Treasury Department Forced To Bail Out ... The Federal Reserve !?!

DriftingByTheStorm

Well you know things are doing well when the fucking Treasury has to lend money to the Fed, for fucks sake.
Sweet sad jesus.
:(

Keep in mind money flowing from treasury to the fed isn't wholly abnormal, its just the timing and the urgency that make this pretty fucked up.

Treasury Department Bails Out The Fed

article in full wrote:

You didn't really think that the Fed's balance sheet wouldn't be hurt by lending $85 billion to AIG, pouring liquidity into the markets, opening new borrowing facilities, guaranteeing Bear Stearns obligations and taking junk collateral at inflated prices, did you? And surely you didn't really buy all that nonsense that the Fed was spending it's own money on these bailouts rather than taxpayer money. The government has wiped away all those illusions. It is borrowing money, and handing it to the Fed to shore up the balance sheet.

Direct from the Treasury Department's press release.

The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.
The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules. Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.

Bloomberg: Treasury to Sell Bills to Bolster Fed Balance Sheet

Bloomberg wrote:

Sept. 17 (Bloomberg) -- The Treasury is selling $100 billion in short-term debt to enable the Federal Reserve to expand its balance sheet, a sign of the strains created by the biggest extension of central-bank credit to financial companies since the Great Depression.

The program started today with a $40 billion auction of 35- day bills, a day after the government agreed to take over American International Group Inc., the Treasury said in a statement in Washington. Another $60 billion will be sold tomorrow, it said.

The proceeds will ``provide cash for use'' by the Fed as it seeks to boost liquidity in credit markets struggling from $515 billion in writedowns and losses since the start of last year. The announcement illustrates the potential drain on the government's finances in taking over AIG, Fannie Mae and Freddie Mac, and taking on $29 billion in Bear Stearns Cos. assets.

``It is becoming imperative for the Fed to take actions to enlarge its balance sheet,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

Tomorrow, Treasury said it will sell $30 billion in 20-day bills and another $30 billion in 76-day bills, both for settlement Sept. 19. These bills will ``help provide additional funding for the Federal Reserve,'' the department said.

Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.

Cash for the Fed

``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program'' and ``will provide cash for use in the Fed initiatives,'' the department's statement said.

Treasury Secretary Henry Paulson has worked with the Fed to manage the financial sector's cash crunch. The new bill auctions will help to ensure financial institutions have ready access to Treasury securities, which have been in short supply recently as firms try to maintain liquidity.

Arguing before Congress in July for unlimited authority to help mortgage companies Fannie Mae and Freddie Mac, Paulson said ``if you have a bazooka in your pocket and people know it, you probably won't have to use it.''

``This is Hank Paulson making sure that there are extra bazooka shells sitting at the Fed,'' said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. Treasury is ``hoping this convinces people that'' the Fed won't have to use them, Posen said.

Fed's Balance Sheet

The Fed will offset the impact of the new bill sales on its balance sheet so as not to affect the stance of monetary policy. The federal funds rate target will remain at 2 percent.

The Treasury said it will sell the new bills using its existing auction procedures, giving ``as much advance notification as possible.'' The bills will not have a uniform fixed term, giving the Treasury the same duration flexibility that it has with cash-management bills.

Fed holdings of Treasury securities have fallen to $478 billion as of Sept. 10, from $741 billion at the beginning of the year, as the central bank has made room on its balance sheet for the new lending facilities.

In tomorrow's auctions, the Treasury said it would sell $30 billion in 20-day cash management bills with a closing competitive bid time of 11:30 a.m. New York time and $30 billion in a 76-day cash management bill with a closing competitive bid time of 1 p.m.

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.netJohn Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: September 17, 2008 17:50 EDT

and for those that missed it last time i posted it...
to clarify this situation with one priceless picture:

GRAPH: Total Borrowings of Depository Institutions from the Federal Reserve: Billions of Dollars: NSA