Wall Street Picks Fed’s Pockets: Rakes in Huge Profits

August 3, 2009

(ChattahBox)—Wall Street is raking in huge profits by trading with the Federal Reserve in the private market, as the Fed continues its purchasing of securities to stabilize the still shaky financial system.

Critics of the Fed say the agency is allowing greedy Wall Street profiteers to take advantage of the transparency of the Fed. While lawmakers like Barney Frank, chairman of the House financial services committee, say that’s the price the government has to pay to keep the financial markets afloat.

Frank said, “You can’t rescue the credit system without benefiting some of the people in it. Still, said Frank “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”

Wall Street traders hold a huge advantage in setting the prices of the securities sold to the Fed. As soon as the Fed announces its intent to purchase certain securities, traders stock up on them to sell to the Fed at an inflated price.

With less competition, the spreads between the bid and offer prices have been widening, setting the stage for some traders to set unusually high prices when trading with the Fed.

Trading with the Fed has resulted in a hidden financial benefit to Wall Street firms. But the Fed says that’s the whole idea; the agency wants to help Wall Street earn profits to stabilize a financial system that was near collapse less than a year ago.

Still, it’s hard to watch Wall Street gaming the system, behaving like a gang of vultures picking off every last bit of meat from the Fed’s bones to line their pockets with easy cash from profiteering.

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