There’s some irony to the unprecedented bond-buying that central banks used to overcome the financial crisis
ECB Head Mario Draghi
The cause of the crisis, you may recall, was caused by an overheated market for mortgage-backed securities that proved to be less secure than ratings agencies indicated. We’re now finding that some of the bonds held by central banks – the European Central Bank (ECB), at any rate – are about as stable as the mortgage-backed securities that banks had invested in a decade ago.
The ECB “has emerged as the most prominent, if not so proud,” owner of Steinhoff 2025 bonds, according to Zero Hedge. The retail giant’s stock and bonds crashed last month when an accounting scandal was reported.
“Steinhoff International Holdings NV, plunged after its chief executive officer resigned amid accounting irregularities,” Zero Hedge reported, “with the company announcing that it was indefinitely delaying the release of its results, citing a criminal and tax investigation in Germany that dates back to 2015, rocking a company that’s rapidly expanded from its roots in South Africa into a retail empire spanning Australia, Europe and the U.S.”
Should we be worried about the Federal Reserve Bank’s $4.5 trillion portfolio?
The Federal Reserve Bank holds plenty of government bonds, but its portfolio includes “holdings of Treasury, agency, and mortgage-backed securities; discount window lending; lending to other institutions; assets of limited liability companies (LLCs) that have been consolidated onto the Federal Reserve’s balance sheet, and foreign currency holdings associated with reciprocal currency arrangements with other central banks (foreign central bank liquidity swaps).”
When you have a portfolio that large, something in it is bound to be bad.