Rumored Source Of Reverse Repo Liquidity: Not Bank Reserves But Money Market Funds

Tyler Durden's picture

And the Fed finds a way to screw everyone over yet again. Contrary to expectations that the Fed will use reverse repos to remove excess liquidity (which, by definition, such an action would) it appears that Bernanke's wily scam is to push even more money out of money market funds and into capital markets. Even though banks currently have about $800 billion in excess reserves which the Fed is paying interest on, and which would be a damn good source of liquidity extraction as the Fed considers to shrink its ever expanding balance sheet, the Chairman is rumored to be considering money market funds as a liquidity source. Reuters points out that the Fed would thus have recourse to around $4-500 billion, and maybe more, of the $3.5 trillion sloshing in "money on the sidelines", roughly the same amount as MMs had just before the Lehman implosion.

Why not the other logical source of liquidity you ask:

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion, the Financial Times said.

Heaven forbid PDs have to sell any of the Treasuries they are sitting on to free up some cash. One also wonders just how much in excess reserves the PDs are currently in possession of. But that would be counterproductive to the Fed's every day scam of running the markets higher. How can PDs, and banks in general keep buying equities, if they are forced to give cash to the Fed? Furthermore, if regular investors perceive some threat to the MM liquidity pool, it will of course pile into other riskier assets.

All in all, the Chairman is determined, come hell or high water, to part consumers with their savings: whether it be through zero deposit interest rates, through money market guarantee removals, through talk of inflation or, ultimately, through actions like these. After all, America has gotten to the point where the Fed is beating the drum on the need to keep blowing the capital market bubble bigger and bigger: anything less, and just as Madoff investors discovered, the entire pyramid collapsed overnight, and where people thought there was $50 billion, there was really $0.

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Mos's picture

The best part is the collateral they are going to use to borrow against, namely the MBS and treasuries they have been buying up with freshly printed money.  So what happens if the Fed gets audited and it turns out much of the MBS used as collateral is grossly overvalued.  Seems to me this will end in disaster and the MM funds will be left holding the bag.

buzzsaw99's picture

I tried to tell everyone that Ben Shalom was a pig, but they all said oh noes, u jus don't know ben...

JohnKing's picture

Is this what you call "all in"?

Bearish Spirits's picture

So we have the guarantees on money market funds which just ran out, declining money market balances, and Bernanke is looking to scare more money out of the funds and into the market.  Really scraping the bottom of the barrel here.

Gilgamesh's picture

Negative interest rates, what's up.  Only for the people, though; banks get paid to keep their (our) money as reserve deposits.

Rula Lenska's picture

Nicely summarized, Gilgamesh!

Anonymous's picture

bernanke is a dead donkey's asshole

Mannwich's picture

My money market funds have just been pulled and they're NOT going into equities.  Sorry Ben.

Bam_Man's picture

You are representative of the class of investors who have stayed in Money Market Funds (at 0.06% yield) throughout this phony, engineered rally in risk assets.

These investors are EXTREMELY risk averse and want nothing to do with the equity market, much less one that is as grossly overvalued and manipulated as this. Taking away their Money Fund 'guarantee' puts them in an unacceptable situation - namely a no-return asset with risk.

Ben is smart enough to know this. And that is that these yield-starved and risk-averse MMMF investors will gradually migrate to relatively "safe" US Treasuries. Not equities.


Mannwich's picture

That's exactly where my MMF went - into Treasuries (for now).  Next stop, my mattress.

Anonymous's picture

Spot on Bman! I always enjoy your observations, here and elsewhere.

Anonymous's picture

keep some cash and gold in your mattress and it will buy more goods in the future. That is risk free, I think.

Anonymous's picture

Face it, this "risk adverse" population is what is left of the Great Depression I. Thus, the plan is clearly to wipe out their nest egg before Obama care has them sign a "solient Green" agreement and I'm not talking about people
as food, but the name derived from soy, lentil and money.

max2205's picture

Bad sign, desperate sign.  MMF backed by MBS, what a fucking joke.  They want everyone out of MMF and into T's to keep a lid on short rates as long as they can.  Sounds like this might be the last act for Ben.


Me out of MMF's

Cognitive Dissonance's picture

Increasingly desperate men do increasingly desperate things.

Anonymous's picture

Only by incremental slippage of one's morals and ethics can a good man do the most vile and evil works of darkness against his fellow men.

reading's picture

This appears to be one of those tremendous backfiring opportunities...I see money pouring out of MM's and most definitely not going into equities.  Creating something very similar to what we were dealing with this very same week just a year ago.  I can promise you, my MM funds are not going into the equities and I know I am certainly not alone.

Anonymous's picture

"the Chairman is rumored to be considering money market funds as a liquidity source."

So just to be clear, he's considering borrowing from MM, using MBS as collateral?

Man, as someone who has most of my savings tied up in a 401k, I just feel like a sitting duck. They offer you way too few investment options, with inexcusable fees, so the only thing I can do right now is keep my money in the MM option, and now they're going to destabilze that as well?

I read a lot on this site and just cynically roll my eyes at Wall Street and the Fed's antics, but this one has me truly pissed.

TheGoodDoctor's picture

This truly is a joke. I can't believe they are forcing me to make a choice to lose money. Best of luck Ron Paul! Audit the Fed!

Anonymous's picture

what kind of bullshit country do I live in?

Cognitive Dissonance's picture

The most financially and militarily innovative bullshit country in the world. God bless Ben Bernanke and the Fed.


Anonymous's picture

You wrote:

it appears that Bernanke's wily scam is to push even more money out of money market funds and into capital markets.

How does it do that? He will give them a Treasury security or a mortgage as collateral and he will receive money from the financial system.

It is not leaving the money market for the capital markets but will park itself safely in a little corner of the world at 33 Liberty street at which time it is dead money.

Money funds lubricate the system. To the extent that he takes money from them and buries it at the Fed it is that much money not available in the money markets which, ceteris paribus, should result in higher short rates.

So there aint no way it is going to the capital markets!!!

BM's picture
BM (not verified) Sep 24, 2009 3:23 PM


unless the FRBNY is "the capital markets"

Anonymous's picture

The point is that once this activity is understood, no one will want their money in MM, and will flee out to other assets, like Treasuries. The Fed's borrowing isn't going to capital markets, the savings scared out of MMs will go to the capital markets (or more likly gold, or the mattress).

AR's picture

TYLER... where is the "Audit the Fed" petition ZH readers and contributors NEED to sign in order to send it to the 75 Senate members not yet on board with Bill S.604 ???  The Fed and Treasury is insane.

Bearish Spirits's picture

Wow...PPT sure were hustling those last few minutes.  There was a death struggle going on around the 200 EMA on the 1-minute DJI chart. 

Tears of joy the Dow closed above it, I'm sure.

Anonymous's picture

So if you're pulling your $$$ out of MM funds and aren't putting it into equities, where are you putting it? Under a mattress?

What if your $$$ is in a MM fund in your IRA/401k?? What then?

Just trying to learn. Thanks.

reading's picture

Don't know if there is an easy answer here as in a 401k you can be hostage to the options it provides which often aren't so hot.  They'd like you to pick treasuries -- however, that's not going to look so hot if inflation takes hold.  So outside a 401k I'd opt for a regular savings account that is insured inside the 401k parameter you'll have to research your options.

In the end, given how fast they seem to be driving this country and our financial system off the cliff it likely won't matter as the average investor won't have 2 cents left in investments by the time they are done.



Cognitive Dissonance's picture

If your money is in a 401(k) with limited investment choices, your only choices are as follows.

1) Quit your job NOW so you can (hopefully) move your 401(k) away from your employers lousy choices plan and into a much more flexible IRA.

2) Keep your job and hold on tight for the ride of your life.


RatherBFlying's picture

Get a Treasury Direct account, and place the money in what they call "Zero Percent C of I" instruments. They are liquid (you're not tied up for a minimum of 4 weeks like T-Bills) so you can transfer the money back to your bank immediately when you are ready to do something else. Also, no FDIC worries, so you can stuff millions there if you want.

Slight hang up with the C of Is: You can only transfer $1K in (from your bank) at a time (so if you want to move in $10K there in one day, you hve to schedule 10 $1K transfers), and when you transfer money in from your bank, they lock your entire C of I balance for 5 business days. It's not been a problem to deal with so far.

If you do this, also open up a Credit Union account and link it in so when want to spend the money you can go with honest folk instead of the Big Bank Rapists (BBRs). Plus, your BBR might not be there, hopefully your local credit union will.

docsdoc's picture
I just bought some more GOLD!
Anonymous's picture

"it appears that Bernanke's wily scam is to push even more money out of money market funds and into capital markets."

yeah, like NY FED's accounts, newbie

Anonymous's picture

When the a goverment revalues the currency does debt revalue also or does it stay at the face value. Example, does a $300,000 mortgage after a currency revaluation of 10:1 stay at $300,000 in the new devalued currency?

Hansel's picture

Clearly you don't know the rules of Calvinball.

Anonymous's picture

ZH Here is a post for you....



I hope the broker dealers didn't hold on to their overallotments for 2 long...

Anonymous's picture

I'm buying physical gold with my MM funds. Check. Your move, Ben.

Bam_Man's picture

Sometime within the next two years "They" will attempt to confiscate your (and mine) physical gold.

It would be a good idea to begin making arrangements to move your physical gold out of the country.

Fred C Dobbs's picture

I am afraid of the US government confiscating gold again too. Anybody care to give an opinion of the best/easiest way to own gold in a foreign country that can't be taken?

Anonymous's picture

sigh, this is starting to get obscene.

let me get this straight. my MM funds will be borrowed by the fed whereby they will use MBS as collateral? thanks

is there a source that points to which money market funds are going to participate in this?

its not enough that they take half our paychecks and probably 60% of paycheck from our kids and 90% of paycheck from our grand kids. they want to get their hands on my savings as well?

at this rate, i am going to have to literally hide my money under mattresses.

lets put that $2.5 under a mattress and see what happens then.

bonddude's picture

As I mentioned before MMs can't last long anyway at these low rates. There is simply not enough

spread to pay for operating them. So reverse repos show the desperation of Uncle Ben since it's such a short term solution.

Anonymous's picture

What is the balance sheet exchange that would be beneficial here? Qui bono? Do the MMF's exchange cash for AAA-backed, and then pass that higher yield on to MMF shareholders? It seems such funds would then be functioning like short-term Government securities funds rather than 30-90 day commercial paper funds. Obviously offering a higher yield would be of great benefit to money market funds, but would not the current legal structure/prospectus of such funds need to be greatly modified to allow such a fundamental restructuring of their portfolios? Perhaps allowing greater leverage (with the Fed reverse repo paper as uncallable collateral) in the issuance of CP would be the hidden inducement.

bonddude's picture

So the government guarantee is up and they would re-inflate MM yields with suspiciously familiar devices (structured products or cp) ? Prospectuses allow just about everything under the sun, even so called "government securities" MMs. Nevertheless, raising MM yields high enough to justify their existence without some outside help seems like recreating the monster (Prime Reserves, etc...) that we have only partial, as yet, have unwound. Still a lot of garbage in those MMs and certainly ARSs are dead. See, they've created an instant T-bill market making MMs untenable.

Anonymous's picture

Wait a minute... Money Market funds operate on the same fractional reserve banking scheme. If the Fed really were to start draining these funds of "reserves" through reverse repos, they would undercapitalize the funds and could cause another liquidity squeeze. A bank run on MM accounts would be devastating.

TD, you wrote that 9/19/08 may have been day the world nearly fell into the abyss. These guys couldn't possibly be repeating that episode? Or are they deliberately doing to set up another crisis?

Anonymous's picture

Agree. Another big liquidity squeeze on bank run.

Primal Reversion's picture

I thought of the exact same thing when I heard this. The last time it happened, some convenient changes were announced (i.e. new $250K FDIC limit increase) just "in the nick of time" to prop things up and make the herd feel [temporarily] safe. One has to wonder if the props came in simply to allow the Big Money to position themselves better before the shoe was allowed to fall.

Anonymous's picture

If you have a mortgage or any debt what so ever, why not just pay it off?

TheGoodDoctor's picture

Because when the dollar goes to hell and hyperinflation happens you can pay off your debts a lot easier with a wheelbarrow full of cash.

Anonymous's picture

By that time, you probably will lose your job and you
house will be under foreclosure.

buzzsaw99's picture

+1 Absolutely, you get a cookie. The lucky ones have the perfect amount of debt which they can pay off to earn a greater return.

Anonymous's picture

What if there is deflation? What if your money market goes bust? Better to have a paid off house.