Fed May Buy Mortgages Next, Treasury Investors Bet

Bloomberg (03/24/08); Kruger, Daniel
Large Treasury investors say the Federal Reserve has not done enough to prevent worsening problems in the financial markets, even though it already has lowered the federal funds rate by 3 percentage points over the past six months, broadened the types of securities acceptable as collateral and now allows dealers to use its discount window. Pacific Investment Management Co. manager Bill Gross believes the central bank could resort to using a Resolution Trust Corp.-type structure to purchase mortgage-backed securities. While it could put taxpayers at risk, Treasury investors insist that reissuing debt backed by the federal government would attract investors. In late February, Gross wrote, "If Washington gets off its high 'moral hazard' horse and moves to support housing prices, investors will return in a rush." Meanwhile, a Financial Times report indicates that the Federal Reserve, the Bank of England and the European Central Bank are discussing the purchase of mortgage-backed securities--a move that has been denied by the central bank.