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First Reverse Repo With Agency Collateral Conducted
A 5th sequential revese repo test conducted by the Fed, indicates either unprecedented posturing by the printer leprechaun or some legitimate concerns about pulling the trillions in banker slush funds floating around and propping REITs around 200% higher than fair value. What was odd about this reverse repo test is that for the first time, the Fed accepted Agencies, and specifically $180 million in a 2 day operation, as collateral. There is still a long way to go before the Fed is willing to reverse repo bankrupt stocks and Goldman bonus pool IOUs: the same assets which the banks have repoed out from the Fed (at par value no less...) We only partially jest about the bankrupt companies part, but since nobody except the Fed Chairman can correct us on what the haircut, and what the assets in the discount window are (the particular data is what Ron Paul is trying to get public), we will continue claiming that the Fed is allowing banks to collateralize worthless assets at 100 cents on the dollar, until such time as there is an actual fact that would refute such claims. At that point we will even gladly issue a retraction. Auditing the Fed would seem like a fair price.
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Skeptical empiricism ... bring it!
Yes Virginia there is no collateral.
"we will continue claiming that the Fed is allowing banks to collateralize worthless assets at 100 cents on the dollar"
What is the legacy cost of this? Someone, just now, is getting rescued so that the many who come later will have to suffer. This is a moral issue of epic proportions. We must abolish the Federal Reserve Act of 1913 and end the Creature from Jekyll Island.
Bank of America live hearings
mms://wms-rbn-sea010.rbn.com/cspan/cspan/wmlive/cspan3v.asf
Bank of America live hearings
mms://wms-rbn-sea010.rbn.com/cspan/cspan/wmlive/cspan3v.asf
Can someone explain how a repo reduces the money supply/reserves, if the collateral and cash is just returned in a few days anyway? Seriously. I just don't get it.
Sounds like you do get it - it's a sham transaction.
i thought a reverse repo involved the fed posting collateral in exchange for cash -- they're posting some of those possibly-worthless agency bonds they've been buying up and sitting on.
so it's not the rest of the world pawning off worthless stuff -- it's the fed saying "i'll buy it back in N days but I'll be taking $1bn out of circulation until then"
the fact that the bonds are worthless doesn't matter -- the fed will if necessary just print money to buy them back.
My thoughts on the agency collaterlized reverse repos have changed a bit since I last opined on the matter.
Intially, one would think that doing a reverse repo for any extended period based on questionable collateral would be a challenge. I'll get back to that point in a second...
The Fed is testing the water on these reverse repos to make sure they work from a process perspective. A 2 day term is literally nothing, and they are doing these in amounts to where even the primary dealers look at these as rounding errors.
As said in previous comments, the reverse repo transactions are somewhat a sham in the sense that net suppy effect is zero. This slight of hand, however becomes more of an issue, however, if the terms extend to 1,3, perhaps 5 years. This is the point that agency collateral becomes a problem.
Now that we back on collateral... the Fed is fully aware of the challange they have on ridding themselves the $1 trillion + of partially worthless MBS they have issued. As it sits today, they can only afford to do test transactions on agency-based MBS reverse repos that are very limited in scope and duration.
What I fully expect will happen, though, is that once the debt ceiling is increased by the expected $1.8 trillion-- the Treasury will start giving explicit guarantees on Fed purchased MBS.
Once the explicit gurantees are given, the agency MBS will trade like water and durations can be extended on the reverse repos. At some point, the reverse repos will not be needed, and the securities can be returned back into the banking system and sold no matter what the value of the underlying collateral. At the point, the Treasury will start assuming a growing liability, which again, will be financed by more debt as they absorb the losses for the taxpayer.
At some point, the Fed may need to take very quick and drastic action to take liquidity out of the system. I think the PD's would be much more eager participants if they knew that Agency debt and MBS had explcit guarantees attached to them BEFORE the reverse repo program really ramps.
This, however, may not happen for months. But when it does, the mechanism must work. In any sense, the taxpayers will get screwed, and this is how it is likely to happen.
Help me out here -- isn't the Fed using the same collateral discount margins for this program as it does for its current collateralized lending programs? If so, then the haircuts are pretty substantial, and slipping in "worthless" collateral seems to be an overstatement, unless you're in the camp that calls all US Dollars "worthless" as well. Use the link at the right hand side to get the table of haircuts.
http://www.frbdiscountwindow.org/discountmarginsrn.cfm?genid=22&desc=Col...
You're comparing apples and oranges here. The Fed's commitment of $1.25 trillion in MBS is a straight purchase transaction-- this is not a collaterialized lending program. There were no "haircuts" on these intital MBS and agency debt purchases. The Fed may have bought these for a discount, but we can only assume they bought these for par.
Why par? For two primary reasons: (1) they needed to create "artificial demand" so the net effect would be to narrow the spread between agency debt and Treasuries to keep mortgage rates low; (2) the second primary reason was that a pissed off Chinese government (certral bank) was holding a lot of this crap-- and pretty much demanded a trade between MBS and much more liquid Treasury notes.
Sure, the purchase of these securities also helped the banks, as they got cold hard cash in exchange for not marking to market bad stuff. Now that the Fed owns the crappy stuff on its balance sheet, there are not likely to be many willing takers. MBS isn't "worthless" on the face of things-- but saying they are "partially worthless" isn't a stretch at all.
To answer the first question posed, the tests are proxies for the Fed reselling the securities into the market as either a longer duration reverse repo, as stated above, or a true sale of the asset to undo the QE strategy.
Just as important is testing the waters to see what the market value of the MBS the Fed purchased is. In other words did the Fed significantly overpay for these securities and are we (taxpayer) about to lose a ton of money?
My question, hopefully someone can answer this, is when the Fed made the initial MBS purchases to prop up the flailing institutions, were these done via Repos or straight sales?
The program is a straight purchase program of assets-- the is no obligation for the counterparty to repurchase. The Chinese (among other foreign central banks) were holding a lot of agency MBS and were certainly in line to be bagholders. So they didn't want to do this any other way... why would they?
http://en.wikipedia.org/wiki/Discount_window#Alterations_during_2007-2009_.27credit_crunch.27
In a round about way it was worse than a straight sale, banks give the fed crap (mbs), they get cash back to hold for ninety days for basically zero, at the same time because the fed is telling everyone its going to buy mbs, the banks crap MBS by sheer demand rises in price, while the fed is buying this crap on the open market, the bank can do whatever it wants with the cash they borrowed to make yield, once the term is up the bank gets back their assets that are now magically worth more and they keep the alpha that they produced while they held the cash. Once they get their crap back that is now priced higher they could again sell it to the fed in the open market at a higher price than when it was used as collateral!
They are seeing if we notice that they are turning worthless claims into fresh new money. This is the mechanism of the printing press - they are hoping no one notices they are never going to make the banks take this crap back. Its a laundry if you roll the repos in perpetuum. They commit to rolling the repos until the system cracks up and/or they've laundered all the bad paper.
The duration of the repos doesn't matter if they commit to rolling them AND they don't reveal the amount/number of outstanding repos.
They are going to get money into the system this way and the bond sales will be for show only.