Continuing With The Revelation of The Fed’s Stealth Bank Bailout (TARP 2.0), We Present Our Analysis Of The Use And Abuse Of The Primarily Dealer Credit Facility

Reggie Middleton's picture

Primarily Dealer Credit Facility

Note: Paying subscribers may download
the fully scrubbed model containing all of the data output by the Fed
regarding the PDCF as an Excel pivot table here, Primarily Dealer Credit Facility Analysis. Those who are interested in subscribing to our research should click here.

Yesterday, I illustrated how the Fed buried TARP 2.0 amongst a
spreadsheet dump of over 70,000 trades and what amounted to probably a
million cells of spreadsheet data distributed among a plethora files,
see Buried
Deep Within The Files That The Federal Reserve Released On Thier MBS
Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!
Today, we will review another one of those files, dealing with the
lending program that the Fed instituted for its Primary Dealer banks.

The Primary Dealer Credit Facility (PDCF) was created in March 2008
as an overnight loan facility that provided funding to primary dealers
in exchange for a specified range of eligible collateral. The PDCF was
intended to foster the functioning of financial markets more generally.
The facility expired on February 1, 2010. Analysis of the Primary Dealer
Credit Facility data provided by the Fed indicates appalling facts.

1.      A total $8,959bn was loaned to financial institutions (incl
roll over) with a weighted average interest rate of 1.53%. The total
collateral against this $8,959bn of loan was $9,665bn, a mere 7.88%
overcollateralization in a time of distress and rapidly deteriorating
assets. The quality of the collateral posted for PDCF was pitiable. Only
1.4% of the collateral, on average, was traditional collateral posted
in form of U.S. Treasury or Agency Debt while corporate securities
topped the list with 24% followed by equity at 22% and municipal bond at
14%. Collateral as indicated by rating points to the fact that almost
65% of collateral was either junk or equities. Of the total collateral,
42% was virtually pure junk consisting of MBS / BBB / BB / B / CCC and
unrated instruments and equities constituted 23% of collateral.  Of the
total collateral, 15% was unrated, 7% MBS, 6% BBB, 4% BB, 4% B and 5%
CCC or lower. Only 20% of collateral was AAA while 32% was rated A and
above. Basically, the Fed simultaneously became the dumping ground for
all of the trash that the nation’s big banks needed to get rid of and
the world’s largest vulture fund, it’s just that it paid premium prices
for the junk (see Buried
Deep Within The Files That The Federal Reserve Released On Thier MBS
Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!

2.      Citigroup was the biggest user of PDCF using almost 20% of
PDCF followed by Merrill Lynch (17%), Morgan Stanley (15%) and Bear
Sterns (11%). Of the 20 primary dealers, these four banks were the
largest users of PDCF. Of these four, all either collapsed or were
rescued save Morgan Stanley, and we issued stern warnings regarding
Morgan’s predicament in February of 2008, see the riskiest bank on the Street.It appears we were definitely on to something!

3.      Barclays took out the single biggest loan ($48bn) under the
PDCF in September 2008. Of the top 20 single largest users of PDCF in a
day, Morgan Stanley topped the list appearing 16 times – again,
referencing the riskiest bank on the Street!

4.      Goldman’s 86% of  collateral consisted of junk securities
including equities (48%) while JPM’s 88% of collateral consisted of MBS /
BBB / BB / B / CCC and unrated instruments, the worst of the lot
followed by UBS (71%) and Citigroup London (70%). We have also warned on
the Street and the media OVERESTIMATING the strength and health of JPM
Morgan, see An Independent Look into JP Morgan.

5.      Citigroup tapped the facility 279 times followed by Merrill
Lynch 226 times; Morgan Stanley 122 times and Bank of America 118
times.  The use of PDCF was highly concentrated with top 4 banks amongst
them using almost 70% of the facility.

6.      During Sep 2008 alone, financial institutions collectively borrowed $1,192bn from the Primary Dealer Credit Facility.