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In Anticipation Of A Run On The Tri-Party Repo System
A week ago the FRBNY's Task Force On Tri-Party Infrastructure came out with an exhaustive must read report discussing its concerns about the massive $1.7 trillion US tri-party repo market, and specifically proposing several ideas that could prevent a bank run on a shadow market that is second in size only to the money-market $2+ trillion US money market. Incidentally, both markets were on the verge in the days after Lehman. Their day of reckoning may be coming again soon, and with the FRBNY task force's explicit attention on Tri-Party repos, all is probably not well. In fact even Moody's today agreed that until the proposed fixes are implemented (likely many months, if not years away), the tri-party repo "market will remain a major source of systemic risk, especially given the current market volatility and the fact that the Federal Reserve’s primary dealer emergency lending facilities are no longer in place." This should be another bright red flashing warning to those who still have to realize that the liquidity situation from a month ago and now are diametrically opposite.
For those interested in the cliff notes on Tri-Party repos, we present Moody's abridged thoughts on the matter. Others may read our previous observations on the topic here.
Tri-party repo is similar to bi-lateral repo except for the involvement of a third party – a tri-party agent (Bank of New York Mellon or JPMorgan Chase, the two major clearing banks), which provides custody, valuation, and settlement services for the exchange of cash and collateral between the borrower and the cash investor. Nearly 40% off its peak size in 2008, at $1.7 trillion the tri-party repo market remains a key source of funding for primary dealers (Exhibit 2). The collateral funded in this market (Exhibit 1) is mostly treasuries and agencies. At $320 billion, less liquid collateral is still a large portion, although down 65% since the start of the financial crisis.
An “unwind” occurs every morning, when the tri-party agent returns the collateral to the dealer-borrower and the cash to the cash investor. Until the transaction (whether a term repo or a rolling overnight repo) is “rewound” in the afternoon, it is the tri-party agent that is lending to the dealer on a secured basis. The purpose of the unwind is to allow the dealer access to the securities in its collateral pool to settle sales, which occur throughout the day. Such intra-day credit extension, while normal, is not guaranteed in the clearing agreement and can be withdrawn at any point, particularly if the dealer’s creditworthiness deteriorates.
In order to reduce the gigantic amount of intra-day credit extended by the clearing banks, the Task Force proposed developing an “auto-substitution” functionality. This would allow dealers to access and substitute their encumbered collateral, thus facilitating settlement without the need for the daily unwind. Any remaining intra-day credit would be extended under well-defined bi-lateral agreements between dealers and the clearing banks. While this is a sensible solution for both the dealers and the clearing banks, its implementation is only targeted for June 2011.
In the meantime, the market remains structurally vulnerable to a repo run. First, many cash lenders (primarily, money market funds) continue to make lending decisions based on the counterparty’s credit rather than quality of collateral. And second, the market as a whole has a tendency for pro-cyclical haircuts – that is, lower haircuts when liquidity is abundant, and higher when liquidity is scarce. If cash investors pulled away in a stressed environment, the clearing banks would be faced with a choice (as they were several times in 2008) of taking on large secured credit exposure to dealers or severely constraining intra-day credit to them. Such market mechanics can exacerbate the effect of a systemic and/or a dealer-specific crisis.
Until the remaining issues in the tri-party repo market are resolved, the risk of a repo run remains in place. Risks could be exacerbated by the Fed’s quantitative tightening program draining available liquidity.
And to loosely paraphrase Troy McClure, now that you know how fragile the Tri-Party repo market is, try to not to panic too much.
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Holy poop on a stick Batman! Think I might pull out of the banks put everything into a shoebox and bury it under the gator out back
Goddamn-dipshit-Rodriguez-gypsy-dildo-punks. I'll get your ass.
But we paid it off. This is our car now.
Some uncultured punk junked me!
Some weird fuckin' shit, eh, Bud?
Disclosure Statement: Long Helping Hand Acceptance Corporation debt and equity.
I love you guys!
Too many things happening all at once....the shell game is done. GAME OVER.
Merkle folded and left the game for a reason. She could not take the maddening play of the ECB and Fed. Yes Germany saved themselves, but will it matter? With nuclear fallout raining down, does it matter?
I will add, great work today Tyler.
+1, when it goes, it will go FAST.
It may seem like we move at a "glacial" pace, and to some extent, that's true: It's years since the 2007 meltdown, and we're still puttering around. However, these are nations and companies *bigger* than nations, and some of these deck chairs take time to move around. We've got to leave enough time for the big players to take their chips off the table, and that takes time too.
However, we won't/can't stay at "Defcon 1" forever. The math is increasingly insurmountable. Further, even if they could pretend to walk the razor's edge, somebody somewhere is going to screw up something, and it will all FLASH.
I get up every morning amazed that the system is still here. Like the slave Juba in Gladiator, "I did not know men could build such things."
.......looks like the Detroit Metro Train station
"I get up every morning amazed that the system is still here." Me too, for the last two years.
That building exists for one reason. A brick maker discovered that if you bake bricks in the sun they can withstand much higher compressive forces. Which took the previous relationships of size and height out of the equation.
Oddly, I for one, am glad this avatar is back.
It actually changed? I was playing with it and it never showed change of avatar. But I log in under windows and linux both.
And a run on this system would be bad because...?
"bad" is contextual, you are correct.
+3.7 Trillion!
"debit card denied -- bank does not exist"
+1 lol
"But it was there on Friday morning!"
Looks like about $50 Billion only gets you a subcategory of all the rest of the junk marked "Other"
Here comes the quality of collateral boogeyman again. The ninja warrior of ultimate destruction. I can't bear the thought of the MMFs breaking the buck. Like Scarlet O'Hara said, I just won't worry about that now. I'm still not feeling well since the 2008 bondholder bonfire.
Quality, term, and access to collateral is the issue. The collateralized lender specifies which party (acceptable to borrower) which holds the collateral, maturity, quality and margin (generally 30 day or less, T-bills, at 105% of money lent where I run a desk) and if the borrower don't like the terms, then finance elsewhere. (Well, we do have a more colorful technical term, but not for mixed company, eh?)
So, once again, the Federalies focus upon this sector of the credit market is akin to a self-administered proctological-enema special combination of the day, which ignores any and all of the fundamental risks proliferating the casino (Oppps, sorry, gives the pit bosses a bad name.) financial markets. Leverage ratios, HFT, not really off balance sheet financing accounted for as such, pay to play municipal financing including swaps related thereto, the GS, JPM business models and marriages to Washington, to name a few.
Ah, but I digress. Nonetheless, the really important item which nobody outside practitioners in the the repo market ever bother addressing, and why is just beyond me, is that repo collateral under US code becomes the property of the estate of the failed borrower and thus technically cannot be liquidated preferentially by the lender.
Council as advised me and I have advised my short-term desk at times of the general rule. Protect the client funds, liquidate the collateral, have the approproiate amount wired back to the client account and the you, my good portfolio manager, get on a plane offshore for a few weeks whilst we sort it out.
So, why all the fuss over an absolute nothing of substance? The fundamental precepts of secured lending are simply not being addressed. But then again, who Gives a Shit about Rights of Secured Creditors in AmeriKa, anymore after GM and Chrysler?
Ah yes, the USG/SCOTUS-approved fucking of the GM/Chrysler bondholders.You just had to bring that one up too.
Time for another Scotch.
Classic texture knukles and a big reason why I read these threads. Comments like this one.
Agreed.
Does it come down to the same old problem of over leveraging against assets that could go down in value, and drive ratios out of whack enough to cause default?
Isn't this similar to the mortgages the banks are holding that need to be foreclosed on, but just with more parties and different assets?
Just trying to understand it all
Most definitely another case of folks waking up to the fact that the pressure of liquidity within the financial system is grossly impaired or can be in a matter of moments. With Italy imposing capital controls, Spain with an imploding regional banking sector and the whole of southern Europe suffering from capital flight it is no small wonder that the FRBNY is openly discussing the Tri-Party Repo system and raising the issue of the credit worthiness of a borrower vs the credit worthiness of the borrowers collateral. Meanwhile, the financial system will continue to require ever greater margin call since it is borrowers who borrow and not their pledged securities...
Know what's cool? Having a bunch of money locked in a current 401k with NO safe investment options! Yay!
+ 1000 billion trillion !!
Sorry to have to drag this clip out again, but it fits so so well:
http://www.southparkstudios.com/clips/222624/
AND......It's GONE. Please step aside for people who actually have money with this bank!
Chet, that has to suck as bad as having a defined benefit pension plan backed by nothing more than a bunch of "full faith & credit" crap. Before ya know it the government will step in after folks get hosed this year in equities and require the "safety" of treasuries and then everyone will be hooked in.
They're called classic for a reason 'bliss...
Some of your 401k might be covered, even through an employer plan, I believe if it is a money market type fund it is covered up to 100k, but you can check this site and see how your situation fits
http://www.bankrate.com/finance/savings/fdic-insurance-protects-your-mon...
Or being the proud owner of a "vested" pension that is going to remain fully funded for about six more minutes. Good thing I had about as much faith in it as in my Social Security. Glad I made those extra payments on my mortgage. Now I can borrow against my equity.
Same situation here exactly. Only I can cash out my pension now. Its good to be able to have this option, but this is a huge decision...
I actually have vested interests in two different construction unions. One I can't touch at any price for 12 more years. The other, 15. My thoughts are that even if they exist, (fully funded in today's dollars) they won't be enough money to stay drunk on cheap malt liquor.
I would think that there is some sort of JG Wentworth type company out there that would buy the rghts to your future annuity at a severe discount.
"It's my money and I need it NOW!"--Remember those commercials?
Take the hit and get out.
How do you protect yourself from this? I am in cash, but in a brokerage account it gets swept into a money market. Schwab's Treasury MMF is closed to new investors so what do I do? (It is an IRA too - and it is about all the money I have in the world.)
Kiss my money goodbye? (Hell, I can't even kiss it ... the best I could do would be to pull up the account screen and kiss the computer monitor.)
This is so fucked up and there are going to be millions of people pissed off about this if it happens.
You spend the majority of your cash in physical PM's, and take the rest in small bills. Then you buy more guns, and keep it hidden somewhere in your house where you can get to it quickly in the event of a fire, and become a paranoid Mother Effer like so many of us here.
I have known that this was coming for many years
so I've had time to think about what to do
and time to look at other cultures and see what they do
and time to plan and to prepare.
The first rule about this is,
anybody who does not know how to live
completely independently from money is going to die.
The trouble with gold and silver are that americans are armed to the teeth,
and not terribly bright; someone is just going to take your welath from you.
Its very late now but here goes:
first you need food. Lots of it, in lots of variety.
look after different proteins, spices, flavors, preservatives,
and some delicacies for bartering or bribes.
second you need friends. strong, healthy, blue-collar friends
who appreciate your continuing generosity to them and their families.
third you need skills.
can you make soap? can you make hooch?
do you know basic first aid? can you sew?
doi you know how to trim an oil lamp wick?
do you know how to preserve meat so that it won't go bad?
fourth, you need tools. hand tools, silly, because the electric grid is coming down too.
there's still time. but not damn much ...
the good news is that good people will survive
and mankind will carry on
but the looters are all gonna be wiped out.
In keeping with the tone of the above post, keep in mind: Food storage is good, but it will not and cannot replace the ability to produce your own. Learn to grow food now, while you don't need to. Can you can food? Also, do not get caught up into the idea that you will hunt and fish for your meat, unless you live in Alaska or areas of Canada. Intense hunting pressure when TSHTF will all but decimate wildlife.
As said, skills, skills, skills. While I do not think the grid is necessarily coming down, unreliability is probable. Again as above, think beyond electricity. And if you buy something to prepare, USE IT NOW to make sure it works.
Do not try to do it all. It will overwhelm you. Focus on what you're good at. If you are a doctor or a nurse, you will not want for food. Those who can build, mend, fix, will have a leg up on those who don't. If you are an art teacher, you might want to learn a trade to fall back on. If you can grow enough food, you can trade vegetables for chickens, rabbits etc..
***For those of you who ridicule the idea that we may rely on barter, it is STILL common practice in rural areas. I have traded guns, firewood, pickups, tractors, boat motors, tools, labor, dogs, pigs, farm equipment, campers, (God, I didn't realize how much shit we swap until I started writing it down), ATV's, straw etc.. for all kinds of things.
If these two posts interest you at all, look at SurvivalBlog.com. No matter how prepared you think you are, there are things to learn there.
Many of the provincial areas in the Philippines still use bartering goods to live their lives. Although many of us would consider it barbaric form or condsider them poor, these people live very comfortable( do not confuse with elegant) lives without all the heartache of money and crooked bankers, and they are happier that way.
My God we are doomed! How many folks today have this level of preparation or can even get there? This is 2010 - lots of us work behind keyboards. I read JHKs 'World Made by Hand', which would be life as you are preparing for it. I'm not there yet...
One step at a time Sweet Jesus.......
The underlying theme of every idiot post similar ot this one is that the bad poor people are more well armed and better quailfied with guns and rifles than people with wealth who have served overseas in the military. I started re-reading your worthless post and inane babble and I cannot get through it. That b.s. will be better recieved at www.EOTW.com.
I don't think anywhere did I mention guns, or battling zombies. I responded to a post about self sufficiency, and talked about gardens, and canning.
You hostility would indicate that perhaps if Byerly's runs out of Evian and frozen entrees, you would have a hard time feeding yourself???? Or are you implying that you are an ex Marine Sniper who will come take carrots from my poor inbred ass?
Don't even waste your time with dipshits like this asshole.
He probably couldn't survive a grape embargo.
I'm sure he assumes that as long as he has enough nonredeemable paper ticket currency, he'll just buy whatever he needs at the A&P.
The God's of the Copybook Headings with terror and slaughter return!!
He probably couldn't survive a grape embargo..LOL, have to remember that one.
triple q really came out of left field with that one...
QQQBall , i junked you due to your inane worthless babble.
I'm with Cooper on this. You don't need a financial disaster to justify being a little prepared. Natural disasters can strike at any time. It makes sense to have some things stored just in case. Unless you are the kind who does not buy insurance, and expects the rest of us to take up for you when you have done nothing for yourself. Or you think the government will be there for you....Like they were for Katrina...Or like how effective they are with this BP thing.
Get a low duration bond fund.......a since inception of 3 % + ....if only to keep your nose far up Uncle Sugar's ass. MetWest is relatively inexpensive with a 3+. There are others.
Good question , more thoughts please. I have been expecting the worst and now wish to act. I dont want to go full bullion and/or cash into a deposit box for practical reasons.
Also , i see most online brokerages protect upto 250k FDIC in case of BK/default. Whats the scoop? Im as cynical as anyone here so spare me the lube but dont dramatise. Will there be an orderly unwind to creditors?
I just had the opposite of a wet dream. Imagine this.
1) Banks wipeout en masse - will FDIC stand by the deposit guarantee in a once in a millenia shock? (as it will no doubt be sold to the public. i think i have answered my own question. so spreading capital through the deposit banks isnt necessarily safe)
2) so one invests in physical cash and PMs. literally. what happens if capital controls are put in place , a la Italy today. How do you make use of your $$$$$$ if you cant spend them in phy form?
3) How about the PMs? 100-1 leverage on paper gold run by the wall street mafia. i am a wannabe gold bug. however , if the system implodes i cant see how it doesnt take gold with it. Theres nothing to stop JPM et al defaulting on massive paper promises. By then the real price of gold is worth what? Maybe 5k in Beijing but how does one with reasonable wealth route it to beijing?
4) debt is defaulted upon en masse , as is being seen already from public to private. will the consequences become so irrelevant that this makes being debt free an investment crime?
5) property. this was my ultimate safe haven until i realised that one doesnt actually own their property whilst taxes can still be levied against it at any rate a tyranica./broken govn choses.
6) food , community , guns. i better buy some cook books and stop being a wise-ass.
.....continue being a wiseass and be sure to get a Benelli shotgun for bird season.
Inertia driven M2 > gas M4.
Nova, 870, 500...Take your pick. K.I.S.S.
So I take the scope off the SL-8 so it will be a fair fight? There are parts, well nearly, to make a G36 .... eh'.
Shotguns ... you can keep em'.
Good stuff here.
One issue I left out is firewood ...
because any other heating system requires a dependable electric grid, and
because (how to say this) the concept of "global warming" was brought to you by the same people who brought you the "recovery" ... between the deep solar minimum
and the volcano in Iceland, the chances for a record cold winter this year are increasing every day. Cold enough to kill, as far south as Raleigh.
and that takes preparation ... you have to learn what to burn and what not to burn, you have to learn what a chimney fire is and how to avoid it ... enough firewood to keep
one small house warm all winter is 4 to 6 cords ... that will help you get over your back problems, it will also cure a lot of splitting headaches ... if you accumulate more than that, its a better commodity to trade than gold, its much harder for someone else to steal it ...
When the SHTF , living in the country, is where you have the best chance of survival...."country boy's will survive"
Ferfals survivalist blog of Agentina would suggest otherwise.
I reckon the wealthiest 'Burbs you can find have the best survivalist chance.
I was at Suntrust the other day and the employee I was chatting with informed me that the FDIC has up to 10 years to pay out on your losses.
yep, there's that too. it's guaranteed but not readily available...
I heard several first hand accounts on the slow payouts when indymac went bust..
Several TBTF institutions are losing a customer this week. I sincerely hope i am being a AAA (should "a" or "an" preceed AAA?)drama queen but i fear the absolute worst in due course and many more hurdles put in place before the bottom.
Don't forget the increased fdic guarantee expires next month. And with the money market one gone already it really can be 08 all over again.
fdic $250k insurance extended out to dec 31 2013
1:30 .. EST.
Comex close.
GOT GOLD? GOT SILVER?
Sometimes I think the people posting here are Luddites. This is the US of A people and we're getting ready to spank the Zips in Norte Korea. Problem solved.
I hope this is sarcasm, what problems would invading NK solve? They don't grow poppies or have any oil :)
"Improvements in transparency and in risk management practices by all participants, as well as ongoing enhancements to the regulatory framework, should improve the resiliency of a Dealer to a withdrawal of repo financing following a weakening in its financial condition."
HAHAHHAHAHA.
This is fucking insane. I don't have time to learn gardening or canning. I also don't have the money to go out and stock up on foodstuffs, buy tools, oil lamps, etc. I can barely make my child support and car payments and I work 60 hours a week.
Actually, I have weapons and ammo (though probably not enough) and I have a cousin who lives in the country in an area near a lake where the land is fertile. I own some property there too with a small cabin. The problem there are the neighbors and hungry people are going to be roaming in gangs taking what they can.
Read "The Road" by Cormac McCarthy or watch "The Book of Eli" with Denzel Washington. The countryside doesn't look too safe to me. It sounds all romantic and gentile, but when push comes to shove people will be people.
Truthfully, I don't think it will get that bad. Local communities will band together and cities will continue to provide services and enforce the law. It will be inconsistent, but it will be there. An economic collapse does not destroy services and society. It may devalue them and people will have to learn to do with little or nothing, but if you have a home and neighbors neighborhood watch/police teams will keep order in many cases. There will be some places where it gets so bad that chaos will ensue, but the country is more likely to become regionalized where local authority will count for more than state or federal.
Now if war breaks out all bets are off. The NK and Iran situations bear watching very closely.
"...now that you know how fragile the Tri-Party repo market is, try to not to panic too much."
I think I'll just panic now and avoid the rush later.
American Century has a Treasury-only MMMF that's still taking contributions. If that's not an option, see if you can convert the cash in your brokerage account to T-bills. If neither of these are options, see if you can move the money to a different broker, and if not, take the early withdrawal penalty so you can get your money out of there now.
Okay, I can understand what people are saying here. And if it were all to unfold it very well could result in many of the scenarios mentioned depending on where one lives. Best places NOT to be in my opinion are in the large cities like NY, DC, LA, Chitown, Miami, etc.. because they are already full of gangs and crackheads that would kill their momma for a hit. I would say Detroit but it is already deserted. Being out in the country where the territory is known by you gives you the advantage. Working with your neighbors, to protect your families and what belongs to you, is crucial. Make friends not enemies. These jihad muslims would love nothing more than for us to destroy ourselves. Are we going to give these f**kers that satisfaction? I would hope not.
However, before it ever came to all that, what can we do? We stand as Americans "UNITED" and march down to the Capital and White House and throw these fucking bumble clots that are destroying our country out of offices. We also would go to every TBTF bank headquarters armed to the hilt and start whacking bankers like Blankfein and Dimon who put us in this hell before it turns into death warrants. Then we can put some trustworthy people in office.
I suppose that means i have to put off hanggliding. In these times i may be shot as someone dinner.
This is hilarious, but awful true:
Over five thousand years ago, Moses said to the children of Israel "Pick up
your shovels, mount your asses and camels, and I will lead you to the
Promised Land."
Nearly 75 years ago,(when Welfare was introduced) Roosevelt said, "Lay
down your shovels, sit on your asses, and light up a Camel, this is the
Promised Land.”
Now Obama has stolen your shovel, taxed your asses, raised the price of
camels and mortgaged the Promised Land!
I was so depressed last night thinking about Health Care Plans, the
economy, the wars, lost jobs, savings, Social Security, retirement funds,
etc . . . I called Lifeline. Got a freakin' call center in Pakistan . I
told them I was suicidal.
They all got excited and asked if I could drive a truck.
Love a good laugh in the morning. Great stuff
You guys can collect your canned food and ammo.
Me, I'd rather go out partying like it's 1999.
"market will remain a major source of systemic risk, especially given the current market volatility and the fact that the Federal Reserve’s primary dealer emergency lending facilities are no longer in place."
Well, that sentence guaranteed a trip to the gun show this weekend.
would this affect JPM's short Silver position?