Today the NY Fed, along with Pimco and Blackrock, requested that Bank of America take back $47 billion of mortgage securities, alleging that BOA didn't properly service the mortgages.
I don't know the ins and outs, but from a distance this seems like a pretty extraordinary step by the NY Fed. They claim to be obligated to do this because they are have a fiduciary obligation to the American people to maximize the value of their bond portfolio. But have they considered the consequences? BOA, for instance, only has a reserve of about $4.4 billion for putbacks. (Its total equity is about $240 billion.) You can be sure that other investors are lining up.
By the way, there's about $14 trillion of mortgage backed securities outstanding in total. And then the derivatives traded based on that volume of securities is many times $14 trillion.
So why is the New York Fed LEADING THE WAY to cast the mortgage market in further turmoil and increase the borrowing costs of money center banks??? Is this also in the fiduciary interest of the Fed?
It's no reach to think that the timing of this move is related to the election and/or the upcoming lame duck session of Congress. If Democrats want to raise taxes and impose a VAT, then a dollar crisis would be the perfect justification.
Anyway, there's more to follow. One hopes that the Fed can keep control of the situation now that they've started the assault on their member banks.