Reverse Repo Failure Confirmation, Primary Dealers Want Exemption From Tier One Capital Requirements To Do Reverse Repos

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Fri, 11/06/2009 - 16:40 | 122749 curbyourrisk
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The FED is so screwed!

Fri, 11/06/2009 - 16:51 | 122760 SV
SV's picture

A slow motion EPIC FAIL in progress...

Fri, 11/06/2009 - 17:16 | 122800 Mad Max
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This would be HILARIOUS, except for suggesting the likelihood of the collapse of the US (economically if not otherwise).  Ask not for whom the bell tolls.

Sat, 11/07/2009 - 15:12 | 123513 Anonymous
Anonymous's picture

what slow motion, its an all out war against the country by its president...

Fri, 11/06/2009 - 17:01 | 122776 Anonymous
Anonymous's picture

The FED is fine. It is the US way of life that is in danger.

Fri, 11/06/2009 - 17:01 | 122777 Anonymous
Anonymous's picture

The FED is fine. It is the US way of life that is in danger.

Fri, 11/06/2009 - 17:02 | 122779 Anonymous
Anonymous's picture

...and so are all of us except the squid.

Fri, 11/06/2009 - 16:54 | 122766 Anonymous
Anonymous's picture

They started this path of easy credit in 1982. It is too late to reverse it. They passed the point of no return long time ago.

Fed is like a boulder rolling down the hill. The longer is keeps rolling, the faster it rolls. The end is when it blows up into pieces.

Fri, 11/06/2009 - 16:57 | 122769 Anonymous
Anonymous's picture

The primary dealer model is completely outdated. Especially since the primary dealers all needed the TARP funds, and almost blew up the world. Now we are back to the argument that the primary dealers are the only ones smart enough, solvent enough, and responsible enough to trade with the Fed? C'mon, open it up, put this stuff on Craigslist. You would at least get a fairer market.

Fri, 11/06/2009 - 16:59 | 122771 MikeNYC
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Purported master? I think you meant "Puppet master"

Fri, 11/06/2009 - 17:00 | 122772 P Rankmug
P Rankmug's picture

Our entire economic market system is based on trying to guess what a handful of individuals, acting in God knows who's interest, may or may not do for reasons no one can discern.  What a joke of a disaster.

Fri, 11/06/2009 - 17:19 | 122805 Hansel
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Fri, 11/06/2009 - 17:54 | 122853 Anonymous
Anonymous's picture


Can I use your quote elsewhere?

Fri, 11/06/2009 - 20:22 | 123070 Mad Max
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Outstanding concise summary.

Sat, 11/07/2009 - 14:38 | 123498 Cursive
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That was good, really good.


TD, can we get this stickied or perma-posted somewhere?

Sat, 11/14/2009 - 14:36 | 130707 JohnyHedge
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+1 Brilliant :-)

Fri, 11/06/2009 - 17:00 | 122773 Anonymous
Anonymous's picture

The current situation has no exit. Only the fat cats know what the end game is.

Fri, 11/06/2009 - 17:04 | 122778 economessed
economessed's picture

Congratulations on being a member of the 0.0001% club.  That's the percentage of the American population that comprehends the implications of this disaster-a-palooza.

I'll remind everyone that the Federal Reserve prints "In God We Trust" on the currency.  That's not just a catchy phrase -- it's the full description of their strategy at this point.

Fri, 11/06/2009 - 17:08 | 122790 Sec.NotSure
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I'll remind everyone that the Federal Reserve prints "In God We Trust" on the currency.  That's not just a catchy phrase -- it's the full description of their strategy at this point.


LOL ... +1

Fri, 11/06/2009 - 17:14 | 122795 BlueStreak
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That one is so good I'm printing it and posting it on my wall.

Fri, 11/06/2009 - 18:08 | 122871 Don Smith
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This is my new status on FB.  LOL!

Fri, 11/06/2009 - 17:02 | 122780 Anonymous
Anonymous's picture

Goldman got 200 swine flue vaccines for its employees. Nearby hospital got 200 shots for the public. Hospital is upset with the unfair treatment.
More here

Fri, 11/06/2009 - 17:29 | 122815 E pluribus unum
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Looks like a certain hospital is going to find all their bonds due on Monday morning

Fri, 11/06/2009 - 17:54 | 122852 Mad Max
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More of the "it would be so funny if it weren't so close to f'ing true..."

Fri, 11/06/2009 - 17:38 | 122829 Anonymous
Anonymous's picture

Wish I had a moment or two with little vials.

Fri, 11/06/2009 - 17:15 | 122796 Anonymous
Anonymous's picture

and when the excess leverage blows up (again), the taxpayer will be totally on the hook while GS somehow manages to remain immune. Time to write congress (again).

Fri, 11/06/2009 - 17:31 | 122818 Anonymous
Anonymous's picture

So is hyperinflation in the cards if the Fed doesn't reduce the liquidity in the banking system?

Fri, 11/06/2009 - 20:24 | 123072 Mad Max
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It depends on how the economy moves, if the govt can keep borrowing from foreign governments, and on a bunch of other things.

If I had a loud tv show named something like "Insane Money" I would be telling people to put all their money in 10, 20, even 30-year certificates of deposit paying 1.00% interest with a prohibition on early withdrawal.

Fri, 11/06/2009 - 17:35 | 122823 waterdog
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"This is the first confirmation that we have read that the reverse repo test was a failure. So, what does it mean?"

It means that the Fed should require every bank with excess reserves to place a large bet on the win, place, show ticket for the Nascar Texas race this weekend. Given the probablity that the outcome of the Talladega race last Sunday was 10,000 to 1, they should lose billions if it happens again this Sunday.

If my luck does not change soon, I am going to have to get a job.

Fri, 11/06/2009 - 17:47 | 122841 bonddude
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This should make long rates jump.

Shouldn't stop stock and and commodity markets in their tracks? I Think so.

Fri, 11/06/2009 - 17:51 | 122849 digalert
digalert's picture

aint no repo gonna happen. why? cause the stimulation worked, banks are stabilized, employment is under control...could go on and on. Oblame said we're saved from the clink brink, bubble Ben has worked magic and turbo Timmy would look good with a fro.

ot, what's sheila up to this afternoon?

Fri, 11/06/2009 - 18:09 | 122873 PD Quig
PD Quig's picture

The TV in the gym locker room was blaring a commercial:

"Are you facing an IRS audit? Have you not filed income tax returns for several years?"

Someone on the other side of the room drolly added, "Are you in the Obama Administration?"

I was the only one that laughed, and when I looked up a few folks were glaring at me. The lefties are a weeee bit touchy right now in Karlifornia.

Fri, 11/06/2009 - 18:38 | 122922 chunkylover42
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aaaaaannnnnnnd the Fed looks longingly towards the money market funds......

Fri, 11/06/2009 - 19:20 | 122985 Anonymous
Anonymous's picture

Janet Yellen - microbrain. I hope there is a nice cell in the seventh ring of Hell reserved for her.

Fri, 11/06/2009 - 19:43 | 123026 Hephasteus
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"But as a practical matter, the Fed could continuously roll over the reverse repos until the underlying asset matures, thereby effectively making a permanent reserve drain.
Some officials believe the Fed need not resort to large reverse repos or asset sales, arguing that its ability to pay interest on excess reserves will set a floor under the federal funds rate and also enable the Fed to disincentivize banks from lending the reserves into the economy if necessary."


This is PRECISELY WHAT russia tried in 1998.


Fri, 11/06/2009 - 20:22 | 123071 Mad Max
Mad Max's picture

And, uh, how DID that work out for Russia in 1998?


Fri, 11/06/2009 - 20:36 | 123084 Anonymous
Anonymous's picture

Right. This plan of paying interest on reserves is beyond desperate; it means that the monetary base keeps expanding---with the goal of containing inflation! That is the very definition of a positive feedback loop; a monetary supernova.

Fri, 11/06/2009 - 22:04 | 123148 Mad Max
Mad Max's picture

Since supernovae are the source of all gold and other heavy metals (heavier than iron) in existence, could The Fed be on the verge of an incredible Grand Unified Fiatsco of physics, monetary policy and alchemy?

Fri, 11/06/2009 - 21:53 | 123144 Mark Beck
Mark Beck's picture

I would think, the yield of the reverse repo would have to be greater than the market rate, or there would have to be a discount on the bond, or a sweetener like reduced reserve requirement. But the borrowed money would have to be exchanged at some point for the bond before it matures, in a repurchase agreement, with prearranged terms. Perhaps this is a way to shift long term 5Y to 30Y instruments owned by the FED, into short term plays.

Fri, 11/06/2009 - 20:08 | 123050 Anonymous
Anonymous's picture

Why can't they just use Ebay?

Sat, 11/07/2009 - 00:57 | 123257 par068
par068's picture

It all makes sense now. If I can stay solvent for about two more

years, I will likely be a millionaire. 


Sat, 11/07/2009 - 10:25 | 123399 Anonymous
Anonymous's picture

Found on the internet:

"...assuming that the Fed will, in fact, choose to execute these operations because it has stated that they are part of the exit strategy policy, I think the alleged Primary Dealers’ balance sheet capacity constraint has been VASTLY exaggerated. It’s true that a Reverse Repo increases the assets of a broker-dealer entity, but this is an issue only for stand-alone broker-dealers (Jeffreys and alike). For Primary Dealers with big commercial banks operations (JPM, Citi, BOA) I don’t believe that this is an issue at all: since they are already sitting on big amounts of Excess Reserves and because 23A (which regulates the activity between a bank entity and its affiliates) does not impose any restriction on the amount of UST, Agencies and Agencies MBS repos that a bank can execute with an affiliate broker-dealer entity, this means that the JPMs of the world could potentially execute reverse repo operations with the Fed up to the amount of excess reserves they are already sitting on without increasing their balance sheet by 1 single cent: it would simply be a transformation of an asset (excess reserves of the bank entity) into another (reverse repo of the broker-dealer entity). So, in my view, the conclusion has to be that the Primary Dealers can in fact absorb a much bigger amount of Reverse Repo than originally thought even by the Fed itself and that realistically the only other counterparties that the Fed might engage directly for these kind of operations are the GSEs: but in this case the reason would not be balance sheet driven but would be driven by the distortion that the GSEs’ participation in the fed funds mkt creates..."

Sat, 11/07/2009 - 15:55 | 123548 Hephasteus
Hephasteus's picture

The first thing the fed did when it got it's mitts on the 700 billion dollars was take a 100 billion and fractionally reserve it out to a trillion. All those excess reserves out there lead back to the FED and It's faking and lying it's ass off. All it takes is a UNIVERSAL or nearly UNIVERSAL 10 percent loan loss rate for our ENTIRE system to crumble.

Credit Cards- Check

Mortgages- Check

Commercial Real Estate- Check

Check and MATE. And not in the good way. With a homemade 80 grit sandpaper condom.






Mon, 11/09/2009 - 05:37 | 124434 Anonymous
Anonymous's picture

Who ever wrote this clearly has a very good understanding of the process and the primary dealer balance sheet implications. It's a pity that ZH has not picked up on these facts. Clearly, the primary dealers can be strong armed into the reverse repo operations IF the Fed wishes to do so, without the need to give Tier 1 "exemption", which seems to be making a big come back as a risk indicator - was it only 9 months ago that TCE was the talk of the town? My guess is that theoretically the Fed should be able to reduce the impact of excess reserves through reverse repo and paying interest on the reserves, and not having to sell TSYs into the open market. The big question is do they have the balls to do it in a timely manner, and ensure that the PDs participate. I for one expect them top blow it.

Mon, 11/09/2009 - 07:04 | 124463 Anonymous
Anonymous's picture

Now if only the Fed had the guts to call the banks bluff (i.e., raise Fed funds rate).......

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