Let's do The Fed's action today.

The ostensible reason was to "liquefy" agency and other "AAA" securities.

Really?

Let's talk about reality.

Reality is this:

You short something it is to sell it to someone else. One of the ways the primary dealers make their money is by shorting Treasuries into the market, borrowing them from The Fed and then generating carry off the money.

Over the last six months the primary dealers have borrowed an insane amount in Treasuries and are short in aggregate close to $100 billion of them!

What's worse, they're long all the other debt instruments, lots of it involuntarily! Like, for example, LBO debt and mortgage securities they can't sell into the market.

So the primary dealers are short Treasuries, which are going up in price, and long everything else which is going straight in the toilet!

THE PRIMARY DEALERS WERE CAUGHT IN A CREDIT MARKET SHORT SQUEEZE!

You've seen it and might have had it happen to you. Been short home builders in the last few months when one of the "Quant" unwinds happens? You know what happens to the market for those stocks, right?

The price rockets higher.

Ok, what happens to treasuries when there is a huge demand? There is a similar rocket shot in price and down in yield.

Now think about how badly it sucks to be you if you're the idiot who packaged up all this crap debt and are watching it dwindling towards zero in value, while what you shorted in an attempt to earn carry is rocketing higher as everyone you sold your crap to is dumping it on the market and fleeing into what you're short!

So what really happened today?

We were almost certainly on the verge of the collapse of one or more of the primary dealers AND international banks FOR THE SECOND TIME IN JUST A FEW DAYS!

Remember, The Fed just took an "extraordinary" action in expanding the TAF!

Their only defense the primary dealers had to being forced to buy back those treasuries at a huge loss is to borrow even more of them from The Fed.

BUT THEY WERE OUT OF COLLATERAL TO POST OTHER THAN THESE MORTGAGE AND OTHER "AAA" BONDS!

What's worse, this short squeeze was being fed by people who did NOT want agency paper at any price; they were generating it by dumping the agencies and buying Ts. They have figured out that its contaminated (see below) and are freaking out about the potential for serious shortfalls or outright defaults.

Remember - "AAA" means "as safe as the US Government."

Except that lately, we've learned that its not - that the claim is a lie.

So The Fed decides that they're going to put in place a "swap" and let the primaries exchange Treasuries (of which they have several hundred billion) for "Agency and other AAA" paper - mortgages. The intent is to "pair" the two, thereby halting the spread widening and thus stopping the short squeeze.

The action today was nothing more or less than an attempt to stabilize Agency spreads which were blowing wide in a historic short squeeze that was threatening to collapse major financial institutions!

Yet if you listen to CNBS, including Fast Money, you hear these guys saying that "The Fed Injected 200 billion in money."

NO THEY DID NOT! IN FACT, THEY EXPLICITLY INJECTED EXACTLY ZERO DOLLARS INTO THE SYSTEM; A SWAP OF ONE SECURITY FOR ANOTHER OF IDENTICAL SIZE AND FACE IS A BIG FAT NET ZERO IN TERMS OF BALANCE SHEET AND MONEY SUPPLY IMPACT.

THE FX MARKETS "GOT IT" IMMEDIATELY BUT NOBODY ELSE DID!

The Fed did what it always does - try to bail out the banks.

Who's in trouble?

Who the hell knows - they won't tell us!

Gee, nothing like Reg-FD, Form 8Ks and the like, eh?

Nothing like actually following the law and disclosing material adverse corporate developments, yes? I mean hell, even Thornburg did file one, even if late.

And while we're at it, let's ask the next AND MOST IMPORTANT question:

What the hell is The Fed doing allowing their regulated primary dealers, who they are responsible for, to increase their short positions by TEN TIMES in Treasuries over the last few months WHILE THEY ARE ACTIVELY ATTEMPTING TO DRIVE TREASURIES UP IN PRICE BY ADDING LIQUIDITY AND LOWERING THE FFT?

What the hell is wrong with BEN BERNANKE and THE FED GOVERNORS?

LET ME BE BLUNT: They sat on their hands WHILE THE INSTITUTIONS THEY ARE RESPONSIBLE FOR multiplied their short positions BY MORE THAN TEN TIMES in securities THE FED IS FORCING UP IN PRICE and BOTH said nothing and DID nothing about it?

Then, when the INEVITABLE short squeeze that results from such an act of pure INSANITY ensues we get THIS as a response, along with a flat-out MISDIRECTION, otherwise called a LIE, as to what was REALLY going on and WHY with exactly ZERO clarification from The Fed as to both the true reason for the action and the fact that it is a big fat net zero on the monetary base?

But don't worry, its all ok. The Fed made it so, and the market believed it, up 416 today on the Dow.

The only remaining question is how big of a sucker YOU are for the LIES of the mainstream media, corporate executives who should be filing 8Ks by the truckload and The Fed itself who willfully ignored the ramping short positions in securities that are attempting to drive up in price!

Yes, that's the question folks.

Are you a sucker?

Because if you think this was about Fannie and Freddie paper being "money good" but the market "unreasonably" discounting its price, you are soon to find out that indeed you are that sucker. After all, the ABX says that "AAA" paper is worth..... wait for it..... somewhere between 53 and 70 cents on the dollar, depending on the vintage.

The Truth is that Fannie and Freddie paper is contaminated with mortgages that have "Back End" ratios as high as 65% in some cases, nearly TWICE the historical sound limit for mortgage lending. This is not commonly known by investors; most think "Agency" paper is "conservatively" underwritten.

The Truth is that lots of mortgages placed with less-than-accurate appraisals and documentation (think "Streamline" or "Fast and Easy" refinances) are sprinkled through all of that mortgage paper. Again, this is not common known by investors; most think "Agency" paper is "conservatively" underwritten.

The Truth is that The Fed did not inject one thin dime of anything into the market today and this had exactly nothing to do with Agency paper "directly"; it was nothing more or less than an attempt to halt a short squeeze that was threatening to destroy their primary dealers.

The Truth is that this is the second time in just a few days that the entire primary dealer system has threatened to explode in everyone's face. READ THAT AGAIN FOLKS: IN THE SPACE OF JUST A FEW DAYS THE FED HAD TO RESCUE THE PRIMARY DEALERS AND BANKS ***TWICE***!

The Truth is that despite the banks and primary dealers being in such poor condition that they had to be rescued TWICE in the space of the last FEW DAYS "investors" bid up The Dow by more than four hundred points today. (Hint: If you have two heart attacks in three days' time, what do you suspect your risk is of a third - fatal - one in the next few days or weeks?)

The Truth is that The Fed has proven they will look the other way, allow, and even encourage their primary dealers to do stupid things while they intentionally drive the price of securities in the exact wrong direction, then come up with "sticksave" after "sticksave" when the unintended consequences are served upon them in a raw attempt to avoid the need to actually force those banks to file 8Ks and engage in what should be Reg-FD-mandated disclosure of the crap on their balance sheets.

The Truth is that The Fed pulled the pin on the next credit market grenade today and stuck it between its legs. It is now praying that it can hold the spoon tight and if EITHER long-bond yields rocketshot (that is, a "disorderly" unwind of people who are in them ensues) OR the spreads between them and agency paper blow further, the grenade will go off, destroying the basis in the swaps they engaged in today. In that circumstance either the primary dealers will be directly trashed or The Fed will have to throw them under the bus on purpose to avoid its own destruction.

WHEN (not if) these truths become apparent to everyone else, don't say you weren't warned.