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The Fed Prepares For A Surge In New Primary Dealer Applications

Tyler Durden's picture





 

These days Primary Dealers are the new black. Being a Primary Dealer is defacto insurance that one is Too Big To Fail, even if that is hardly the case. Having unfettered access to the discount window, to the Primary Dealer Credit Facility, to various repo facilities, and all other mechanisms that Liberty 33 has come up with to make goosing the market a formality, is a guaranteed way to achieve record profits and a wet dream for many a bank CEOs. In many ways this is comparable to the rush by everything with a heartbeat to purchase a home using New Century loans back in 2005, with the Fed of course in the role of the now bankrupt subprime lender.

Today, the Fed issued new guidelines for capital requirements for the line of banks that are willing and able to join the ranks of their infinitely bigger market monopolist brethren such as Goldman Sachs, on the receiving end of the taxpayer bailout trough. And because the Fed is certainly taking this risk "seriously" it has made becoming a PD ever so much more difficult: now instead having $50 million in net capital, PD wannabes will need to show $150 million of capital to the Fed kleptocrats. Prudence defined.

The full list of incremental requirements:

  • a more structured presentation of the business standards expected of a primary dealer;
  • a more formal application process for prospective primary dealers;
  • an increase in the minimum net capital requirement from $50 million to $150 million;
  • a seasoning requirement of one year of relevant operations before a prospective dealer may submit an application; and
  • a clear notice of actions the New York Fed may take against a noncompliant primary dealer.

Surely, the $100 million incremental capital requirement will be sure to prevent any and all future financial crises. Here is the justification for this joke of a risk-management move, direct from the Fed:

This change reflects the proportional increases in gross U.S. Treasury
debt issuance and the size of the U.S. Treasury market, as well as the
evolution of open market operations since the policy was last updated
in 1992.  The New York Fed believes a minimum net capital requirement
is a prudent element of its counterparty credit risk management.   In
light of the significant business expectations of primary dealers and
the meaningful securities positions that primary dealers may take as a
consequence, the New York Fed retains flexibility to require higher
capital where circumstances warrant (e.g., if a dealer has a riskier
business model or does not have significant support from a parent or
affiliate).

PDs, which are nothing but Fed proxies due to their requirement to bid for govvie auctions, have been instrumental in loading up with billions in new government debt in 2009. By the looks of things, their life will be even more interesting in 2010, now that the Fed is not directly monetizing debt: with $2 trillion of new Treasuries in the pipeline, the Fed will need any and every bank to be a Primary Dealer. We expect the list of 18 current primary dealers to balloon skyward in the coming months courtesy of this new directive.

And lest we be called biased, here is the politically correct definition of Primary Dealers, aka Massive bank failures in waiting, and soon to be TBTFs, direct from the Chairman (who will hopefully become so on a pro tempore basis in 3 weeks).

Primary dealers serve, first and foremost, as trading counterparties of
the Federal Reserve Bank of New York.  This role includes the
obligations: (i) to participate consistently as a counterparty to the
New York Fed in its execution of open market operations as directed by
the Federal Open Market Committee (FOMC), and (ii) to provide the New
York Fed’s trading desk with market information and analysis helpful in
the formulation and implementation of monetary policy. 
Primary dealers
are also required to participate meaningfully in all auctions of U.S.
government debt, including an underwriting commitment, and to make
reasonable markets for the New York Fed when it transacts on behalf of
its foreign official account-holders.

We are confident that the New York Fed's trading desk is sufficiently qualified to manipulated markets on its own. Yet with what will soon seem like an avalanche of Fed transparency demands, it just may become obvious with what liberties the fine young yield cannibals behind Bloomberg terminals at 33 Liberty have been transacting. Thus, the logical move is to spread the wealth: and if that means allowing soon to be FDIC bank failures to become Primary Dealers, well, so be it.

 


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Mon, 01/11/2010 - 15:03 | Link to Comment Stoploss
Stoploss's picture

Tyler, go to market ticker, (you may already have) and check out the PD%. Parking huge amounts of money, with zero return. 

 

The bell is ringing.

Mon, 01/11/2010 - 15:58 | Link to Comment SayTabserb
SayTabserb's picture

North of 60%.  And just to check my memory, weren't the Indirects carrying the load (also more than 60%) just a year ago? So the positions have been flipped. Which makes it all seem kind of contrived.

Mon, 01/11/2010 - 15:13 | Link to Comment trav7777
trav7777's picture

Can I mark my feces to model and get in on this?  I'm thinkin 200, 250 million

Mon, 01/11/2010 - 15:36 | Link to Comment SayTabserb
SayTabserb's picture

Why not let some Primary Dealers from Cartagena and Tijuana in on this action? They could blow the doors off those paltry capital requirements.

Mon, 01/11/2010 - 15:41 | Link to Comment SayTabserb
SayTabserb's picture

But really, isn't this another example of the Fed's protean, brilliant capacity for innovation? How to cover the $2 trillion in new Treasuries along with the trillions in roll-over coming up in 2010 without massive PD support? Can the "Household Sector" really do it all, even with free vacuum cleaner attachments from the Fed's Hoover Division to suck up all the quarters between sofa cushions in this great land of ours? The Fed can keep "recapitalizing" banks off the radar; the bank-PDs can keep giving this money back to the Fed, and we're solvent, baby! How can we get rid of Bernanke, the man who invented financial perpetual motion?

Mon, 01/11/2010 - 16:02 | Link to Comment the grateful un...
the grateful unemployed's picture

okay so who benefits from this? inquiring minds want to know?

Mon, 01/11/2010 - 16:04 | Link to Comment BaronG
BaronG's picture

So, buy the banks that get approved, wait for the quarter results and hopefully take advantage of the potential gain?? Thoughts?

Makes sense, but then again, who am I kidding

Mon, 01/11/2010 - 16:24 | Link to Comment molecool
molecool's picture

So, if I want to I can become a PD? :-)

Mon, 01/11/2010 - 16:40 | Link to Comment Anonymous
Mon, 01/11/2010 - 16:48 | Link to Comment Anonymous
Mon, 01/11/2010 - 18:45 | Link to Comment Anonymous
Mon, 04/26/2010 - 14:30 | Link to Comment Adam33
Adam33's picture

Very informative and useful article. I have to admit that I always follow your website because it is full of various information, especially about the tech and mobile devices. Well, reading this your entry I have found some new information, which I have not known before. These incremental requirements which you have stated for us are really new for me. I decided to find more information about this subject in your website. So thanks a lot one more time for the great and interesting post and keep up publishing these detailed information in the nearest future too. Regards, Adam Matton from web application development

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