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Foreign Banks Line Up At The Primary Dealer Trough
Yesterday we suggested the Fed's recent cosmetic changes to Primary Dealer application requirements were merely a front for what we (and the Fed) expected would be an onslaught of new Primary Dealer applications. We were right. Dow Jones reports that less than 24 hours after the NY Fed press release, Societe General, infamous for almost singlehandedly causing the Fed to lower interest rates by 50 bps in 2008 when Jerome Kerviel went apeshit and killed the market in January of that year, courtesy of a few billion futures dumped overnight, Scotia Capital and TD Securities are already lining up to become primary dealers. Allowing foreign banks to become Primary Dealers is nothing but a back-alley way to provide bailouts to international financial institutions and bypass the respective central banks completely. The Fed is priming itself to be global financial lender of first and last resort once again. We wonder why the urgency, and what is it that the Fed, but not the broader market, is seeing.
More from Dow Jones:
The U.S. government, faced with record budget deficits, needs primary dealers to participate and help smooth its record sales of Treasury debt, which are likely to top $2 trillion this year for a second year in a row. Weak participation by primary dealers could lead to higher interest rates which could hurt the broader economy by raising rates for consumers and companies. Treasury yields are benchmarks for mortgage rates and a variety of borrowing rates for consumers and companies.
For the Fed, a larger group of primary dealers is likely to be a welcome development as the central bank prepares to unwind the massive monetary stimulus it has provided in the past two years to help the economy recover from the worst economic downturn since the Great Depression.
And the joke that the new "entrance requirements" are:
The Fed's balance sheet has swollen beyond $2 trillion and there have been some concerns that the primary dealer group may struggle with the large-scale asset sales the central bank may have to undertake to withdraw the liquidity it has pumped into the system.
But the entry into the primary dealer pool has become tougher. Monday, the Fed revised its guidelines for primary dealers, for the first time since 1992, increasing capital requirements from $50 million and requiring that applicants must have had "relevant operations" in place for at least one year.
This is precisely what we need: more banks to pad their pitchbooks by pumping themselves up as PDs, while at the same time they saddle the Fed with ever more garbage "assets" for which they get 100 cents on the dollar capital, in principle accelerating the arrival of D-Day when the Fed crumbles under the weight of its own increasingly worthless holdings. We fully expect Iceland regional banks to soon be admitted under some "special exemption" to new entrance guidelines, and borrow, borrow, borrow from the discount window. It is not like we don't have enough: from the list below, please do a Where's Waldo of not only the TBTF's but any bank that actually has positive equity value (under proper accounting guidelines, which of course assumes FASB was at least a little less corrupt than the utterly worthless and discredited SEC):
BNP Paribas SA, Bank of America Corp.'s Banc of America Securities, Barclays PLC's Barclays Capital, Cantor Fitzgerald LP, Citigroup Inc., Credit Suisse Group AG, Daiwa Securities Group Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holding PLC, Jefferies & Co, J.P. Morgan Chase & Co., Mizuho Securities, Morgan Stanley, Nomura Holdings Inc., Royal Bank of Canada's RBC Capital, Royal Bank of Scotland Group PLC and UBS AG.
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No more backdoor bailouts.
Dang it. Stop it right now.
This lead balloon will not fly.
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it was a 75 bp emergency cut the morning after Martin Luther King day(and they subsequently cut another 50 bp @ their meeting about a week & a half later). Awesome job guys(the Fed, not u ZH), w/ what appeared no info whatsoever, just cut the rate to prevent a 4% down day.
So 2010 is shaping up to be 2009 only more Q.E and even less transparency.
I really got to stop reading ZH at work, stuff like this makes me want to turn to the bottle. Glad to know that everyone can pony up to the discount window including foreign banks. What's next, is Wal-Mart going to be riding up to the discount window, or just make a sub to do it on their behalf?
Just keep a bottle on your desk like me. And trust me, just get the 1.75, the 750 will go faster than you think...
Perhaps a stealth frost retaining beer mug
disguised as a flower vase....
Holy shit.
This smells like the beginnings of changing the name of the USD and making it the defacto world currency.
Yes, and I was worried about a shortage of USG debt. I feel much better now!
USD as defacto world currency seems to be a plausible end game or end objective.
I am looking for QE 2.0 later this year, with Chinese silence or weak protest when it comes.
Then looking for pressue on the Euro block with countries looking to opt out and join the de facto USD bloc.
We've already got a USD-zone between US and all the pegged currency countries.
A way to handle and even sustain an inflated FED balance sheet is to broaden (formally and informally) the economic activity to which that balance sheet corresponds.
We really are gluttons for punishment aren't we.
It will be strange when the Fed finally owns everything. We're socializing everything much more effeciently and quietly than the Soviets or Cubans ever did.
So perhaps the ZH crowd could help me in evaluating changing the bank ourcompany currently deals with. I won't name names, but our current bank is one that has lined up to become or already is a primary dealer.
One of the VP's for a bank we are considering is coming by next week to discuss moving our capital to them. Any suggestions on questions we might want to ask them? I have a list ready, but I am sure I am missing much. This bank has a good Texas Ratio, but there is more to choosing a bank than the ratio right?
Is this a ploy for enabling cross-border debt monetization among central banks? Are those foreign financial institutions going to act as conduits for grand, global circle jerks among CBs?
I think some in the broader market are seeing it hence the purchase of $28 billion in bills at 2bps.
"record sales of Treasury debt, which are likely to top $2 trillion this year for a second year in a row. Weak participation by primary dealers. . ."
No way there's a legit market for $2 trill this year
Legit?... perhaps not.
The 'illegitimate market' however is set to increase substantially it appears...
So now, literally, every man's trash will be the US taxpayers' "treasure." Wonderful!
'Allowing foreign banks to become Primary Dealers is nothing but a back-alley way to provide bailouts to international financial institutions and bypass the respective central banks completely.'
Great stuff.
There are a number of foreign banks that are already PD, and two of these applicants are Canadian, which is the best-capitalized banking system in the world. Is there smoke here?
From the article:
The current 18 primary dealers are: BNP Paribas SA, Bank of America Corp.'s Banc of America Securities, Barclays PLC's Barclays Capital, Cantor Fitzgerald LP, Citigroup Inc., Credit Suisse Group AG, Daiwa Securities Group Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holding PLC, Jefferies & Co, J.P. Morgan Chase & Co., Mizuho Securities, Morgan Stanley, Nomura Holdings Inc., Royal Bank of Canada's RBC Capital, Royal Bank of Scotland Group PLC and UBS AG.
More importantly, allowing foreign banks to become primary dealers creates a larger pool in which to throw Federal debt turds. Given the size of this year's debt that needs to be financed, this seems to mainly be an attempt to ensure that there are enough purchasers for all this toxic crap. I think allowing the new PDs to dump toxic mortgage assets to the Fed is a secondary consideration, and even then I'll assume the Fed sees that as a positive since it should free more cash for lending (according to Bernanke).
Since the British government now owns 84% of RBS Group, you might as well make the cheque out to Elizabeth Regina: well probably not, as the Queen's personal wealth is more meaningfully separated from the government than RBS is.
This is not hard. Allow me to translate:
"The U.S. government, faced with record budget deficits, needs primary dealers to participate and help smooth its record sales of Treasury debt..."
Having used up all of the available on-shore Ponzi participants, it's time to open up this once elite handful of dealers to include anyone who is willing to soak up Treasury issuances so we can play "rotating repurchase" in a bigger field of participants. "Sure we said something about having $150MM of capital but believe me, if you're willing, we're listening and we waive anything for a good reason."
See, one level of QE is for the Fed to simply print and buy; then go one step removed, buy the US debt through an intermediary, and then maybe you buy their next to last purchase - get it? Then that morphs into QE that gets someone to buy in exchange for a promise to buy it back, well, later, and buy at a premium that guarantees a return for the carry. So then you can "soak up" the issuance with more players - some near term, some father term - all of whom count as bidders, mind you, and it doesn't look so bad. Not even like QE.
Next up, compulsory merger of hundreds of thousands of IRAs and 401(k)s who will all be given the once-in-a-lifetime chance to become primary dealers and play too!
Remember Madoff: if you said you wanted in, the first thing you were told is "no, we're closed, sorry." Then later they came back to you "looks like we can fit you in. . . " So the first set of primary dealers tells everyone what a sweet deal they have playing the QE game, it's found money, it's so easy, and the marks start surrounding them like . . . fools.
Child's play.
Folks, its easy to see. PD's can borrow at "0" and the deal is simple. Buy our trasheries at low rates so we can finance all of our shenanigans. So we are lending so that others can loan it back to us at a low rate. daaaaaa.
I have not seen anyone discuss derivatives unwind here. Yeah we need to have phony ponzi playas to help with the big musical chairs game but why would others be willing to do this?
I am seeing something but I may not say it well. Is there a way of swelling up banks with lots of extra "funds" so that the processing of all the derivative bets that need to unwind can occur against a background of excess liquidity so that no one has to say they are bankrupt, even as the losses happen and the ledgers balance out? Right now it seems to me the margin call from hell is the beast being held back at the door. Some folks have barred the door, some have tried to talk the beast into not coming in, but the door is getting ready to bust. How to handle it? Make sure everyone has enough money so that as things cancel out across balance sheets, as few heads as possible go "underwater."
Much of the problem is a logistics one. No mark to market, no margin calls, because as you are waiting for your payback from your CDS to pay off, they can't pay you because they are waiting for theirs from another counter party. You go BK, so do they. But if there is a backdrop of enough cash, maybe considerably fewer of our neighbors (sovereigns) go under, and the unwind and the margin calls can begin.
There is a critical point when all these unsettled bets bring businesses to a standstill and they must be processed.
I am suggesting the strategy is a Preinflation to hedge against the vacuum suckage of deflation when assets finally unwind.
Add in deflation of the USD as well, it will continue to fall against the price of gold and commodities in general depending on the extremity of the eventual devaluation. The same liquidity backstop is also preventing the US Treasury market from collapsing.
Why, you ask? With the ever growing sea of newly minted Treasuries, perhaps there's some profit to be made? There's no need for the big US banks to keep all the profit for themselves.
A couple of points to remember, the Fed once had to deal with nearly 50 primary dealers. Second, any bank registered to operate in the US can borrow (cheaply) at the discount window.
does an aspiring primary dealer need to place its $150mm in escrow, or can they actively use it to trade? Assuming the prior...anyone know?