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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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Thu, 09/24/2009 - 15:44 | Link to Comment Mos
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.

Thu, 09/24/2009 - 15:45 | Link to Comment buzzsaw99
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...

Thu, 09/24/2009 - 15:46 | Link to Comment JohnKing
JohnKing's picture

Is this what you call "all in"?

Thu, 09/24/2009 - 15:47 | Link to Comment Bearish Spirits
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.

Thu, 09/24/2009 - 15:52 | Link to Comment Gilgamesh
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.

Thu, 09/24/2009 - 16:02 | Link to Comment Rula Lenska
Rula Lenska's picture

Nicely summarized, Gilgamesh!

Thu, 09/24/2009 - 15:50 | Link to Comment Anonymous
Thu, 09/24/2009 - 15:51 | Link to Comment Mannwich
Mannwich's picture

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

Thu, 09/24/2009 - 16:04 | Link to Comment Bam_Man
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.

 

Thu, 09/24/2009 - 16:11 | Link to Comment Mannwich
Mannwich's picture

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

Thu, 09/24/2009 - 16:28 | Link to Comment Anonymous
Thu, 09/24/2009 - 19:04 | Link to Comment Anonymous
Thu, 09/24/2009 - 22:36 | Link to Comment Anonymous
Thu, 09/24/2009 - 15:56 | Link to Comment max2205
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

Thu, 09/24/2009 - 16:10 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Increasingly desperate men do increasingly desperate things.

Thu, 09/24/2009 - 16:28 | Link to Comment Anonymous
Thu, 09/24/2009 - 15:56 | Link to Comment reading
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.

Thu, 09/24/2009 - 15:56 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:37 | Link to Comment TheGoodDoctor
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!

Thu, 09/24/2009 - 15:56 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:14 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

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

NOT

Thu, 09/24/2009 - 16:00 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:23 | Link to Comment BM (not verified)
Thu, 09/24/2009 - 16:32 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:02 | Link to Comment AR
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.

Thu, 09/24/2009 - 16:04 | Link to Comment Bearish Spirits
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.

Thu, 09/24/2009 - 16:04 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:15 | Link to Comment reading
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.

 

 

Thu, 09/24/2009 - 16:19 | Link to Comment Cognitive Dissonance
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.

 

Thu, 09/24/2009 - 16:46 | Link to Comment RatherBFlying
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.

Thu, 09/24/2009 - 17:51 | Link to Comment docsdoc
docsdoc's picture
I just bought some more GOLD!
Thu, 09/24/2009 - 16:05 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:06 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:53 | Link to Comment Hansel
Hansel's picture

Clearly you don't know the rules of Calvinball.

http://www.bartel.org/calvinball/

Thu, 09/24/2009 - 16:10 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:11 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:28 | Link to Comment Bam_Man
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.

Fri, 09/25/2009 - 04:38 | Link to Comment Fred C Dobbs
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?

Thu, 09/24/2009 - 16:15 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:20 | Link to Comment bonddude
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.

Thu, 09/24/2009 - 16:49 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:28 | Link to Comment bonddude
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.

Thu, 09/24/2009 - 16:21 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:20 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:30 | Link to Comment Primal Reversion
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.

Thu, 09/24/2009 - 16:24 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:43 | Link to Comment TheGoodDoctor
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.

Thu, 09/24/2009 - 17:17 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:49 | Link to Comment buzzsaw99
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.

Thu, 09/24/2009 - 16:50 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:12 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

Actually then I think it would be better to keep your dollars because your dollar would buy more since prices would deflate. You would have people clamoring for the dollars and even investing them might provide a higher yield.

Thu, 09/24/2009 - 17:34 | Link to Comment bonddude
bonddude's picture

+10

Thu, 09/24/2009 - 17:41 | Link to Comment buzzsaw99
buzzsaw99's picture

Better to have a paid off house.

Agreed.

Thu, 09/24/2009 - 16:26 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:26 | Link to Comment Happy Days
Happy Days's picture

Let's not forget that Bernanke is just a pawn in this game. His

moves are orchestrated by none other than the Rockefellers, Rothschilds

and the few other families in this line of fine business. If anyone thinks

that H.R. 1207 will solve this...(although needed)...think again as

this would assume that the Fed would come clean and tell the truth

in an audit. Folks...to think they would not "cook" the books is 

fantasy land...and they will if it ever gets that far...and that may be

a stretch. We know they have lied and have been secretive. If that

would change, then I guess the earth is flat. Enjoy the show brought

to us by Hollywood East and Las Vegas East.

 

Thu, 09/24/2009 - 16:31 | Link to Comment A_MacLaren
A_MacLaren's picture

End the Fed...  NOW.

Clearly the #1 Source of the problem.  More and more Debt "liquidity" is the cure to too much debt.  yeah, right.

Though the clueless politicos (of both parties) that passed Gramm-Leach-Bliley (finally repealing Glass-Steagal) and then the Commodities Futures Modernization Act of 2000 that gave legal standing to the derivative bomb of Swaps, run a close #2

Thu, 09/24/2009 - 17:37 | Link to Comment Primal Reversion
Primal Reversion's picture

I keep hearing this, but what/who would actually have the power (or the stones) to even attempt it? They own the game and everyone that has been playing in their game is subject to playing by their rules. I don't see an end to the Fed until some external factor(s)/force(s) come in and give us/them no other alternatives. Unfortunately that scene isn't a pretty one for any of us.

Thu, 09/24/2009 - 16:32 | Link to Comment Gilgamesh
Gilgamesh's picture

FDIC insured MMKTs going away too, for what it's worth.

Thu, 09/24/2009 - 16:32 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:46 | Link to Comment Anonymous
Thu, 09/24/2009 - 16:56 | Link to Comment Gilgamesh
Gilgamesh's picture

Yes, makes you wonder what they have planned by letting CIT go away (eventually) and now killing mmkts.  Well, I have my theory that seems more likely every day now - but it's still considered wing-nut.

Thu, 09/24/2009 - 16:47 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:39 | Link to Comment bonddude
bonddude's picture

They will start sending money back to shareholders or you pay them to hold it OR whatever mutual fund or brokerage holds it eats the maintenance costs as an accomodation.

Thu, 09/24/2009 - 16:51 | Link to Comment buzzsaw99
buzzsaw99's picture

Sorry Ben, your FICO is in the toilet and your collateral ain't worth squat. Next stop, the Bank of Sealy.

Thu, 09/24/2009 - 16:56 | Link to Comment Anonymous
Thu, 09/24/2009 - 19:23 | Link to Comment cougar_w
cougar_w's picture

[need additional regulation] Haha.

FED: "OK Mr. MMF. I'm going to hand you this sack of busted hammers and you are going to give me all the money in your wallet."

MMF: "But... that would be madness! My wife will kill me!"

FED: "That's right. In addition, by accepting the deal you demonstrate that you are insane. We'll send around a physician to examine you, pronounce you unfit to wipe your own ass, and throw you in a mental ward."

MMF: "But that's not fair! I'll be divorced and ruined!"

FED: "But I really need the money in your wallet. Be happy you are getting a sack of busted hammers. It's better than the alternative, which is nothing."

MMF: "What the... no it isn't!"

FED: "But if I simply take the money and keep the sack of busted hammers, then that's theft and I get in trouble. Plus I still have the sack of busted hammers to get rid of."

MMF: "Well that's your problem, on both counts. So why don't you... hey! You just took my wallet! No, keep the hammers! Help me someone I'm being robbed!!"

FED: "I'm glad you see my problem. Thank you for your assistance. Have a nice day."

Thu, 09/24/2009 - 16:58 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:09 | Link to Comment buzzsaw99
buzzsaw99's picture

I suppose draining the borrowed reserves away from the banks would make too much sense to anyone who isn't a maggot bankster?

Thu, 09/24/2009 - 17:12 | Link to Comment Anonymous
Thu, 09/24/2009 - 17:23 | Link to Comment buzzsaw99
buzzsaw99's picture

+1000

Thu, 09/24/2009 - 17:26 | Link to Comment NumisEX
NumisEX's picture

want out of your MM fund and don't know where to go? Buy /GC and /SI unleveraged and take delivery!

Thu, 09/24/2009 - 17:34 | Link to Comment surfer
surfer's picture

Guys I read every day and I the known knowns are exposed in a truly valuable  way. However as I said to my seniors be careful what you wish for!!

 

I think the expression you cant handle the truth , more appropritely should be, WE cant stomach the truth and thats not just the heirachy, Joe Public has enjoyed the game too.

 

And please dont forget that the desperados will do anything to avoid the end game dollar strength before dollar collapse, the rest of the world cannot afford.

 

We should hope for a muddle through over the next 10+ years, the alternative is worthn punting on.

 

Just me thoughts...

Thu, 09/24/2009 - 18:37 | Link to Comment Anonymous
Thu, 09/24/2009 - 18:39 | Link to Comment Hondo
Hondo's picture

I just bought another case of 45 ACP's....I'm ready

Thu, 09/24/2009 - 19:26 | Link to Comment cougar_w
cougar_w's picture

They'll be worth their wiegh in gold some day. Literally.

Thu, 09/24/2009 - 18:57 | Link to Comment Anonymous
Thu, 09/24/2009 - 20:54 | Link to Comment cocoablini
cocoablini's picture

This is basically the Gold Confiscation Act of the 30's-except they are Confiscating savings and giving you toxic assets that are NOT guaranteed by the Fed necessarily. They are trying to schuck agency and MBS' onto the MM and when the MM gets a drawdown they get to declare "lock out" period. This is what I was waiting for-what the FED and PPT had in mind for Droptober. Lock up the cash, no shorts, no access and we are fucking stuck with a MM that cannot have a drawdown nor can it meet it's obligations. And since they are SIPC insured, that means whatever shithole insurer will go bust after one MM asks for it's cash to pay the run on it.
SIPC is a scam-it's industry-backed for like one broker tanking it
Best bet: you are guaranteed your stock certificates so get into equities that you think could do OK. Like gold miners. They may dump, but in a deflation they will do better than most
Better: Get physical gold-not easy now.
Treasury-backed mutual funds are now offlimits unless you are in already.
This really means the US is in deep poo

Thu, 09/24/2009 - 21:21 | Link to Comment Gilgamesh
Gilgamesh's picture

Just a cautionary note to anyone - MMFunds are only SIPC insured if the entire brokerage holding your investment account goes bust and/or someone takes off with your assets (i.e. they are "missing").  SIPC doesn't do a thing if a Money Market fails/breaks the buck.

 

You're on a good track with the 'bets.'  Put hedging with it (vs market) isn't a bad idea in this environment, for sure.

Fri, 09/25/2009 - 00:58 | Link to Comment texpat
texpat's picture

What about FDIC-backed sweep accounts?

 

Fri, 09/25/2009 - 09:24 | Link to Comment Gilgamesh
Gilgamesh's picture

Those are fine (managed by a bank that pays for the FDIC backing).  But these are being slowly terminated, by request of you know who.  Don't be surprised to soon find out you no longer have that FDIC insured sweep option.

Thu, 09/24/2009 - 21:32 | Link to Comment wackyquacker
wackyquacker's picture

Duh. Only one way out of this mess- pay up. Simple as that. Think you can shepherd PM's across borders and still not have it confiscated? This one's coming bigger than Butch.

Thu, 09/24/2009 - 22:20 | Link to Comment Anonymous
Thu, 09/24/2009 - 23:18 | Link to Comment Hephasteus
Hephasteus's picture

Get to mattress cash and gold/silver. He's going to shove Money Markets into the stock market and crash it. It's not enough to break the buck this time. It has to be crushed.

Thu, 09/24/2009 - 23:52 | Link to Comment ShankyS
ShankyS's picture

Brilliant! Why not, they freaking guarantee everything else and if it fails, they are not on the hook for anything. Time for us to step up to the plate with our funds! Wait a minute, we already did that. Hey Ben, FO, and keep your mitts off of our $$. You are not welcome here anymore.

O - fer on the captcha. It must be late. Need to get the calculator out.

Fri, 09/25/2009 - 00:38 | Link to Comment cocoablini
cocoablini's picture

shovel your cash into the system and they are not on the hook for backing it up. The MM system will break if no on trusts the MM to hold the cash for investments. It's a great scam-move private savings into the money system and collateral is unbacked assets that the FED has been trying to dump for months

Fri, 09/25/2009 - 01:19 | Link to Comment Assetman
Assetman's picture

Let's say PIMCO has a money market fund in the $40 billion range.  What would stop PIMCO from refusing to make a reverse repo?

If the Fed forced the issue and required the MM fund to take MBS collateral, what would stop PIMCO from taking them to court?

I am thinking almost every MM fund out there would not want to touch the mortgage related collateral with a 10 foot pole.  I just don't quite understand how the Fed could force the issue on a non-bank MM provider.

Fri, 09/25/2009 - 11:38 | Link to Comment Anonymous
Fri, 09/25/2009 - 00:56 | Link to Comment Anonymous
Fri, 09/25/2009 - 00:57 | Link to Comment Anonymous
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