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.