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Are Reverse Repo Liquidity Suctions Approaching?

Tyler Durden's picture


Could this be the proverbial first step removing the trillions in excess Federal liquidity? Per Bloomberg:

Central bank officials are discussing plans to use so-called reverse repurchase agreements to drain some of the $1
trillion they pumped into the economy, said the people, who
declined to be identified because the talks are private. That’s
where the Fed sells securities to its 18 primary dealers for a
specific period, temporarily decreasing the amount of money
available in the banking system.

Or maybe this is just yet another red herring, while the true liquidity pump continues until the bubble blows up under its own weight. Knowing the Chairman, everyone's money is on the latter. And in confirmation of just that:

There’s no sense that policy makers intend to withdraw
funds anytime soon, said the people. The central bank’s
challenge is to decrease the cash without stunting the economy’s
recovery and before it sparks inflation. Fed Chairman Ben S.
Bernanke said in a July Wall Street Journal opinion article that
reverse repos are one tool to accomplish that goal without
raising interest rates.

Alas taking liquidity from PDs will be harder than weaning heroin addicts using metric ton injectable portions of methadone.

“One thing the Fed has to figure out is if they can launch
pilot programs without spooking the market and creating the
perception that they are about to tighten,” said Louis
Crandall, chief economist at Wrightson ICAP LLC, a Jersey City,
New Jersey-based research firm that specializes in government
finance. “They are discussing things like accounting issues,
and updating the governing documents to the volume of reverse
repos the dealer community could absorb.”

Looking at this market where downticks over the past month can be counted on one hand, it is unlikely that the market will be too happy if it were to be taken away its main bubble creating toy which is then translated into persistent block ramps using various algorithms in the absence of any real trading.

Yet there was no market hesitation today, as the S&P closed once more at year highs, without even a breather of hesitation, with tomorrow's FOMC unlikely to be even remotely surprising. As the table below shows, inflation expectations are only for show: nobody believes the Fed will have any response to the commodity price inflation that Americans may be witnessing. The real deflation is here to stay. Also the amount of people expecting a rate hike by December is now 5%, compared to the 59% at the market's lows in March. Which makes sense looking at Treasuries. However, to understand equities, feel free to call your friendly neighborhood PD, and also loop in whatever collocation boxes accept collect calls around your primary exchange. Don't worry, thanks to flash VoIP the boxes will already be expecting your call.


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Tue, 09/22/2009 - 16:35 | 76705 SDRII
SDRII's picture

i thought the fed paying interest on reserves was the tool to keep the liquidity out of the market? So now they will just do a reverse repo? What is the rate spread between a GC reverse repo and the rate paid on reserves? this sounds like a Bloomberg headline for the unwashed

Tue, 09/22/2009 - 17:29 | 76759 MyKillK
MyKillK's picture

Thats why this makes no sense. How is this supposed to remove excess liquidity when the securities will be bought with excess reserves held at the Fed? They are just shuffling these securities around in a closed-loop system.

Tue, 09/22/2009 - 23:12 | 77007 Anonymous
Anonymous's picture

Maybe the real point is to raise more money for the FED (borrow) that Bernanke can then spend on propping up the Treasury auctions. He's already spent the $1 trillion in increased bank reserves he's pulled out of the banking system over the past year. But the deficit spending in nowhere near being fully financed so Geithner needs to raise more national debt. The money will go back into the economy once the government starts spending it, if the Congress ever gets those massive spending bills passed, like healthcare and cap & trade. In the mean time, if the government cannot spend it as fast as the money is raised, then Geithner can deposit it in the Treasury's account at the FED giving Bernanke even more money with which to prop up the Treasury auctions or buy more MBS crap. They are just postponing the inevitable.

Tue, 09/22/2009 - 23:23 | 77014 californiagirl
californiagirl's picture

Could it be that Bernanke just wants to raise some more cash to prop up more Treasury auctions and buy more MBS?  He already spent the $1 Trillion in reserves he extracted from the banks in the past year.  Geithner needs to raise plenty more debt.  In the mean time, since Congress has not managed to pass the Cap & Trade and Healthcare, the government will not be able to spend it as quickly as it would like.  So Geithner can deposit the extra money into the Treasury's account at the FED and give Bernanke more spending money.  It is just postponing the inevitable.

Wed, 09/23/2009 - 15:03 | 77568 MyKillK
MyKillK's picture

He already spent the bank reserves? This is not true, bank reserves are still as high as ever.

Wed, 09/23/2009 - 18:44 | 77907 californiagirl
californiagirl's picture

I meant the cash the FED received from bank reserves on deposit at the FED. 

Wed, 10/21/2009 - 23:36 | 106547 dnarby
dnarby's picture


Tue, 09/22/2009 - 16:36 | 76707 JOHNICON
JOHNICON's picture

Anyone notice that lately, despite the ebullient sentiment, the indices are not skying everyday?  Or is it just me...?

Tue, 09/22/2009 - 16:42 | 76715 Anonymous
Anonymous's picture

Up every day is still up every day. Based on nothing but fast cash.

Tue, 09/22/2009 - 17:05 | 76735 kensdad
kensdad's picture

Everyone is max long...  The VIX is crashing and Put/Call ratios are super bearish (skewed to calls over puts)...  The market is still going up on muscle-memory dip-buying.  When the correction arrives it's going to be vicious...  Still, you've got to have steel cojones to get short...

Tue, 09/22/2009 - 17:20 | 76751 MyKillK
MyKillK's picture

The Fed has set up the conditions for a huge crash in October by conveniently scheduling the POMOs to be completed at the end of this month. Should be a very interesting month.

Tue, 09/22/2009 - 19:53 | 76863 Missing_Link
Tue, 09/22/2009 - 22:45 | 76994 glenlloyd
glenlloyd's picture

I'm hearing 28-30 days

Wed, 09/23/2009 - 08:02 | 77194 Anonymous
Anonymous's picture

the market is going up because a computer program is manipulating it up, controlling every tick. dip buyers have nothing to do with price action; they merely ride the back of this computer-guided FARCE. There will only be a crash/correction/0.3% dip when HAL9000 makes it so. I am not being facetious - the market is totally controlled and bogus. If it weren't totally controlled and bogus, it would move independently of wiggles in euro/yen.

Tue, 09/22/2009 - 16:39 | 76710 MyKillK
MyKillK's picture

Something tells me the Fed is getting worried about being audited. Maybe the real plan is to use these reverse repos to offload the worst of securities at full value, and then when the audit is finished they take them right back because the dealers certainly won't want them.

Just throwing it out there. The timing just seems too coincidental. Audit the Fed bill gets its first committee meeting and almost immediately the Fed is in discussions with its dealers over 'exit strategies'...

Tue, 09/22/2009 - 17:06 | 76737 deadhead
deadhead's picture

"...these reverse repos to offload the worst of securities at full value"

or, the Fed can offload millions of shares of spy, bac, wfc, ad infinitum

Tue, 09/22/2009 - 17:13 | 76746 MyKillK
MyKillK's picture

The more I think about it, the more I think this may be what they are up to. Otherwise, consider how completely ineffectual this move would be if the goal was to either reduce the Fed's balance sheet or to remove liquidity from the system. It won't remove any liquidity from the system, because the money was never really in the system to begin with. There's a giant mountain of bank money sitting at the Federal Reserve as excess reserves. Also, it won't really reduce the Fed's balance sheet because the repo is only temporary. But temporary is exactly what they'.d want if they just want to stow them away out of sight of any audit. Besides, any talk of reducing liquidity when interest rates are to be kept at 0-.25% seems crazy

Wed, 09/23/2009 - 02:07 | 77116 Anonymous
Anonymous's picture

you do not seem to understand reverse purchase

the fed will sell securities it currently owns
to primary dealers for a temporary period of time...

the primary dealers will pay with money they
have or raise...

as such there will be a huge sucking sound
as money leaves the economy going into the fed...

thus the money supply is reduced - for the
term of the repurchase agreement...

those reserves in the fed are going no where
for the time being.....

this has nothing to do with a fed audit....

Wed, 09/23/2009 - 15:12 | 77582 MyKillK
MyKillK's picture

Is there a specific reason why bank reserves could not be used to fund these purchases?

Tue, 09/22/2009 - 21:16 | 76926 Ned Zeppelin
Ned Zeppelin's picture

Since the terms of the reverse repo will almost certainly require the return of the securities at the expiration of the contract term, they can hide, but they can't run from an audit. Easy question to track down.

Wed, 09/23/2009 - 15:11 | 77580 MyKillK
MyKillK's picture

Ok, this is the kind of answer I'm looking for. But, still, I am not convinced. If it's so difficult to run from an audit though, I have to wonder how all these banks managed to pass the so-called stress tests.

Tue, 09/22/2009 - 16:40 | 76711 Anonymous
Anonymous's picture

What does Bernanke think when he pulls up the intra day action in AIG on his bloomberg for today - "This was the biggest insurance company in the world. Now it moves like this on rumors. Hmm, Must be those green shoots. I say, Normalcy is returning to the markets. Remind me to put that in the FOMC statement tomorrow."

Tue, 09/22/2009 - 17:36 | 76767 D.O.D.
D.O.D.'s picture

Yes, and don't leave out, 'recovery will be sluggish for a time'.

Tue, 09/22/2009 - 16:40 | 76712 Anonymous
Anonymous's picture

There has been only one policy for 10 years; easy money. It won't change until the USD breaks. No way.

Tue, 09/22/2009 - 17:08 | 76734 Bam_Man
Bam_Man's picture

You're being WAY too easy on them.

Monetary policy has been totally asymmetric (as in "EZ-Money, all the time") ever since September 1992, when Fed Funds was lowered to 3.00% and left there for a year-and-a-half in order to inflate the equities bubble. That's 17 years and counting.

At the end of the day, push eventually WILL come to shove, and the Fed will be forced to defend the dollar to prevent a run on all US $ denominated assets. But that's probably going to be a 2011-2012 problem, so party on!


Tue, 09/22/2009 - 18:51 | 76824 I am a Man I am...
I am a Man I am Forty's picture

At the rate the dollar is dropping, it will be within two months.

Tue, 09/22/2009 - 21:17 | 76927 Ned Zeppelin
Ned Zeppelin's picture

Shoring up the dollar is but a crisis away, easily arranged.

Tue, 09/22/2009 - 21:48 | 76952 deadhead
deadhead's picture


Wed, 09/23/2009 - 15:45 | 77618 monkeyshine
monkeyshine's picture

Not to be interpreted as a defense of all things, but, the dollar has been the reserve currency for the rest of the world since long before that, and during the last 17 years in particular the ROW has had incredible expansion and appetite for spending. Loose dollar policy can be "blamed" for the greatest economic expansion in the history of the world. It hasn't been all bad.

Tue, 09/22/2009 - 16:46 | 76717 Anonymous
Anonymous's picture

We've been having a few large distribution days. Commercial short interest is really starting to build in a lopsided way.

We're looking for a correction to start on October 12th and deliver about a 320 point downturn in the S&P.

Tue, 09/22/2009 - 17:09 | 76740 mule65
mule65's picture

Of course you're Anonymous.

Tue, 09/22/2009 - 19:56 | 76866 Missing_Link
Missing_Link's picture

Oh, OK.  I'll take your word for it, Mr. I Make Random But Very Specific Predictions With No Arguments Whatsoever To Back Them Up.

Tue, 09/22/2009 - 16:47 | 76719 fotokemist
fotokemist's picture

Shold MyKillK be correct, is there any reason that the audit cannot include all transactions for, say, the past two years?

Wed, 09/23/2009 - 02:12 | 77119 Anonymous
Anonymous's picture

people people people...please think before
engaging keyboard....

the fed audit has NOT been voted on let alone passed....
for fuck's sake the house has not even started

these repo agreements will have a shorter duration
than the time it will require to ramp up an audit
assuming that it becomes law.....

the audit will NOT pass the senate with a veto
proof majority and it is almost certain that it
will not pass the senate at all....and if it
were to pass the senate mubrak will veto it....

these repo agreements have nothing to do
with audits...

it is a dead dead dead issue.

Tue, 09/22/2009 - 16:48 | 76722 Brian Griffin
Brian Griffin's picture

Wow, that analogy is hilarious. 

Tue, 09/22/2009 - 16:54 | 76726 TwoJacks
TwoJacks's picture

I'll believe this reverse repo bidness when the dollar reverses. Until then, it's b.s.

Tue, 09/22/2009 - 17:31 | 76764 MyKillK
MyKillK's picture

If this is a bluff, what does the Fed stand to gain for it?

Tue, 09/22/2009 - 17:44 | 76775 Stevm30
Stevm30's picture

Temporary credibility from Treasury buyers - buys time for both them and the FED.  Maybe a miracle will happen!

Tue, 09/22/2009 - 18:21 | 76808 MyKillK
MyKillK's picture

I don't believe that explanation. They don't need to buy credibility. They seem to be able to sell as much Treasuries as they so desire.

Tue, 09/22/2009 - 18:44 | 76814 Stevm30
Stevm30's picture

Yeah now they do, but not once their $300 billion treasury program ends ($9 billion left)... high and dry.

Tue, 09/22/2009 - 20:56 | 76909 jm
jm's picture

There is plenty of money in the stock market to plug the hole.

Tue, 09/22/2009 - 18:36 | 76818 MyKillK
MyKillK's picture

This is true. But it seems like a really weak attempt. Anyone involved in the bond market would see right through it.

Tue, 09/22/2009 - 17:03 | 76731 lizzy36
lizzy36's picture

Alas taking liquidity from PDs will be harder than weaning heroin addicts using metric ton injectable portions of methadone.

classic tyler durden....

Tue, 09/22/2009 - 17:16 | 76748 donatoloscalzo
donatoloscalzo's picture

it will all end in tears....................i feel sorry for Bernanke: he has and still is doing everything and even more than humanly possible but..............

Tue, 09/22/2009 - 17:30 | 76762 Lionhead
Lionhead's picture

I hope you also feel sorry for the millions of savers, retired folks, and assundry shareholders of all strips that are/have been penalized for his policies and wrong headed decisions. Add to that, the nation's young-lings that will be forced into paying off all this debt.

I have no tears for this man; may God judge him harshly for all the fellow citizens he's harmed.

Tue, 09/22/2009 - 17:41 | 76772 ghostfaceinvestah
ghostfaceinvestah's picture

I stand by my prediction that he will be the first to be hung as a traitor when the Revolution starts.

Tue, 09/22/2009 - 20:51 | 76905 SteveNYC
SteveNYC's picture

Solid prediction, I have been thinking the same thing. There is no more treasonous act than destroying the currency of a sovereign nation, the currency you have been mandated and paid to manage and defend, bringing about the ruin of its responsible citizens, destroying the fruits of their hard labor.

He will be judged harshly, and rightly so, in my opinion.

Tue, 09/22/2009 - 18:57 | 76827 I am a Man I am...
I am a Man I am Forty's picture

No offense, but I hope we don't have to leave it to an all powerful being to punish these guys.  I'm not convinced anyone upstairs is paying attention.

Tue, 09/22/2009 - 17:49 | 76781 Stevm30
Stevm30's picture

Also he's not doing everything that's "humanly possible".  Instead, he's doing what is easiest, and getting all the bs political laurels from the media that comes with "taking the easy way".  For example: for further exacerbating a crises that we WILL have to eventually confront, he has been appointed to another term...  Remember how fawning his 60 minutes profile was?

Tue, 09/22/2009 - 17:17 | 76749 Josey Wales
Josey Wales's picture

I think this is a great idea, why just look at how good the treasury sales are of late!!!  I bet the primary dealers will be chomping at the bit to give some cash in exchange for Treasuries! 

Or perhaps the FED will issue these Re-REPOS, load the banks with treasuries, then POMO them back onto some FED balance sheet a week later like they do the treasury auctions. 

Maybe this story sells in the US but do foriegners actually believe this stuff???

Tue, 09/22/2009 - 17:26 | 76755 MyKillK
MyKillK's picture

You are assuming this is referring to Treasuries, but you must have forgotten that the Fed has created several liquidity programs over the last couple years that deal with every kind of security imaginable. I would bet that the Fed is dealing with the worst of Wall Street's trash here...

Tue, 09/22/2009 - 17:46 | 76776 Josey Wales
Josey Wales's picture

The article referenced "primary dealers", so I guess I assumed these were the same primary dealers who sell treasuries.  Perhaps I made an ass out of me and umptions...

I guess if they would sell any security with the promise of buying it back they could use that as a way of establishing a price for new mark-to-market rules.  Maybe the banks could point to the prices offered by the FED as legitamate fair value of all this trash? 

Tue, 09/22/2009 - 18:17 | 76806 MyKillK
MyKillK's picture

Here's a wonderful pdf that lists all the Fed and Treasury liquidity programs, who is eligible to participate, and what type of assets/securities are covered:,_Federal_...

TALF, MBSPP, PDCF, TSLF, and TOP all involve the Fed & Primary Dealers. What's very interesting, is most if not all of these programs are scheduled to finish at the end of October.

Tue, 09/22/2009 - 17:30 | 76761 Fritz
Fritz's picture

There is no game plan on the part of the Fed.

They are making shit up as they go along. If they pull liquidity now, they know its game over for asset prices.

Tue, 09/22/2009 - 17:41 | 76771 Anonymous
Anonymous's picture


When you write titles such as

"Are Reverse Repo Liquidity Suctions Approaching?"

you start looking more and more as CNBC (inverse of course). I am tired of seeing this old-media trick, and this is the last place where I was hoping to see it.

It is starting to sound as a perma-bear, just like they are perma-bulls.

Tue, 09/22/2009 - 17:53 | 76788 Tyler Durden
Tyler Durden's picture

you are spot in your comparison, except that unlike CNBC we have a sense of humor.

Tue, 09/22/2009 - 18:39 | 76819 MyKillK
MyKillK's picture

I doubt CNBC would even cover this story in the slightest

Tue, 09/22/2009 - 19:35 | 76848 gmrpeabody
gmrpeabody's picture

Wrongo..., Kudlow is milking this to death as support for King Dollar.

Tue, 09/22/2009 - 19:36 | 76851 Uros Slokar
Uros Slokar's picture

See: Manifesto.

Tue, 09/22/2009 - 18:30 | 76816 Anonymous
Anonymous's picture

The impact reverse repos have upon mortgage rates will be difficult to navigate, as the Fed selling Treasuries and Agency bonds into the market in exchange for excess reserve monies, in addition to new issues entering the market, will drive interest rates higher (unless they compensate by increasing the interest rate paid on excess reserves-which would rather defeat the whole idea). The Fed funds rate is already at the basement, so there is not any maneuvering space with that knob. I foresee a corrugated-shaped recovery.

Tue, 09/22/2009 - 19:14 | 76833 Anonymous
Anonymous's picture

Ben will continue to pump up asset prices until oil reacts to the excess liquidity or the bond vigilantes growl.

Wed, 09/23/2009 - 08:10 | 77197 Anonymous
Anonymous's picture

bond vigilantes? that is so early 1990s. they've been extinct for a decade +.

Tue, 09/22/2009 - 19:21 | 76837 Anonymous
Anonymous's picture

Can anybody tell me how those probs are calculated? I'm having a play around with the ff but can't match the implieds from that Bloomberg chart. Jan fed funds settled at 99.785 - looking at wsj data page - (and dec at 99.81) so I can's see how you get those implied probabilities, whatever the day count issues are. I'm obviously missing something pretty basic in the methodology and cbot site doesn't help.

Any help to somebody trying to get a handle on all this appreciated.

Tue, 09/22/2009 - 19:24 | 76842 Anonymous
Anonymous's picture

This is news? The fed is always doing rev-repos for the PDs, and they already started increasing in size - $3 bil last week alone, $22 bil over the last year.

This is just to placate the hawks and attempt to prempt inflation expectations as reflation continues and dollar-demand falls. If they were actually hawkish they wouldn't leak the news, they would simply start pulling the reserves out before it became obvious unless of course they want to get gamed... oh wait, that's what they're there for

short rates continue to plunge and they're talking about massive rev-repos - amazing... trying to have their cake and eat it too

Wed, 09/23/2009 - 02:23 | 77124 Anonymous
Anonymous's picture

this is not the event which some of the previous
posters have been hyperventilating about some
of whom have not paid their clue phone bill this

there is the pr benefit as you say of showing
a strong stand against inflation fears but more
to the poit it is probably in response to the
dollar slide which the fed is hoping to stem....

however, i don't think it has enough of these
agreements to make an appreciable impact on
dollar support....

it at least gives been the ability to say that
he has his finger on the trigger....

Wed, 09/23/2009 - 11:19 | 77282 Anonymous
Anonymous's picture

their greatest tool is to talk the market where they want it - assuming we don't start looking behind the curtain and lose confidence in their mastery and awesomeness.

I agree that this is also about the dollar slide, but I think we shouldn't separate the dollar slide and inflation(inflation expectations); we're an import economy (goods and capital) that can see cost-push inflation from a weak dollar and/or a weak dollar from dollar sellers looking to avoid neg real rates and rising money prices in the dollar zone. The two are inter-related.

Tue, 09/22/2009 - 20:04 | 76870 Anonymous
Anonymous's picture

actually it sounds more like the fed will sell back these "distressed" assets to the banks while the market is high so the banks can claim full price for them, justifying it by pointing to the stock market and thus pushing up their end of the quarter numbers.

Tue, 09/22/2009 - 22:01 | 76960 Bryan
Bryan's picture

Why does the word "liposuction" keep coming to mind?

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