Tuesday, January 26, 2010

Soc Gen, the Fed, and the USD

What we all knew...
From Zero Hedge,  Presenting The BlackRock-AIG Presentation In Which It Becomes Clear That Soc Gen Had Pledged Sub-50 Cent Securities To The Fed's Discount Window

"And speaking of the Federal Reserve, while reading the SocGen section, we came across this little stuner on page 3:
We have heard second-hand from a trader that Soc Gen has pledged much of the portfolio to the Fed discount window for future liquidity
Aside from the fact that in October 2008 France-based Soc Gen was not a Primary Dealer (it only just applied for this position a few weeks ago), one needs to turn to page 5 of the presentation to realize that Soc Gen's portfolio had a value of 49 cents on the dollar. What this implies is that in October of last year (and ostensibly prior) Soc Gen, a foreign, non Primary Dealer, had access to the Federal Reserve's Discount Window, where it had pledged securities that had a value of 49 cents on the dollar, and for which the Fed would have taken arguably no haircut, thereby funding the French firm at par for securities that were worth less than half, and which the taxpayer was on the hook for. Indeed, these securities may well have been completely worthless: lower on page 3 we read:
Soc Gen and AIG are currently in dispute over existing events of default and credit events under transaction [ineligible] for 2 deals, totaling $650 million of notional exposure.
We would not be at all surprised if the defaulted securities were part of the crap that had been given to Tim Geithner, at the time head of the New York Federal Reserve.
And what Soc Gen was doing by pledging reference assets to the Fed, we are certain that all the other counterparties (those which unlike Goldman still held on to the securities) were doing as well."

Think about that for a minute....foreign banks were  (are) desperately short USD's. The Fed came to the rescue once,the odds of getting that through again are probably pretty low. And BTW aren't they obliged to repay those dollar advances, and presumably liquidate the pledged collateral at some point?
The road that can has been kicked down may be coming to an end.

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