs. It's a giant counterfeiting scheme, which it's legally permitted to engage in, even though the scheme violates all principles of natural law.

Here's where Barry's argument goes wrong. According to Barry:

"Through the early months of 2009, they [the FED] bought $1.75 trillion dollars of ‘toxic illiquid asset’ debt from America’s biggest banks. Where did the Fed get the money for the purchases? The conjured it from our Treasury, of course."

No, the FED got the money by creating it themselves, out of thin air, NOT from the Treasury.

"So now the ‘toxic illiquid assets’ are ‘maturing’ or defaulting. If the garbage is maturing, the original notes are getting paid and the Fed is accumulating cash in place of the notes."

No, the FED doesn't accumulate cash. It doesn't need to, because it can create cash whenever it wants.

"If the garbage is defaulting, the Fed is losing money."

The FED can't lose money.

"If the Fed is getting repaid on the garbage, and they got the original money from the Treasury in the first place, shouldn’t they then return the money to the Treasury so the US government can pay down debt?"

They didn't get the money from the Treasury in the first place, so it doesn't make sense to say they should return the money to the Treasury. In any event, since the government doesn't produce anything, money in the Treasury comes either from taxing the productive sector, or by the FED monetizing (printing) and buying Treasuries, or by borrowing. And since borrowing must ultimately be paid for either through taxation or monetization, it's all looted money.

"If the Fed is losing money, isn’t that the chance they took?"

The FED can't lose money. Commercial banks can, but not the FED.

"They are now engaged in QE2 that appears to be an exercise in laundering the garbage for Treasuries."

Yes, as the MBSs are retired, they are buying Treasuries.

"Instead of returning any money back to the Treasury, they are exchanging the garbage for Treasuries."

No, they are buying Treasuries with newly created money, just like they have always done. Yes, they are exchanging the garbage for Treasuries, but so what? Ultimately, it's just an accounting exercise.

"Thus, the Fed’s balance sheet will remain in the $2,000,000,000,000.00 range and they have effectively pulled off the most successful heist in history."

The heist is the counterfeiting scheme which has been going on in exactly the same way since 1913. All they did was make the scheme bigger, and enlarge it so the total amount is now $2T instead of $800B.

Pieter Samara Schoonheim
15 Oct 10, 03:38
regulatory basis for State Capitalism

Dear Barry,

Further to your article:

$2 Trillion False Flag Event at the U.S. Treasury, The Fed’s Furtive Filching

These articles are very important, as they explain how and why the regulatory basis for Private Sector Capitalism was undermined to bring forward the regulatory basis for State Capitalism.

See latest article: The FASB 157e Time Bomb and decent into financial conflagration

Previous article, also very good was: Critical to understand that American Capitalism did not fail

Please also read and post the other articles as well, all blockbuster articles explaining the stealth regulatory change behind the real cause for the apparent systemic collapse in Capitalism and that by reversing the regulatory cause and becoming educated about and working with the economics of the bank regulatory mechanism, the economy will be restored into a Golden Age of Freedom and Prosperity.

Pieter Schoonheim Samara

Max C
15 Oct 10, 07:26
This is all wrong

As Leonidia said, the Fed doesn't buy from the Treasury, how is the Treasury supposed to create currency? The Fed creates currency. When it buys something, the monetary base expands.

White Papers explaining the regulatory cause for the economic collapse and its reversal, resolution and restoration of an expanding economic boom
30 Oct 10, 13:52
White Papers explaining the regulatory cause for the economic collapse

Dear Barry,

The following are several articles / White Papers found in Answers for Americans that explain the direct cause for the systemic chronic collapse in Private Sector capital formation and access to credit that began abruptly in the month of December 2007, a stealth regulatory change, with historic precedent from 1929-1938, that removed the regulatory basis for the Private Sector free enterprise Capitalism, repeated on the sly November 9, 2007. Then, as now, that single regulatory change precipitated a financial meltdown that became the basis to shift the political-social-economic direction of America to a radical Socialist agenda.

Capitalism, whether Private Sector free enterprise American Capitalism, i.e., the economic basis for the Constitution and vision of the Founders, or government owned and controlled State Capitalism – Socialism, is based entirely on the bank regulatory system to which all market pricing reacts.

Therefore, to understand the cause for the crisis and its reversal and resolution into an expanding economic boom one needs first and foremost to learn about and understand the economics of the bank regulatory mechanism, which is the operating system for all markets just as the Windows and Apple operating systems are for all programs and applications.

This provides a roadmap into how the potential of the Private Sector economy has been repeatedly undermined by Republicans and Democrats in Congress from Administration to Administration and how on November 9, 2007, Private Sector Capitalism was put into a slow a deal spiral, intended to force lenders to accept government as the first and last refuge and guarantor for all Private Sector loans. This is the Regime change to a New Normal, openly discussed in the media as inevitable, which was planned from the outset to take 4 to 6 years to complete, which is why Obama has asking for continued Congressional support to complete, and in any case will complete, no matter what Congress tries to do, because he has a key regulation on his side that is bleeding the life blood out of capital and savings from the Private Sector in favor of the government.

The direct cause for the collapse was the November 9, 2007 replacing of FASB 115 and instituting of FASB 157 mark to market accounting on the Private Sector with ONLY THE GOVERNMENT AND FEDERAL RESERVE, retaining the right to value newly originated and acquired assets, including owned and controlled financial entities on a hold to maturity basis. The result and true political intent of this stealth regulatory change was effectively obfuscated from the public. Without notice, the regulatory basis for Private Sector Capitalism was terminated. Thereafter lenders were penalizing for making loans to the Private Sector resulting in a continuous chronic and systemic deterioration and defaults in bank asset values, unless again unless approved and guaranteed by the government and by extension, the Federal Reserve.

FASB 157e, April 2, 2009, which allowed banks to refinance assets and conditionally and temporarily value them on a hold to maturity accounting basis is a Time Bomb that needs to be disarmed by immediately restoring FASB 115, .e., hold to maturity accounting to the Private Sector, as there are a number of politically motivated triggers in place and possible (internal and foreign) events that can and will set off an economic Time Bomb that will implode the economy into a crisis of unmitigated proportions that will be the basis to usher in, as the only solution to an uninformed and bewildered Congress and people State Capitalism / National Socialism / Marx’s concept of Communism based on the regulatory control of the banking system by the government.

Here further below are some of the must read articles that explain the economics of the bank regulatory mechanism that uncover the veil of the predator and crony Capitalists and Progressive government elected and bureaucratic officials behind the contrived economic collapse.

The articles also explain how by understanding and following how the regulatory ratios for determining the principal value of mortgages and loans and their classification within the banking system that, subject to the very first act of the New Congress and/or the States to nullify FASB 157e, FASB 157 and reinstate FASB 115, hold to maturity accounting in the Private Sector, the regulatory Time Bomb will have been disarmed and the economy will not only recover but shift towards a pervading widespread economic boom, where the limits to the creativity, ingenuity and innovation of each new generation of entrepreneurs will be unshackled allowing the American Experiment to finally enter into a Golden Age of prosperity envisioned by the Founders.

Here are some of the many articles. I urge you to read, reread and study them all. Meanwhile, I’m available to explain the economics involved, which BTW unlike other market based economic models, is irrefutable and entirely and absolutely predictive of the economic-social- political outcome of any politically motivated event, whether initiated by internal or external interests.

Time Bomb | Progressives’ Destruction of Private Sector Wealth and Control Of Capital and Property

How Progressives Destroyed Capitalism and How to Restore the American Dream

The New Normal

Capitalism’s economic mechanism, versus Socialism’s economic mechanism

Freedom Versus Enslavement Using Banking Regulations to Destroy Free Enterprise

Goldman Sachs went long oil and short MBS knowing that a stealth regulatory change Nov 9, 2007 would collapse lending to the Private Sector to foster State Capitalism (Part One)

The Myth that the subprime market caused the collapse of 2007 and 2008: Part Two

All these articles have to do with the understanding of the financial infrastructure that is the underpinning to all Main Street and Wall Street financial institutions, including the Federal Reserve and by extension the entire Main Street economy, and how this is orchestrated by the government to benefit and promulgate the betterment of the Private Sector, or to benefit itself and patrons of crony capitalists by creating subjugated classes and subjugating access to capital.

The true economy is like an iceberg with all capital markets, market pricing and political social outcomes playing out on the 10% above water, but entirely based on the 90% regulatory underpinning below water, that until the this below water hidden regulatory mechanism is understood, remains hidden from view, thereby enabling those elite in banking and government privy to this arcane economics to manipulate the markets, economy, and political direction of society to their nefarious ends.

FASB 157e must be overturned and forever banished as the last act of a “King George” elite mentality to conquer the Americans, and FASB 115 must be reinstated and its importance to the Private sector understood.

The electorate are hoping for some restoration of the economy with minimal suffering, but what really awaits them, if they understand follow the implications of working with the economics of the bank regulatory mechanism, reoriented to favor those in each new generation, who work, create and innovate, is the immediate reversal and exponential expansion of all levels of business, banking and the economy into a true Golden Age of ever expanding widespread prosperity. Read these articles and White Papers and understand the regulatory cause for the crisis and also the real potential awaiting them.

Pieter Schoonheim Samara


Skype: pietersa

For background regarding Answers for Americans and my own career as an entrepreneur in various businesses, mortgage banking, securitization and real estate development in the US, Europe and Asia, go to the website http://answersfor and click on the About tab.

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