Indirect Bidding Revisited

June 25th, 2009 10:07 am | by John Jansen |

The new process is really an accounting change and will give a more precise measure of ALL customer interest.

Previously many dealers would bid for customers with a direct bid and then sell that award to the client. The bid was not the dealers and the dealer had no risk in the transaction as the client had agreed to take the bonds at a price.

The Treasury, with the change in procedure, is providing market transparency which was only available before to those who submitted those customer bids as direct bids. That dealer would know that a substantially larger amount of bonds had been “put away” or sold to end users than was actually being reported.

Under theĀ  old system the award to the dealers was larger as the customer bid was included in the dealers bid. In that way the total to dealers was misleading as it made it look as though dealers were buying more bonds than they truly were. This gave an unfair advantage to the dealer who submitted the investor bid.

Simply stated many people look at the dealer total and view those bonds as bonds that will be quickly flipped back into the street. Now the number will be more accurate and in the aggregate we will have a better handle on total client demand.

There is also a very inside baseball game here. The Federal Reserve reviews the participation of primary dealers in the auction process. I know factually that some smaller dealers were hassled for the small percentage of the auction for which they bid. The Federal Reserve would sometimes compare different dealers and critique some for lack of participation relative to a peer.

In fact some dealers were bulking up their totals by including the client bid as their own and in that way overstating their participation. Now the Fed and the Treasury will have a better handle on the true participation rates of the various parties.

All of this sprang from the famous Solomon Brothers bidding scandal in the two year note auction in ( I believe ) May 1991. I will leave the details of that for a slow July Friday.

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  1. 18 Responses to “Indirect Bidding Revisited”

  2. By Barney on Jun 25, 2009 | Reply

    Did you consider PST into a weak 7 yr auction or are there too many cross currents? Thank you.

  3. By John Jansen on Jun 25, 2009 | Reply

    I considered and rejected the idea. I missed the opportunity to sell yesterday when 10s traded below 3.60. I think there is some sloppiness today but it seems as though there are buyers between 3.67 and 3.70 and any sloppiness will be fleeting.

  4. By Bman on Jun 25, 2009 | Reply

    As I watch Bernanke testify in front of the House Comittee, all I can think of is foreigners calling and saying “please shown me a bid on $1 Billion 10′s”.

  5. By Tyler K on Jun 25, 2009 | Reply

    “Independence of the Federal Reserve”

    haha, good one Ben

  6. By MS on Jun 25, 2009 | Reply

    “The Treasury, with the change in procedure, is providing market transparency which was only available before to those who submitted those customer bids as direct bids.”

    ……it’s being done to show appetite from FCB’s when it currently is not there. The FED then jumps in and makes the purchases but the “change” is seen as a new way to track interest. The Fed could give a crap about what it pays since it’s using money backed by NOTHING.

    I’m surprised you are so easily fooled

  7. By John Jansen on Jun 25, 2009 | Reply

    MS,

    1) i edited out the barnyard epithet.

    2) You have no evidence to support your claim regarding the Fed.

  8. By MS on Jun 25, 2009 | Reply

    and you have none either other than you’re own interpretation of what the word transparency is.

    It’s not that hard to see that a gov’t agency changes the way it accounts for FCB purchases a few weeks in front of the largest auction ever.

    But I suppose putting 5 lbs of crap into a bucket that only was ever seen to hold 2lbs makes it look like the Fed isn’t gaming the purchases?

    Paleeeze

    You are much smarter then that…I think.

  9. By John Jansen on Jun 25, 2009 | Reply

    The circular which the Treasury publishes with the results of the auctions states that SOMA (Federal Reserve Account…….System Open Market Account ) purchased $ 784 million of these bad boys today. If you are suggesting that they bought more,then where are they hiding it?

  10. By MS on Jun 25, 2009 | Reply

    It’s not about what they (fed) bought…..it’s about changing the reported results to show something skewed towards less Fed purchasing and more FCB buying or ,at the very least, the perception of it. I’m sure you recall the discontinuation of the M3 report based on cost-considerations

    As an aside to that I don’t believe a damn thing they report out…..if I knew where they were hiding it we wouldn’t be having this discussion. It would actually be transparent and not something like this that acts like it.

    MS

  11. By MFL on Jun 25, 2009 | Reply

    JJ thanks for this note… Great color as usual.

  12. By John Jansen on Jun 25, 2009 | Reply

    I worked there once and have spoken to people at that organization in the nearly three decades since I departed.

    Trust me that these are as dedicated a group of public servants as you will find anywhere.

    Many could make much more money some where else but choose to remain at the central bank.

    I guess I take it personal but having worked there and knowing many who have over the year I think you demean them and do them a disservice with your opinion.
    You are entitled to it but I vigorously disagree.

  13. By MS on Jun 25, 2009 | Reply

    I don’t even know where to begin with that type of response…..

    Good luck with that…you’re going to need it.

    MS

  14. By MS on Jun 25, 2009 | Reply

    Upon further reflection….John..I’m sure the people that you’ve dealt with are upstanding and competent, hard-working people. I never questioned that…I think you’re a little too sensitive in the context of what’s actually being questioned here. Let’s stick to the original discussion:

    The policy regarding reporting got changed in front of the largest auction EVER. It now shows an appetite for the auction-at the indirect level- FAR above what has been reported in the past. The definition of an indirect bid has been changed and it’s now “massively successful”…
    That is cherry-picking data at it’s finest

    I just find it hilarious that you can’t or won’t see the actual mechanics of this.

    MS

  15. By Jason on Jun 25, 2009 | Reply

    Thats fine if they want to change how the primary dealers are considered when purchasing for USA customers, but indirect main purpose was to know how foreign purchasers dealt with our debt. If they want to add transparency, then add a separate figure to report the amount purchased by foreign parties. Then we can have some real high frequency data again instead of waiting around for the TIC.

  16. By GreenAB on Jun 26, 2009 | Reply

    John,

    MS has a point here.

    why do they change the rules NOW?

    these are intelligent guys, they could have done it long before.

    whenever the government changed reporting on the CPI, it was always done in order to provide “more transparency”. (i think you know shadowstats.com …)

    so whenever the government/fed changes rules i tend to go with the skeptics.

  17. By Macro on Jun 26, 2009 | Reply

    JJ why not come clean and show some transparency yourself that this story is another media “plant” trying to grow green shoots in a junkyard. If they wanted transparency they would have left it that all bidders need to be registered with commercial brokerage firms. You are defending the indefensible – no wonder you get on so well with your good friends at the Fed

  18. By carol on Aug 7, 2009 | Reply

    John,
    I came here via today’s link in the monetization story

    “Now the Fed and the Treasury will have a better handle on the true participation rates of the various parties.

    All of this sprang from the famous Solomon Brothers bidding scandal in the two year note auction in ( I believe ) May 1991.”

    ????? The FED does this *now* to provide more transparency (BTW, if they are so into transparency, then why the alarm about an audit?!), due to a scandal in *1991*? What took them so long? So, that really begs the question: why now?

  19. By Indiana Gividen on Aug 13, 2009 | Reply

    Hello John Jansen. Thank you for the article.

    I know virtually nothing about the bond market and I am trying to rectify that.

    I am still at little confused about what a indirect bidder is. Is an indirect bidder ANY entity that purchases through a dealer? What about a dealer buying through a dealer?

    Are the identities of the dealers, customers and investors available to the public with this change?

    I searched for the “Solomon Brothers bidding scandal” article you were going to write and did not find it?

    Thank you!

    Indie

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