Insider Trading at The Federal Reserve and Investment Giants?

It certainly seems that way. A new report from Reuters shows that the Pacific Investment Management Co. (Pimco) made a killing off mortgage-backed securities at the same time the firm was under contract with the Federal Reserve to implement and manage its unprecedented mortgage-backed security purchases. Based on Pimco's asset purchases between 2008-2012, it appears that the firm was basing investment decisions on inside knowledge that the Fed would continue buying bonds, thus driving prices higher and increasing returns for Pimco and its clients. In fact, Pimco's Total Return Fund's assets were composed of 91 percent of mortgage-back securities, despite the industry benchmark's fund containing only 39 percent mortgage-back securities at the time.

Holding 91 percent of your assets in one thing is extremely risky. Unless, you have inside knowledge that the government is going to continue pushing prices higher in perpetuity.

'The Fed provides non-public information on new programs to select private parties that trade the same securities as a fiduciary to investors and, after creating the program with the input of those firms, hands contracts to those same firms to purchase securities both for the Fed and private investors.' The Pimco team, according to a person familiar with the program, held daily calls with counterparts at the other firms and with the New York Fed. On the calls, the group discussed which securities to buy for the Fed and when.

Pimco claims that there was no coordination between the investment team handling the Federal Reserve's contracts and the team managing the firms funds. Yeah right. All you need to do is look at the composition of Pimco's flagship Total Return Fund. 91 percent mortgage-backed securities. 91 percent.

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Full report from Reuters HERE

Tags: Audit the Fed