How selling the US Debt works

Perhaps the uninformed anti-Federal Reserve conspiracy theory email I just got is just fan mail from a Ron Paul Freeper….  but it contained so much wrong information

When the US Treasury needs to borrow money by selling securities, it has several ways to do that:

• Sell Savings Bonds to the public
• Sell to individuals through the Treasury Direct program
• Sell them to Social Security and other trust funds
• Sell them to the Federal Reserve (monetizing the debt)
• Sell them to the public (banks, corporations, insurance companies, mutual funds) via “Primary Dealers“

The agreement with the US Treasury is that whatever interest the Federal Reserve would be paid for the Treasury Securities it holds is rebated back to the US Treasury as a “fee” for the right of the Federal Reserve to “print money”.  The information is both on the Federal Reserve’s financial statements and the US Government Budget and US Treasury Department’s financial statements.  Any claim that this is secret or hidden information just means the person who is saying it doesn’t know where to look or what it means.

FRB Accounting Manual

60.20 Interest on Federal Reserve Notes
Since 1947, the Board of Governors has required that the Reserve Banks remit to Treasury, as interest on Federal Reserve notes, all net earnings after providing for dividends and the amount necessary to equate surplus with capital paid-in. Effectively, this policy sets Reserve Banks surplus levels and requires, as a nondiscretionary expense, each Reserve Bank to remit all residual net earnings to the Treasury.

The Federal Reserve plays no role in the sale of US Government Securities beyond transferring the money between the Treasury and the Primary Dealers – in the same sense when you buy something with your checking account.

There are currently 20 primary dealers (List).   Each time there is a sale of US Treasury instruments, those dealers submit competitive bids on how little interest they are willing to take, and the dealers who offer the cheapest rates get the Bonds.

Here is the list as of the end of May:

United States:
Citigroup Global Markets Inc.
Goldman, Sachs & Co.
Cantor Fitzgerald & Co.
JP Morgan Securities
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Jefferies & Company, Inc.
MF Global Inc.
Morgan Stanley & Co. LLC

Canada
RBC Capital Markets, LLC

UK:
Barclays Capital Inc.
HSBC Securities (USA) Inc. (London/Hong Kong)
RBS Securities Inc.

France:
BNP Paribas Securities Corp.
SG Americas Securities, LLC

Germany:
Deutsche Bank Securities Inc.

Switzerland:
UBS Securities LLC.
Credit Suisse Securities (USA) LLC

Japan:
Daiwa Capital Markets America Inc.
Mizuho Securities USA Inc.
Nomura Securities International, Inc.

After they buy the bonds, they then run the Secondary Market in securities, in the same way that NASDAQ or the NYSE are where you go buy and sell stocks.    There is nothing “Evil” about investment banks making a profit buying and selling US Government Securities.

The New York Fed DOES participate in what are called “Open Market Operations” – buying and selling securities in the secondary market to implement the policies of the FOMC (Federal Open Market Committee).  Member banks of the Federal Reserve are required to hold a certain percentage of their deposits as reserves, kept on deposit at their Federal Reserve Branch.    The Fed then invests those funds in “safe” US Government securities and pays the banks the Fed Funds rate on their money.   As the reserves of banks go up and down, the Fed goes into the public market to buy more securities or sell securities.   They are trading with the market for existing securities, the US Treasury is not a party to those transactions, no more than GM is involved if you go to Merrill Lynch and sell your GM stock.