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If this story is confirmed over the weekend, then I think we have a genuine candidate for the Blackest of Mondays.

Zero Hedge Exclusive: Is State Street Trading For Federal Accounts?

Posted by Tyler Durden at 9:54 AM

Zero Hedge has always been fascinated by the behemoths of securities lending (or not so much lately) State Street and Bank Of New York: these firms, which allegedly had just marginal toxic exposure, were in the front lines for the TARP bailout and have traditionally been handled with velvet gloves by the administration. In fact, many would say the custodian firms are in a league of importance much higher than even Goldman or JP Morgan as with their repo activity, security lending and cash collateral reinvestment, they are the de facto center of the shadow banking system.

A Cliff notes version of the stock lenders' Modus Operandi, sent in compliments of a reader:

* In the securities lending arb, stocks and bonds are lent out by custodians and investment managers. The loan is collateralized by the borrower with cash, the lender promises the borrower a return on that cash and then invests the cash in repo and short-term debt at a spread to that promised rate of return. The sec lending market is in the trillions. This market is basically rolling overnight repo right now as it tries to dig itself out of the MTM/liquidity hole.

* Many of the Fed/Treasury balance sheet efforts have been basically attempts to supplant securities lenders. Sec lending funds were the biggest buyers of 1-3yr FRNs (hence, TLGP). Lenders were also the biggest buyers of AAA cards and autos (read TALF 1.0). They were the second-biggest buyers of ABCP after 2a7 funds (ergo AMLF). Indirectly they were the largest funder of LT2 bank debt (via SIVs MTNs). They're large repo counerparties, and did everything from short-dated CDS to liquidity put options on Canadian levered super-senior CDOs.

* Many stock lending funds, which have similar accrual accounting regimes to '40 Act money-market funds, have broken the buck but are still trading at $1. for example see the section beginning "We may be exposed to customer claims" on p.11. What does this mean? Not only are certain securities lending providers opening themselves up to significant litigation risk but, importantly, clients in stocks can't reallocate to bonds (or vice-versa), since the sec lending funds aren't letting them out (except in-kind). Finally, of course, as long as sec lenders remain hurt but unsupplanted, they stay short duration, which extracts hundreds of billions of $$ in term financing capacity out of the market. Fed won't act as a lender of last resort since they're still smarting from the AIG sec lending bail-out they didn't see coming.

It is no surprise that in order to incite a return to pre-Lehman economic levels (the administration's #1 goal bar none), not only the stock market would have to much higher from its March lows (a task largely accomplished through market increases on disappearing breadth, liquidity extraction by the likes of Goldman Sachs, and assorted last minute inexplicalbe ramp ups in the various futures and ETF markets), but also the shadow system would have to be back with a vengeance. And while new mechanisms to achieve this such as securitization replacement alphabet soups have yet to prove their efficacy, the real heart of the shadow banking system Frankenstein is and has always been the repo market.

Which is why we were greatly troubled when we learned recently on good authority that Federal representatives may have opened multiple undisclosed-type accounts with none other than State Street Global Advisors over the past few months. All of these accounts are allegedly handled by one single trader, who is cocooned and isolated from interaction with other partners.

Zero Hedge can, as of yet, not vouch for this being 100% factual and is asking readers who may have additional knowledge of the situtation to please come forward and share their views (tips@zerohedge.com). If, indeed, the Federal Reserve or other derivatives of the administration, are now directly involved in trading, managing repo terms, stock lending, collateral distribution and other liquidity-crucial aspects of what was once an efficient market, then indeed this rally could be written off not merely as the biggest short covering rally of all time, but one that has been explicitly orchestrated by those who should be most impartial to an efficiently working market.

got this story from this ticker

Uhhhhh.... Ben? (Blatantly Unlawful Acts?)

Props to Zerohedge for having the nads to run this unconfirmed:

Which is why we were greatly troubled when we learned recently on good authority that Federal representatives may have opened multiple undisclosed-type accounts with none other than State Street Global Advisors over the past few months. All of these accounts are allegedly handled by one single trader, who is cocooned and isolated from interaction with other partners.

Zero Hedge can, as of yet, not vouch for this being 100% factual and is asking readers who may have additional knowledge of the situtation to please come forward and share their views (tips@zerohedge.com). If, indeed, the Federal Reserve or other derivatives of the administration, are now directly involved in trading, managing repo terms, stock lending, collateral distribution and other liquidity-crucial aspects of what was once an efficient market, then indeed this rally could be written off not merely as the biggest short covering rally of all time, but one that has been explicitly orchestrated by those who should be most impartial to an efficiently working market.

Uh, there's a bit more than just "writing off this rally" there.

If this is true and especially if The Fed is involved, there is a major problem with the law.

See, The Federal Reserve is explicitly not permitted to buy anything that doesn't have the full faith and credit of The US Federal Government behind it. It is that fact (found in Sections 13 and 14 of The Act) that has led me to repeatedly rant about The Fed's purchase of Fannie and Freddie paper - distinctly outrageous acts, given the plain language of the law. (Note that purchase of Ginnie Mae securities, which are fully guaranteed with full faith and credit, would be fine. Note also that Ginnie Mae didn't get in trouble fiscally either. Hmmmm....)

The Fed's charter and statement of operation is that liquidity operations are to be performed through the NY Fed dealing desk. That transparency is important. It is why I was able to detect the liquidity drain on September 24th and sound the alarm - even though it went unheeded - three days before the equity market collapsed.

This sort of transparency of open market operations is critical. Even though nobody gave a damn about the huge liquidity drain in September, the record remains for Congress and others to look at in the future, should they so choose, and if there is an investigation of the propriety of those actions, the proof is right there in front of people's nose.

If The Fed is dealing through one "special trader" at State Street, then all such transparency of action and intent is GONE.

Such intentional obfuscation can only have the purpose of being able to "act in the shadows." It is entirely possible that while Congress ignored my warning call, The Fed did not, realizing that there is a tremendous amount of exposure for them (as there should be!) for such an action, and therefore, acts were undertaken to hide this sort of thing in the future.

Bad juju folks.

Worse is that if this is true and is proved the risk of capital flight is extremely high. Do you want to participate in a market that is "rigged" like this by The Fed, operating with essentially limitless liquidity to game the markets any time they'd like in violation of the law?

If this is just a bad rumor or some tinfoil conspiracy, then it is. Lord knows there have been plenty about the "Plunge Protection Team" over the years.

If this proves up as real, The Fed must be immediately decertified and, if we can find a criminal act in here (I suspect that prosecutors might be able to) everyone responsible for this, or who acted with knowledge of it, needs to wind up in prison.

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Well, somebody's been painting the tape on Wall St. There is a video from Fox or similar that had a financial chat show talk about the mysterious market topups, always for the same amount, and every day at the same time near close.

Who's got that kind of money?

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A bunch of doom mongering prognosticators, proved wrong by the recovery in equities, trying to explain the fact they were wrong with tin foil hat conspiracy theories.

Nothing to see here.

Oh, there you are mate - I was starting to worry about you. We can start trolling these stupid bears now....

Green shoots.......WIBBLE!!!!.....etc....

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