Primary Dealer Credit Facility
Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications? Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump? Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.
In what is the first formal speech of Simon "Harry" Potter since taking over the magic ALL-LIFTvander wand from one Brian Sack, and who is best known for launching the Levitatus spell just when the market is about to plunge and end the insolvent S&P500-supported status quo as we know it, as well as hiring such sturdy understudies as Kevin Henry, the former UCLA economist in charge of the S&P discuss the "role of central bank interactions with financial markets." He describes the fed "Desk" of which he is in charge of as follows: "The Markets Group interacts with financial markets in several important capacities... As most of you probably know, in an OMO the central bank purchases or sells securities in the market in order to influence the level of central bank reserves available to the banking system... The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions." In other words: if the SPX plunging, send trade ticket to Citadel to buy tons of SPOOSs, levered ETFs and ES outright. That the Fed manipulates all markets: equities most certainly included, is well-known, and largely priced in by most, especially by the shorts, who have been all but annihilated by the Fed. But where it gets hilarious, is the section titled "Lessons Learned on Market Interactions through Prism of an Economist" and in which he explains why the Efficient Market Hypothesis is applicable to the market. If anyone wanted to know why the US equity, and overall capital markets, are doomed, now that they have a central planning economist in charge of trading, read only that and weep...
Over the last few weeks markets have recovered from the significant stresses that were building towards the end of May (until yesterday's slow realization). The recovery has been in no small part due to expectations of intervention and that fresh rounds of QE and their equivalents will soon be implemented around the developed world. Deutsche Bank believes that markets are now addicted to stimulus and can’t function properly without it. There is little evidence yet to suggest that markets in this post crisis world have the ability to prosper in a period without heavy intervention, though empirically asset prices benefit from liquidity but that the environment remains fragile enough for them to struggle to maintain their levels when the liquidity stops. Critically, they agree with us that the structural problems the West faces mean that QE and its equivalents and refinements will likely need to be around for several years to come to ensure that the financial system and its economies don’t relapse into a depressionary tail-spin. There is no evidence that we are currently close to being able to wean ourselves off our liquidity addiction. The hope would be that with further injections we can prevent the worst case scenario but the base case remains for the stress and intervention cycle repeating itself as far as the eye can see. Central banks still have much to do.
"should only 2% of the Fed's assets go into default — or if there is a loss in value of 2% — the Fed becomes insolvent"
Disclosure Of The Fed's Primary Dealer Credit Facility Warehousing Of Worthless Collateral Goes MainstreamSubmitted by Tyler Durden on 03/22/2010 15:51 -0400
Ten days ago we penned "How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility" in which we described in minute detail how the Fed agreed to collateralize borrowings in its Primary Dealer Credit Facility, basically lending facility of last resort, with paper that other rational parties, when engaged at arms-length negotiations, qualified as "bottom of the barrel" and "junk." Today, thanks to Ryan Grim, this topic finally gets a much broader mainstream exposure. As we have long argued, the collateral backing most if not every form of liquidity provisioning, not only by the Federal Reserve of the US, but by Central Banks globally, is likely totally and utterly worthless, which implies that the US taxpayer is on the hook for trillions of dollars should there be another risk flaring episode (which is an inevitability as the entire financial system is based on a house of corrupt cards), and all the collateral is exposed for the worthless garbage it is. In the meantime, the money the banks get by pledging worthless assets to the Fed is used to stage short squeezes in various equities, to gun the Dow to 36,000 in a straight line, and to keep the Treasury curve at its record steepness, thereby hoping to stimulate inflation so that bank balance sheets can be absolved of the 20% by some estimates of bad loans that still exist on bank books, and which make the entire US banking system insolvent in its current state. All this is happening with Ben Bernanke's blessing, which would be considered an act of treason... if only there was some way to confirm these virtual certainties. Which, of course, there isn't, as the Fed will first self-destruct before it opens up its book to the general public.
How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit FacilitySubmitted by Tyler Durden on 03/13/2010 15:44 -0400
Five months ago, Zero Hedge observed the nuances of the Federal Reserve's Primary Dealer Credit Facility (PDCF) and concluded that this artificial liquidity boosting construct was nothing more than yet another scam to allow banks to extract ever more money from taxpayers, with the complicit blessing of the Federal Reserve Board Of New York (as the original piece also provided an in-depth discussion of the triparty repo market which is now a parallel to the buzzword of the day in the form of Lehman's "Repo 105" off balance sheet contraption, it should serve as a useful refresher course to anyone who wishes to understand why while Repo 105 with its $50 billion in liability contingency may have been an issue, the true Repo market, with over $3 trillion of likely just as toxic assets, is where the real pain in the future will come from). The PDCF would allow assets of declining and even inexistent value to be pledged as collateral, thus making sure that taxpayer cash was funneled into sham institutions holding predominantly toxic assets, and whose viability was and is limited, yet still is backed by the Fed, which to this day continues to pour our money into them. Today, with a tip from the NYT's Eric Dash, we demonstrate just how grossly negligent the Federal Reserve was when it came to Lehman's abuse of the PDCF, and how the trail of slime of Lehman's increasingly obvious manipulation of its books goes to the very top of the Federal Reserve Bank of New York, and its then governor - a very much complicit Tim Geithner.
Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception, and in fact in the days immediately preceding the collapse of Bear Stearns first, and subsequently, Lehman Brothers, the Federal Reserve established and refined a program that permitted banks to pledge virtually any security as collateral, including not just investment grade bonds and higher ranked securities, but also stocks of companies, the riskiest investment possible, and a guaranteed way for taxpayer capital to evaporate in the context of a disintegrating financial system, all with the purpose of bailing out Wall Street's major institutions. On two occasions last year: on March 16, 2008, and subsequently on September 14, 2008, the Federal Reserve first established what is known as the Primary Dealer Credit Facility (PDCF), and subsequently amended it, so that the Fed, in becoming the lender of last resort, would allow any collateral, up to and including stocks, to be funded by the Federal Reserve's credit facility, in order to prevent the $4.5 trillion repo financing system from imploding. By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.
Readers who have been concerned with the moral hazard provided by the Fed's monetization of Treasury and Mortgage debt, should be doubly concerned by this Fed action which sent three key messages to Wall Street: i) it made sure that Primary Dealers would generate massive profits on risky assets as the Fed would provide the funding to acquire any and all stocks (keep in mind the cost of funding of the PDCF to primary dealers was negligible); ii) it tipped its hand as to the existence and modus operandi of the rumored "plunge protection team," iii) and it made clear that the much maligned, by none other than Chairman Bernanke, concept of "moral hazard" is the one and only systemically relevant doctrine as long as the Fed's Chairman is in control, and not subject to any auditing auspices. The fact that PDs used over $140 billion of taxpayer money within a few weeks of the program's expansion in September to fund what one can assume were exclusively equity purchases, demonstrates that the American financial system got the message.