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The Latest Reincarnation Of Repo 105 - With End Of Quarter "Deleveraging" Over, Primary Dealer Repoable Assets Surge
One of the take home lessons from the Lehman Repo 105 scam is that Primary Dealers will do everything in their power to dispose of assets in any way possible at end of quarter time in order to make their leverage ratios palatable to investors and rating agencies. A week ago, taking a hint from the WSJ, we observed how for the week ended March 31, total Primary Dealer assets plunged by $34 billion in just one week: from March 24 to March 31. For this EOQ asset window dressing hypothesis to be confirmed, we needed to see a corresponding spike in asset in the week immediately following March 31. Sure enough, using Treasury data of Primary Dealer holdings, we observe precisely that, and then some. In the week ended April 7, total Primary Dealer assets exploded by $53 billion to the highest level seen in 2010, or $300 billion, a stunning 21% increase in total assets in just one week! This is also the highest total level of PD asset holdings since June 10, 2009. What do primary dealers do with these assets? They either repo them out back to the Fed directly, or via the Tri-Party Repo System, or via some other off balance sheet conduit, using the cash proceeds to go elbow deep in risky assets and purchase every stock imaginable (having given the impression the week before that they are all prudent fiduciaries who don't "gamble" with other people's money). If you were wondering where the surge in buying interest came from in the first few days of April, wonder no more. Furthermore, as PDs would be careful about negative carry on the repo rates, it would be expected that the one security they would buy the most of, would be T-Bills with their next to nothing interest rates... Which is exactly what happened: PD T-Bill holdings surged from a mere $12.6 billion at March 31 to $44.4 billion on April 7. PDs no longer need Repo 105 - they do all their EOQ window dressing directly in the open market.
And now for the numbers behind the data - in chart form.
This is a area plot of all PD UST holdings from the Lehman collapse through April 7. Note the explosion in T-Bill (dark blue series) holdings.
Another way of visualizing the dramatic ramp up in UST holdings, this time in 2D. The surge in both Coupon and Total holdings is more than obvious.
Isolating just the T-Bill series, it is easily visible how PDs ramped up their Bill holdings to levels not seen since June 2010.
Expanding away from just Treasuries and aggregating all holdings including Agency, MBS, TIPS and Corporates, makes it extremely obvious that the Lehman EOQ leverage games are far from over.
And a chart showing just how PDs always mysterious end their quarters at the lowest asset holding levels in any given quarter, only to ramp up immediately after is presented below. The surge from the March 31 total assets at $250 billion to last week's $300 billion sticks out like a sore thumb.
It is high time the SEC expanded its inquiry into Goldman to all Primary Dealers and to actively investigate just how and why the PDs enjoy fooling their investors in such a crude way. Then again, with the market response to the Goldman news indicating that any honest action by the regulators is now seen as an outlier event, we sure ain't holding our breath that the SEC is anything more than fluffer material for Rahm's PR games.
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What! It took them a year and a 3/2 vote to get this far ... do you really think it will go deeper?
They are crooks on so many levels that if one looks anywhere they will find unethical, illegal, and corrupt dealings.
The problem is that the ones doing the looking are corrupt also ... and unfortunately inept. Plus, there is no real incentive for them to go after these guys ... maybe if they were paid a commission of everything they found ... 10% solution
Well good, because why shouldn't fraud be a standard business practice? Thank God for the Fed huh?
So since it looks like they are doing their own 105 schemes. So is the fraud built into the PD stock prices?
They are going to pass that bogus finance reform bill so none of these frauds see the light of day. Their survival is reliant on this. They will give the FED more power and of course they will abuse it.
There are too many layers to this scam for it to sustain itself.
And people who aren't getting their fair share will talk.
In Fact, I would guess that they already have and that more than one group is planning to ambush this administration come November.
Lol you won't get justice from within the system. There would literally need to be aliens crash-landing on earth instituting their own form of justice in order for anything to get done. Do you really think they will let everything unravel for all the world to see? I mean get real, we all see how hard they dress the shit they cook up to make it look like a nice meal day in and day out.
+1
Only a total fool would believe that the SEC, CFTC, FDIC etc would dare to truly follow the law and prosecute the guilty in a CRIMINAL court of law. This is also why Denninger is such a fool and many people laugh at him.
Karl stands up for the right stuff. That does not make him a fool.
Denninger is no fool, that is for sure. I can credit him with peeling the first layers off of this rotten financial onion for me a few years ago (man! already???).
People mistake his acerbic attitude for foolishness because it is difficult to read any content past the first two lines. Skip over his dickishness and he has valid points.
I can't read him any more because my therapist says I need to get as much bitterness out of my life as I can.
Orly tell your therapist that you've opened up to new people...and have been accepted with out condition.
+8 Denninger would do well in a Feudal society
The best we can hope for , though it will be to all our detriments, is the total collapse of the system . Isn't it really inevitable !! Patience my friends
Is their a way to make an ETF that trades on this kind of clock work volatility?
ticker symbol: SCAM
This is unbelievable intel. +100
Good. If they can go this and get away with this, More power to them. I cant wait for it to end. It will come crashing down, Wont it?
Its just another of 1000 reasons the Fed doesn't want to get audited. Transparency......Not !
This would be a simple case for the SEC to prove. Chances of that happening..... .0001 %.
Ron Paul in 2012 !!!!
Moral hazard depicted for all to behold.
One day the blow back from these activities will astound. I hope I live long enough to witness this event.
Mr.Durden you do good work.
so when are the ends of quarters?
The only response to a rigged game is to not play. Forget the hucksters who tell you to ride along and make money; only the house wins a rigged game. Don't invest in companies that operate outside accounting standards. Don't do business with scammers.
Solicitation of opinions: isn't this a second cousin of the "window dressing" performed by countries like Greece?
Greece may have dug her own grave, but I imagine the idea to fudge numbers using such shenanigans came from somewhere.
There can be no doubt that repo 105's are in fact US Government policy.
It has been identified as existing.
It is now verified to be continuing
Ergo ... it is sanctioned by the Government.
"you guys" dont get it. Your analysis of all of these situations is spot on but you have not yet realizied that you are playing a Monopoly Game in which Goldman owns the Houses and Hotels. You are coming around to Boardwalk and Park Place and you want to quit because Goldman has all of the money. Goldman is having a ball so they lend or print you some extra money so you can pay the rent. In the mean time everyone else wants to fold up the board and play again.
Stop looking for the snake. You have the snake. The powers to be need the game to continue. This is kin to a wrestling match on TV where all has been set up.
You are right in your homework and analysis, So what? Where are you going with this information? ZH has been spewing this accurate information since its inception and anyone who has followed it has gotten killed beceause ZH fails to see the entire Monopoly Board and has failed to see that everyone who has those little $5, $10, $20 and $100s think they have something. They have nothing. Just think of being in the dessert without water. What would you give?
This is the real truth. Being right doesnt always mean anything agianst those that spin and twist everything.
Game rigged?!? Gosh, darn, golly?!? Get out! Really?
Thanks for the heads up, Slim.
(Now you'd better own some physical gold...)
Whoa, folks, be aware that this "quarter-end disappearing act" has been s.o.p for TWENTY FIVE YEARS. Yes, little ones, this was the norm way back, before all your daddies created CDS, CDO's, CLO's... back when you could actually trade T-Bill futures and Gordon Gecko hadn't taught us the truths of today. When it REALLY got going was right after the repeal of (you smarties are ahead of me, I know) Glass Steagall. That's when our good friends at the Fed said - "hey - you folks can do these nifty things that banks can't do, if you're not 'principally engaged.'" So, way back in the 80's, when some readers were still in diapers (to which some readers have returned, but I digress), all the banks realized that they needed to "increase the denominator." That refered to the fact that only a certain amount of revenues could come from newly permitted products, but a majority of revenues had to come from traditional products. New becamee the numerator, traditional became the denominator. And repo agreements were a quick and easy denominator builder. they generate lots of interest income and are very "light" from a capital-haircut perspective. So, at the start of every quarter, the bank treasurer said "take the repo book up, but all the trades need to close at quarter-end." Fair approach, we're talking a balanced exchange of excellent collateral versus cash with capable counterparties. The problem, folks, is not the denominator.
Repo doesn't kill banks, insane leverage kills banks. There are lots of ways to make leverage without touching the balance sheet at all, regardless of the calendar.
--rQ
Seriously... is there any question that every company does this? Or that it extends to every balance sheet line (inventory etc)?
Amazing work Zero Hedge!!! Incomparable excellence.