I’ve been assuming since day one (since there was no other logical explanation for QE aside from the fact that it can clean up bank balance sheets) that QE2 was a bank bailout and not a Main Street rescue plan and it now looks like Ben Bernanke and the Fed are (at least partially) confirming this.  They are concerned about the capital positions of the nations largest banks. The WSJ reports:

“The Federal Reserve will require all 19 banks that underwent stress tests during the height of the financial crisis to undergo another review of their capital and their ability to absorb losses under an “adverse” economic scenario.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank.

The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.”

The Fed clearly sees something that Wall Street doesn’t.  They know the housing market is now rolling over again and that Christopher Whalen is likely correct about the banks and their woes.  Ben Bernanke has implemented QE in case he needs to buy MBS and shore up the credit markets.  He wants to avoid a repeat of Q4 2008.  That’s a good thing.  It’s actually quite brilliant if you ask me.  But the fact that QE is being sold to the public as some sort of jobs creation program or Main Street stimulus is 100% nonsense.  It will have little to no impact on Main Street, but will likely go great distances in ensuring that the credit markets don’t relapse.  It’s nice to see the Fed being proactive for once.  But now the question must be asked – just what do they know that the market doesn’t and how bad could it really get?


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Captain America

    Stress test part deux? Are they serious?

  • http://seekingdelta.wordpress.com/ seekingdelta

    TPC, You have ripped BB for missing the housing crisis the first time around and then for implementing the wrong solutions. Are you really assuming that BB is seeing the double dip before it happens?

    When you say “that’s a good thing” do you mean the QE2/ MBS bailout plan or avoiding ’08. Agree on the later…not the former.

  • http://www.zerohedge.com fb

    Something tells me $600B is not going to be enough to buttress against another credit collapse.

  • KB


    When you name it “brilliant” is it the same brilliant when a thief takes my wallet and i do not feel it because of clever distraction?

  • American Dreams

    TPC I have been a reader for quite some time and have never felt the need to post until now. I find it had to believe that you would consider another round of bank bailouts a good thing. Do these poorly managed institutions of banking not need to fail? Do we not just extend the problem by rewarding their failures yet again? IMHO the credit markets need to be exercised of their respective demons which would help this 30 year credit expansion properly contract. Buy the Fed purchasing more MBS and shifting its balance sheet back to being expansionary in this area it’s just saving the banker bacon(again) at a time when they should be left to fall into the fire.


  • http://www.pragcap.com TPC

    Not even close to enough to save banks, but could be enough to avoid a serious credit market relapse.

  • http://www.pragcap.com TPC

    FED is lender of last resort. It’s their job to make sure overnight market doesn’t collapse.

  • American Dreams

    TPC I have been a reader for quite some time and have never felt the need to post until now. I find it had to believe that you would consider another round of bank bailouts a good thing. Do these poorly managed institutions of banking not need to fail? Do we not just extend the problem by rewarding their failures yet again? IMHO the credit markets need to be exercised of their respective demons which would help this 30 year credit expansion properly contract. By the Fed purchasing more MBS and shifting its balance sheet back to being expansionary in this area it’s just saving the banker bacon(again) at a time when they should be left to fall into the fire.


  • http://www.pragcap.com TPC

    I don’t advocate another bank bailout. And it’s important to note that $600B won’t save the banks from their $20T mess. But this can keep credit markets from collapsing and that’s a good thing.

  • haris07

    They have said that they will only buy Treasuries, how did you get to the idea that they will buy MBS? I don’t recall even a word that suggests MBS….I don’t think BB is doing anything “brilliant”, this is just him following up on his 2002 “Making sure we don’t get there” whute paper. If the banks have trouble, BB and Timmy will engineer another backdoor bailout using some other means (although this time with 2nd lien and HELOC’s, he can’t use Fannie/Freddie).

  • http://www.pragcap.com TPC

    The option to buy MBS is always on the table. They’re not restricted at all. I could be wrong. If I am then BB is just wasting his breath.

  • prescient11


    Watch out buddy, I’ve literally got over a thousand at risk that says they ramp the ever loving hell out of the market manana.

    You think they want that IPO going off in a soft market. pleazzzeeee.

    Just one cynics bet buddy. I expect more than 150 points up on the Dow tomorrow, at some point.

  • http://www.pragcap.com TPC

    150 points on GM? They’ve already won the game here. The GM IPO is a huge success and the administration will talk endlessly about how the taxpayer is getting their money back and how it was all a huge success. Not sure that means much for the rest of the market though….

  • prescient11

    And another thing, TPC. If BB is seeing more trouble down the road, then don’t you think they are going to ramp the f’ing hell out of the market so that these banks can do additional equity offerings.

    Look how fast they paid back TARP. Ridiculous. They run the damn show man, and the retail sucker is still not in the game.

    So, to keep it short and sweet, I think feelers are being put out that they are going to have to raise more capital. We all saw how it went down last time.


    And the Repubs are not going to allow wholesale takeovers, or are going to go ape about it.

    Thus, knowning that these banks really are too big to fail, and that the government likely does not have the balls or resources to put them into receivership, we get QE2.

    BB knows it’s a bank bailout, but I believe that it also has some of his intended effects, however slight, of hurting currency strength, etc. So, if he can soak up some more garbage from the banks and then, at the same time, the market gets jammed up so that these banks are raising tons of additional capital at nondilutionary prices, or at least as much as possible, that’s where I see it going.

    One more big capital/equity raise by the biggies, and I think that should get them through the worst of it, imho. I actually see new highs into 2011 if we end the year within 400 points of current levels.


  • quark

    Someone needs to tap all of Bernanke’s avenues of communication. As was reported in 2007 we had the Treasury Secretary Henry Paulson meeting with Goldman Sachs in Russia and Robert Rubin calling Paulson in July/August time frame expressing his concerns.

  • http://fridayinvegas.blogspot.com Kid Dynamite

    I’m hearing QE2 will aid job growth… straight from the horse’s mouth:


    “Federal Reserve Chairman Ben S. Bernanke met with U.S. senators today to defend his expansion of record monetary stimulus, saying it would aid job growth”

    aside, if losses fall on a bank balance sheet, but no one is there to mark them to market, do they make a sound?

  • http://www.pragcap.com TPC

    Yeah, I would love to know exactly how adding bank reserves will lead to job creation. This man is delusional if he truly believes that….

  • KB

    well, there are other means to support overnight market. Also, I have not noticed any weakness in that market anyway…..
    I agree with the thesis that QE2 is solely designed to support banks. The problem is, the way its preparation and execution done would make QE3 next to impossible to implement because of extremely high level of public resentment. We can only pray that QE3 will not be necessary

  • B Ferro

    I disagree with your logic – why pull the trigger before you actually need to given the political landscape?

    Even if we permit Bernanke to be clairvoyant in an economic sense, I would think pulling the trigger on your last bullet before it is needed and failing to see the backlash that would result from QE2 at least nullifies his “vision” of what is to come

  • mike mohr

    I think QE2 is a bank bail out also. It is to keep the markets from rolling over so the banks can unload their investment to main street.

  • http://none rhp

    prescient and TPC,

    love your banter! TPC, I have to go with prescient on this one. I don’t think he’s saying that GM IPO will drive the mkt higher tomorrow. I believe he’s saying “DA BOY’S” will drive the mkt higher tomorrow in order to extract maximum bennies (I believe those were the uppers in previous years before meth became big)from psych perspective……..

    bets are placed. tomorrow we find out!

  • prescient11

    One more data point TPC. Check this out on ZH


    28 weeks of mutual fund outflows. When that reverses for 28 straight weeks, then I will get nervous that the last sheep has crossed the road…

  • http://www.pragcap.com TPC

    Well that would certainly be convenient for the govt. We’ll see. I am more inclined to bet that claims and Philly Fed data rule the day….

  • Captain America

    I see this all the time and it’s confusing. Money doesn’t flow into and out of stocks. All stocks are held by someone all the time so this data is clearly missing the point. If you sell your mutual fund then the fund manager is selling shares of stock on your behalf. Someone is buying those stocks. So, if you sell your mutual fund you are moved into cash. It’s not different than saying that you are moving out of stocks. But net net nothing changed. Someone still holds all the stocks and now all the same cash is held.

    Looks like datamining if you ask me.

  • Captain America

    You know we’ll rally tomorrow. This is a huge win for the government and they’ll milk it for all it’s worth.

  • Chris

    Perhaps Job Growth at Banks, Government Regulators, and Real Estate Lawyers :-)

    Agree with TPC that Bernanke left QE 2 wide open for MBS especially on the repurchases. I bet its a back up plan in case congress messes up the bag holders Fannie and Freddie or the banks lose an MBS case to investors and get putbacks. BAC, C, and Ally will need govt support if they get significant put backs. It is prudent if you believe in the whole extend and pretend strategy, i just wish he would put the banks in receivership but that would probably trigger CDOs that would blow up the financial system.

    “The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”


  • prescient11

    Well obviously that is a true statement, kind of like the goofy “money on the sidelines” argument.

    My focus is on who is doing the buying and selling. And retail looks to still be selling. Fundies don’t put a ton of money in Fidelity mutual funds, to my knowledge.

  • mlb

    Your “second bailout” scenario is fiscal policy plain and simple. I don’t think Congress or the American taxpayer should stand for that. And I don’t think Bernanke is brilliant for finding subtle ways to practice fiscal policy. I believe Congress will see the Fed’s actions for what they are (fiscal policy when buying MBS) and severely limit the Fed’s mandate at some point. Ben will go down in history as the man who killed off the Fed – brilliant.

  • Captain America

    Yeah, but couldn’t they be selling mutual funds and buying ETFs? I’m just glancing at the chart from ZH and I don’t see how it’s useful. How do you use it? They’ve been selling for most of 2010.

  • Dan G

    The market has been tied inversely to the dollar. It doesn’t look like the dollar is going to take a big hit at this juncture. I think GM will be a pump and dump.

  • Captain America

    Futures already being walked up afterhours. They did this last night also. We would have been down big today if not for the 5 points of ES that was goosed into the market before the open. They walked the Nasdaq higher by a full 0.6% last night. Already looking at a couple points this session.

  • Captain America

    I’m telling you guys. Just look at the futures already. Up 40 points on no news no nothing. The govt is running gun this market tomorrow just so they can talk about how great their stupid IPO was.

  • Captain America

    Futures have rallied 50 points since the close. Amazing.

  • Captain America

    This is practically comedy. Now up 65 points. No news. Nothing.

  • Bill

    HR 3808 veto upheld -To require any Federal or State court to recognize any notarization made by a notary public licensed by a State other than the State where the court is located when such notarization occurs in or affects interstate commerce.
    Maybe BB watches the House ? Lots o MBS are gonna crumble due to this veto . Banks are definitely going to hurt to the tune of 600 mill . Thats the first morphine shot .

  • walden

    Re: the bank bailouts. Why’s that news? Chris Whalen has been predicting that for months.

  • Captain America

    Now up 80 points. Looks like the government is going to take credit for the rebirth of GM and America tomorrow in a big way.

  • Barbadosbob

    “With all due respect, U.S. policy is clueless….(the problem) is not a shortage of liquidity. It’s not that the Americans haven’t pumped enough liquidity into the market.”

    Wolfgang Schauble, German Finance Minister reacting to QE2

  • flipspiceland

    Stop thinking “institutions” when referring to these ripoffs.

    Real people are getting this money, namely The bank’s top echelon employees.

    The institutions are not going to be dented by a trillion dollars but boy oh boy their execs, bond holders, and other parasites will do just great in spite of running failed institutions.

    They don’t give a hoot about anyone else. They are beyond wealthy for another 3,000 years,

  • okl

    if it’s not somewhat true, it won’t be so funny…

    TPC: apologies in advance for posting from another website.

  • okl

    posted too fast

    i do somewhat disagree with the idea that the Fed is buying USTs from the banks as stated in the video… i just don’t quite see the point in that because it would be a little too blatant and it also doesn’t give the banks chance to earn from the spread and recover their balance sheets.

    if the Fed isn’t gobbling up MBS or some crappy toxic stuff, I don’t see the point.

    as much as i hate to say it, i think a proper fiscal stimulus plan would be much better than QE2; though I also admit that
    a) Obama probably used up his political capital in the healthcare plan
    b) Congress is gridlocked for another one; probably anything economic
    c) As a result of (B), Washington will probably try to improve the situation in the Middle East to score points

    I’m pretty sure we will see how deflation like what happened to Japan would look like in America…

  • Alex Grey

    Very perceptive. Underlying bailing out the banks is a view that central banks and fiscal policy can stop the spread of asset price declines (notably in MBSs) resulting from the slump in house prices. I think that concern over the risk of debt deflation (see your posted article by Eggertsson and Krugman) is at the root of the problem. If it were not for debt-deflation fears I think the IMF solution to financial crises would have been more likely adopted i.e., nationalisation of the banks and recognition of the extent of price declines in MBSs as a result of house price declines. Bernanke is aware of the risk of debt deflation but emphasises the role of the financial system in propagating price declines. Hence policy is being directed to try to stop the widening of asset price declines. My own opinion is that this will ultimately fail. Already Ireland is indicating that if you don’t have control of monetary policy and therefore the cental bank cannot bail out the banks, that bank losses are too great for fiscal policy alone to absorb. Ultimately it seemingly comes down to whether you believe Eggertsson and Krugman (and their predecessors, Keynes, Fisher, Minsky) or whether you believe Bernanke. If debt-deflation is an inexorable process that can only be ultimately stabilised by fiscal policy, then the policy of trying to stop widening asset price declines through monetary policy will ultimately fail. Fiscalpolicy is needed to stabilise demand. Hoewever, things are not so simple. A key issue, that is not being openly discussed, is at what level can fiscal policy alone stabilise the economy. There is the legitimate concern that stabilisation will occurr at a very low level, after substantial asset price declines, as occurred in the Great Depression. I think Krugman must wonder about this, hence his seeming support for QE2, which has confused many. If so, thene the real issue is whether debt-deflation is an inexorable process or not. Japan is the best case since the Great Depression, which indicates that it is inexorable (witness Koo’s reference to a decline in commercial real estate prices of 87%). What is distinct about Japan is in fact its ability to stabilise economic activity in the face of widespread asset price declines. This is arguably a result of fiscal policy but also some special features of Japan (strong exports,high personal savings rate, tendency for persons not to abandon houses where the mortgage is underwater). This may be the reason that Krugman supports QE2, but will it be enough without the other positives that Japan had/has.

  • Guy Baker

    If Whalen is right BofA has become a REIT with a finance arm, just as GM became a healthcare company with an auto-making business on the side. And, BofA needs to reorganize, or be taken over preemptively under Kanjorski and be dismantled.

    Which will it be? BofA is currently in a race against the clock to sell off assets by the end of the year as per its agreement with the government. Problem is, foreclosure and MBS putback-related liabilities appear to be building faster than BofA can liquidate assets.

    If it’s discovered that it was standard operating procedure at Countrywide to hold onto mortgage notes and NEVER transfer them into the trusts as per their PSA’s, AND if it’s soon obvious that BofA can’t pass the de facto stress test (ie it won’t be deemed by the government as fit to issue dividends or buy back stock), what will happen to BofA shares?

    Could it be that QE2 is primarily designed to help fund whichever entities will be buying BofA’s assets?

    Interestingly, did you see that PIMCO is ramping up efforts to build a huge new distressed debt fund? And have you heard that a couple big hedge funds are hiring MBS experts in anticipation of soon being able to buy these assets on the cheap?

  • Guy Baker

    One more thing, when I say “buy BofA’s assets” I don’t mean the ones it’s sold so far. I mean the ones it may have to sell shortly.

  • Concerned

    Guy Baker,

    If you want (or need) a bit of confirmation of the fact that CountryWide held onto the the notes in violation of the PSA’s, consider the following: if they did not even bother to generate the necessary assignments, that set of 3 assignments needed to move each mortgage into the securitized trust, do you doubt they kept the notes? All they had to do was write up and properly sign each of those 3 pieces of paper for each mortgage. (Yeah, they may not have to record the assignments with the county since they were useing MERS but they should have had the assignments stashed in the files for eventual use, right? At each transfer, it MUST be documented or you wind up with a clouded title.)

    So do the following: for a county like San Diego, CA, go to the County Recorder’s site and do a search on “America’s Wholesale Lender”. Now that ‘AWL’ moniker is a TRADE-NAME for CountryWide.

    If you indeed search the San Diego site, you will find a very high level of filings that are in 2010. Those listing are a mixture but all represent filings for a company that should have ceased doing business in that name.

    Included in the mixture is a significant number of assignments. Guess what? About all of those assignments are the improper form of assignment that was touched on in the hearings on Capitol Hill this past week. They are assignemts from AWL directly into the ‘pool’ instead of the multi-step assignent with the PSA depositor putting the mortgage into the pool.

    Why the flood of assignments now? It is probably all for properties that are in some stage of foreclosure.

    If they are short-circuiting the assignment work, why believe they bothered to transfer the notes?

  • Concerned


    BTW, can I presume that these late assignment filings are not part of the asset disposal that BofA is to do per it’s agreement with the government that you referenced?

    What was that agreement, exactly?

  • Guy Baker

    The agreement? Earlier this year, as a condition for repaying TARP funds, the bank has to come up with a sum of additional capital. It was supposed be an even larger sum, but BofA negotiated it lower. The bank has until the end of the year to produce the additional cash. Problem is, they may be incurring new liabilities faster than they can sell assets to meet the deadline. I add to the list of known liabilities (Pimco/putback) and foreclosure liability, the possibility that they may have a big legal problem as it appears Countrywide may not have placed hundreds of thousands of mortgages/notes into trusts as promised.

    What will the cost of this be for BofA, if Kemp v Countrywide and other similar cases get widespread attention?