In line with its previously reported plan to purchase more mortgage backed securities, the US Federal Reserve has announced that it has bought mortgage backed securities worth $950 million from a number of firms.
This move was particularly important taking into account the recent transaction failure that took place between the Federal Reserve and MF Global which went bankrupt.
The Federal Reserve’s policy of purchasing mortgage backed securities is seen by many as an economic stimulus package that attempts to speed up the rate at which the economy will recover from the global financial downturn.
In just a matter of about a week, the Federal Reserve has initiated purchase of mortgage backed securities amounting to about $5.5 billion of which the $950 million package forms a part. While the action taken by the Federal Reserve will in the long run help the troubled US mortgage market, it is sad to note the collapse of MF Global.
This was after the company filed for bankruptcy on Monday following a decline in its share value due to the troubled European market of which MF Global has heavily invested in. As the company saw its assets liquidated in order to pay up its lenders, the New York Federal Reserve acting for and on behalf of the US Central bank, revoked MF Global’s operational licenses.
All along, the Federal Reserve has been very skeptical in doing business with the company citing the company’s high dependency on the European market as a cause. For this reason, acting on behalf of the Central Bank, the New York Federal Reserve was instructed to ‘take progressive and proportionate steps’ against over reliance on MF Global.
The Federal Reserve then went further to implement a number of conditions for which MF Global was to meet if the company wanted to continue doing business with the Feds. But it was soon to be realized that the company would not be able to keep up with these conditions.
This led to a cancellation of the transaction between the Feds and the company, further weakening the already troubled company.
However, it was not just MF Global that suffered from this cancellation of transactions; the Federal Reserve had to spend an additional $3.1 million in order to replace the orders that had already been initiated with MF Global.
Since the general aim of buying mortgage securities is to help improve the mortgage sector, the Federal Reserve is of the opinion that there is an even greater advantage to be achieved through this transaction thereby justifying the extra spending.