Wall Street profits from trades with Fed By Henny Sender in New York Published: August 2 2009 23:04 Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say. The Fed has emerged as one of Wall Streetâs biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party. However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price. The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fedâs balance sheet, detailing the share of the market in particular securities held by the Fed. âYou can make big money trading with the government,â said an executive at one leading investment management firm. âThe government is a huge buyer and seller and Wall Street has all the pricing power.â A former official of the US Treasury and the Fed said the situation had reached the point that âeveryone games them. Their transparency hurts them. Everyone picks their pocket.â The central bankâs approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. âWe believe that opting for transparency is a greater good,â he said. âIf we didnât have transparency, weâd be criticised on other grounds.â However, another official familiar with the matter said the central bank âhas heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.â Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system. âYou canât rescue the credit system without benefiting some of the people in it.â Still, Mr Frank said Congress would be watching. âWe donât want the Fed to drive the hardest possible bargain, but we donât want them to get ripped off.â The growing Fed activity has coincided with a general widening of market spreads â the difference between bid and offer prices â as the number of market participants declines. Wider spreads enable banks, in their capacity as market-makers, to make more profit. Larry Fink, chief executive of money manager BlackRock, has described Wall Streetâs trading profits as âluxuriousâ, reflecting the banksâ ability to take advantage of diminished competition. âBid-offer spreads have remained unusually wide, notwithstanding the normalisation of financial markets,â said Mohamed El-Erian, chief executive of fund manager Pimco in Newport Beach, California. Spreads narrowed dramatically during the years of the credit bubble. Brad Hintz, an analyst at AllianceBernstein, said he doubted that spreads would ever return to those levels, a development that could be pleasing to the Fed. âThey want to help Wall Street make money,â he said.