Fed Holds $1.25T in Mortgage Backed Securities

It is hard to say how many of what assets the Federal Reserve Bank has on its balance sheet, not without a full audit, but I'll post what information there is. MarketWatch is reporting the Fed has accumulated $1.25T in mortgage backed securities [1] through a program which ended last March. Today in an FOMC meeting they announced their hesitation to sell these securities[2], until the economy settles better.

I'd guess this hesitation lies with the fact these mortgage backed securities are toxic and have insubstantial market value, which putting them up for sale would reveal. It is my understanding these purchases are non-recourse, so whatever money is not paid pack on these securities amounts to a gift of free money to whoever gave them to the Fed. This is inflationary, to be sure, but deflationary forces are greater, and keeping asset prices down from their 2007 highs.

The $1.25T comes from a quantitative easing program announced in March 2009 and outlined in June 2009. It was announced then the Fed would buy $1.25T in agency MBS's, and by "agency" they mean the GSEs (Fannie Mae and Freddie Mac), and in addition another $200B in agency debt, and by "debt" I never encountered an adequate definition. Then there was a final $300B in Treasury Bonds the Fed would buy for a total of $1.75T.

Since the Fed hasn't been able to lower interest rates below 0%, which happened on December 16, 2008, quantitative easing is the next step in loose monetary policy. It is a temporary infusion of liquid cash, where the Fed prints money to buy bonds. Any bonds will do, usually it involves Treasury bonds, but in this case Mortgage Backed Securities were also used. The printed money returns to the Fed as the bond is paid off over years. Selling these bonds, as was considered this FOMC meeting, has the opposite effect of draining money out of the economy and back into the vaults of the Fed.

So long as the bond is fully paid off, there is no net infusion of cash over time, but if it isn't, then the Fed has essentially given away the cost of the bond to the seller of the bond. In this case it would be the GSEs so this is a roundabout way for the Fed to hand money to the government. Since GSEs support the banks, banks are the ultimate private beneficiaries in all of this.

As of March, it would appear quantitative easing efforts have ended and I've seen no new ones announced. If some in the Fed are even contemplating removing MBS's from its balance sheet, this might be viewed as a positive sign—amid the sea of pessimism that quantitative easing with mortgage backed securities conjures.

Sources:
1. Fed won't sell mortgage holdings anytime soon.
2. Fed Majority in no rush to sell assets.