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A Primary Dealer Cash Shortage?

Tyler Durden's picture


When one thinks of the US banking system, the one thing few consider these days is the threat of a liquidity shortage. After all how can banks have any liquidity strain at a time when the Fed has dumped some $1.7 trillion in excess reserves into the banking system? Well, on one hand as we have shown previously, the bulk of the excess reserve cash is now solidly in the hands of foreign banks who have US-based operations. On the other, it is also safe to assume that with the biggest banks now nothing more than glorified hedge funds (courtesy of ZIRP crushing Net Interest Margin and thus the traditional bank carry trade), and with hedge funds now more net long, and thus levered, than ever according to at least one Goldman metric, banks have to match said levered bullishness to stay competitive with the hedge fund industry. Which is why the news that at noon the Fed reported that Primary Dealer borrowings from its SOMA portfolio, which amounted to $22.3 billion, just happened to be the highest such amount since 2011, may be taken by some as an indicator that suddenly the 21 Primary Dealers that face the Fed for the bulk of their liquidity needs are facing an all too real cash shortage.

For those who are unfamiliar the SOMA Securities Lending Program (described in detail here) is just another shadow conduit allowing Primary Dealers to obtain Fed funds at a tiny cost, in this case paying a fee rate that dealers paid in order to borrow the specified issues. These borrowed issues are subsequently used as downstream collateral to obtain liquidity in the shadow interbank market, or to demonstrate sufficiency of eligible quality collateral for regular way margined/levered transaction. With the average weighted rate on today's lending operation a meager 0.05% it is clear that the opportunity cost to obtain quality collateral is negligible.

Why wouldn't Primary Dealer fund all their liquidity needs using SOMA loans then? Well, for one, the Fed's SOMA portfolio was never supposed to be the gargantuan monstrosity it is now, and historically until the failure of Lehman, the primary liquidity conduit was the Fed's Discount Window (since slammed shut due to the glut in excess reserves and fear of Discount Window stigma which many say is what gave Lehman away as having acute liquidity needs in the days before its filing). On the other hand, there is a $5 billion aggregate limit per dealer, which means that loans from the Fed's SOMA while not nearly sufficient to provide wholesale funding to run a bank, are usually a last ditch liquidity conduit, which indeed has been mostly used during quarter end window dressing to make bank books appear in better shape than they usually are.

But perhaps the best definition of the Fed's securities lending operation comes once again from SourceWatch which defines it as follows:

The Federal Reserve expanded the SOMA securities lending by $36 billion (an increase of $2 billion per primary dealer, of which there were 18 as of July 27, 2009). The program provides liquidity for the dealers in the event of an emergency. It allows the borrowers to avoid reserve requirements by allowing them to post Treasury securities rather than cash as collateral for loans.

In brief: Treasurys for cash with the Fed's blessing. Got it.

Those who are curious about the actual dynamics behind the SOMA loans need to be familiar with a rather shadow-banking specific concept known as "borrow-versus-pledge" which underlies every security-for-security repo transaction. To wit, from the Fed:

Dealers that have elected to participate in the program may submit bids via their Fedline terminals. The bid rate represents the lending fee rate that a participant is willing to pay in order to borrow the security. It is not a repo rate. Because the program operates on a borrow-versus-pledge basis, the bid rate may be considered equivalent to the spread between the general collateral rate and the specials rate for the borrowed security

To understand what this means in further detail we go all the way back to 2008 and Matt King's seminal work "Are the Brokers Broken?" who explains the literal magic of how thus deemed borrowings end up completely disappearing from the dealers books:


The explanation lies in the magic of the intricacies of repo accounting, and in the way that hedge funds run their books [ZH: in this case Primary Dealer banks]. Figures 6 and 7 contrast a normal repo transaction (“borrowed versus cash”), in which cash is lent against the reverse repoing in of collateral, with a “borrowed/loaned versus pledged” transaction. The latter works in exactly the same way, except that instead of cash being lent, securities are. Another way of thinking of it is as though a counterparty had collapsed together a simultaneous repo and reverse repo transaction into a single trade. One of the counterparties is said to have “loaned versus pledged”. The other is said to have “borrowed versus pledged”. The distinction between the two is supposed to be made on the basis of who is ‘driving’ the transaction, but is best described as confusing. The magic occurs in that under FASB, borrowed versus pledged transactions do not feature on balance sheet; under IFRS, neither borrowed versus pledged nor loaned versus pledged transactions are consolidated.

In other words, a Fed loan that does not appear on the Dealers' books? The plot thickens.

But leaving all the accounting technicalities to the side, what all of the above can be summarized as is that in period of marginal liquidity squeezes, the SOMA Securities Lending Program is where Dealers go to obtain stealth funding which, for one reason or another, they desperately need.

A period such as... now.

The chart below shows the total usage of the SOMA loan portfolio.

One thing that is obvious in the chart above, and as highlighted in yellow, is the frequent, periodic quarter-end spike in lending, which, as explained above, makes sense: these are the times when Dealers, who have to open their books to their accountants for the quarter end unofficial review, do everything in their power to demonstrate a pristine balance sheet.

So what happens when one normalizes for the window dressing by assuming an average balance of the days immediately before and after? This:

The chart above allows us to appreciate a more disturbing development: the surge of PD borrowings under this program at a pace that has been unseen since the summer of 2011, when the stock market plunged by some 20% following the debt ceiling fiasco and the US downgrade, and is now as high as it was when the summer of 2011 rumblings began, and is also as high as it was during the last market swoon in March of 2012 when everyone thought Europe was fixed, when in reality it was all just the ECB's €1 trillion LTRO effect, which fizzled in March leading to yet another market correction.

So, one wonders, is the recent surge in daily SOMA lending facility usage, which was at just $5 billion on January 18, and has since spiked to $22.3 billion, more indicative of the market correction we may be entering following yesterday and today's sell off, or of more systemic liquidity problems at the Primary Dealers who, just as they always do when they run out of liquidity, go to the Fed for extra cash?

We will find out in the days to come: luckily the Fed updates the daily usage of its SOMA Lending Facility daily at this page.

We urge readers to keep a close eye on it because this time, unlike the last, there is at least a way to know in advance if the financial system is once again starting to freeze up.


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Thu, 02/21/2013 - 15:32 | Link to Comment Say What Again
Say What Again's picture

Let me tell you how I know that we've reached a top in the market.  When I opened the ZH page in previous weeks, I was always presented with advertisements for girls from asia, russia, or brazil.  Now I'm getting ads from T-Row & Price, Schwab, etc. telling me that they have some great investment opportunities.

Thu, 02/21/2013 - 15:35 | Link to Comment MFLTucson
MFLTucson's picture

And which girls did you like best?

Thu, 02/21/2013 - 15:44 | Link to Comment Dear Infinity
Dear Infinity's picture

How many retail day traders are left? Clearly not enough for those monkeys to earn their keep. I had a WellsTrade account with 100 free trades and when I actually used it to trade as such, they immediately placed sanctions on my account so I have to CALL them every time I want to place an order. Of course when I place an order over the phone with them, I don't get to use my free trade! What a joke! Thanks FINRA et al for continously screwing the little guy.

Just trying to dump my SLV shares for some physical, according to it seems like the premiums have settled from yesterday's surge, if only I could actually trade my account at will.

Lesson learned, never ever use WellsTrade.

Thu, 02/21/2013 - 16:00 | Link to Comment Kitler
Kitler's picture

$50 bucks says Tyler Durden just made Obama's Kill List.

Good work Ty... now 'eyes up' and keep an ear out for buzzing sounds.

Thu, 02/21/2013 - 16:08 | Link to Comment Say What Again
Say What Again's picture

News Flash --- CNBC says to BUY THE DIP

I love this shit!!!

Thu, 02/21/2013 - 16:27 | Link to Comment Poetic injustice
Poetic injustice's picture

It's always a good time to buy a dip! Realtors and brokers know what they are talking about, they got good looking printed out diplomas on their walls!

Thu, 02/21/2013 - 16:44 | Link to Comment Mudduckk
Mudduckk's picture

SOMA Hematoma Carcinoma. Just saying.


Thu, 02/21/2013 - 17:36 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

Soma, poma.  You're on to them.  So what? Investigative journalism is so 1970s.  Look at the murderous stuff they are doing right in everybody's face.  And you've exposed yet another financial scam that J6P can never understand.  Wowie Zowie!!!!!

Sunshine used to be the best antiseptic.  Now it's just sunshine.  Thanks for the effort, but it doesn't matter.

And as long as $ can be crammed into suitcases and you are required to pay your taxes with $$, the show goes on.  Let me know when the empire cannot "create a new reality" on command, then the tide has turned.  Until then they are firmly in control.  Of everything now, unlike in 2008.

Thu, 02/21/2013 - 19:08 | Link to Comment Panafrican Funk...
Panafrican Funktron Robot's picture

As an fyi, an average day for SOMA operations is $8 billion.  The average so far in February is $18 billion.  

Thu, 02/21/2013 - 19:10 | Link to Comment Panafrican Funk...
Panafrican Funktron Robot's picture

It's also worth noting that the last big borrowing binge was back in June of 2011.  What a fucking surprise.  

Thu, 02/21/2013 - 18:37 | Link to Comment Cheduba
Cheduba's picture

I just tuned into CNBC because it has been about year since I watched it and I was treated to a gem.  Some housing "expert" - House prices to surge 7-10% this year!  Buy a vacation home!  Why would anyone not want to buy a home with money so cheap?  Buy a house before it's too late!

Thu, 02/21/2013 - 16:43 | Link to Comment TheGardener
TheGardener's picture

Nobody gets killed, idiot. Mixed race pussies on the run,
maybe. Don`t get scared, unless you happen to own a mirrow.

Thu, 02/21/2013 - 21:38 | Link to Comment hswalj
hswalj's picture

Play that funky music white boy!

Thu, 02/21/2013 - 15:55 | Link to Comment BandGap
BandGap's picture

I actually started dating one of the Snorg Tees girls

Thu, 02/21/2013 - 16:05 | Link to Comment Say What Again
Say What Again's picture

Oh man.  I'm jelous!!!

Thu, 02/21/2013 - 16:29 | Link to Comment JenkinsLane
JenkinsLane's picture

I'm holding out for the Papua New Guinea girls.

Thu, 02/21/2013 - 16:42 | Link to Comment nope-1004
nope-1004's picture

Which one?  Don't leave me hangin man......


Thu, 02/21/2013 - 15:37 | Link to Comment waterwitch
waterwitch's picture

Maybe those girls are now working for T-Row etc? /s

Thu, 02/21/2013 - 16:10 | Link to Comment CheapBastard
CheapBastard's picture


You've got to be nimble these days...roll with the punches and smile at those ads...

"Meet the Perfect Christian Single" on the right sided advert (chosen by God for you, of course)... or hook up with that Hot Asian number on the left side of the page.


Don't waste your time with those mutual funds. They will not bring you the same Happy Ending the girls will bring.

Thu, 02/21/2013 - 16:35 | Link to Comment resurger
resurger's picture


I thought i got a worm in my fucking browser or something of that sort regarding those websites.

Thu, 02/21/2013 - 16:46 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

I got a worm in my pants, and it does a great impression of a meerkat looking for trouble when it sees the ad for 

Thu, 02/21/2013 - 21:25 | Link to Comment Buck Johnson
Buck Johnson's picture

You hit it right on the head.

Thu, 02/21/2013 - 15:38 | Link to Comment MFLTucson
MFLTucson's picture

And where may I ask is the Fed getting money?  Of course, we all know the answer, the printing press.  So this is otherwise refered to as a circle jerk!

Thu, 02/21/2013 - 15:38 | Link to Comment Xibalba
Xibalba's picture

nothing to see here.  move along .... or else!

Thu, 02/21/2013 - 15:34 | Link to Comment km4
km4's picture

Why Should Taxpayers Give Big Banks $83 Billion a Year?

Thu, 02/21/2013 - 15:37 | Link to Comment MFLTucson
MFLTucson's picture

Because they are financing Obama phones??

Thu, 02/21/2013 - 15:37 | Link to Comment fuu
fuu's picture

Is this "Cash for Clunkers 2.0"?

Thu, 02/21/2013 - 15:39 | Link to Comment ekm
ekm's picture

What have I been saying, it's been 6 months?


At least one primary dealers is going shit and I think this time will be a non US based one.

My speculation is on Deutsche Securities.

Thu, 02/21/2013 - 15:43 | Link to Comment ekm
ekm's picture

The financial system was NEVER unfrozen, never since 2008.


The Fed was simply providing cash to primary dealers so they pay their swap losses.

However, it looks like the order must have come from the dear leader to stop doing that.

The reason: CRUDE OIL

Thu, 02/21/2013 - 16:45 | Link to Comment Mine Is Bigger
Mine Is Bigger's picture

So, it's not a paypack for Germany asking gold back?

Thu, 02/21/2013 - 15:52 | Link to Comment Winston Churchill
Winston Churchill's picture

Not so sure about Deutsche.

BofA is actually looking good to shit the bed.

A twofer with them owning Merrill Lynch.

Thu, 02/21/2013 - 16:04 | Link to Comment ekm
ekm's picture

We've had 3 US based primary dealers die:

Bear stearns




Time for european one to go, you know, shared pain.

Thu, 02/21/2013 - 20:29 | Link to Comment reload
reload's picture

RBS....? Still a lot of hidden horrors lurking there

Thu, 02/21/2013 - 16:35 | Link to Comment seek
seek's picture

BofA is the other bank in addition to DB that's on my super-short list of known problem children in the banking world. They've been a mess for a while, but they've also got TBTF helping them out. I think it's far more likely it's a non-US dealer that is imploding.

I agree with you, though, when a US dealer(s) go, BofA will be first in line.

Thu, 02/21/2013 - 16:42 | Link to Comment ekm
Thu, 02/21/2013 - 15:53 | Link to Comment fonzannoon
fonzannoon's picture

You think Deutsche Bank? They are a whale. That would be something.

They would get bailed out.

Thu, 02/21/2013 - 16:03 | Link to Comment ekm
ekm's picture

Somebody here told me few months ago that deutsche sec bought a shitload of spanish bonds.

It reminded me of MFG buying italian bonds.


re: Seth Klarman

I'm trying to say that his philosophical conclusion is carved in stone. I never said he is infallible, as far as his AIG investment.

Thu, 02/21/2013 - 16:13 | Link to Comment fonzannoon
fonzannoon's picture

Fair enough about Klarman.

Why wouldn't said PD just pick the the red phone and call the bernank and have some benny bucks deposited behind the scenes? Why would they have to go flopping on  the deck of the boat like a dying fish in the market? An incident like that could drag the S&P down 5 or 6 points....

Thu, 02/21/2013 - 16:22 | Link to Comment ekm
ekm's picture

One answer:



Only the dear leader and the republican softie (Boehner) have the legal power to TEMPORARILY pause QEs. We know boehner has no balls, so it's up to Obama.

His hand will be forced by crude oil price.

Thu, 02/21/2013 - 16:25 | Link to Comment fonzannoon
fonzannoon's picture

It's an interesting theory but it seems like our dear leader is knockong down crude right now easily enough, no?

Thu, 02/21/2013 - 16:27 | Link to Comment ekm
ekm's picture


As I said, little drops here and there, don't matter.

I'm waiting for $10-20 crude oil drop in one day.

Thu, 02/21/2013 - 16:25 | Link to Comment ekm
ekm's picture

We are far beyond the point of 5 or 10 S&P point drops.

I'm waiting for 50 or 100 S&P collapse in one day, after the dear leader signs the order.

Thu, 02/21/2013 - 16:18 | Link to Comment seek
seek's picture

I think that's a good call. I can't get into details but I have had a business relationship with them, and they're clearly shutting down a lot of IB/wealth management activities.

Not positive it'll be them, but I have a lot of signs that several firms are in a pretty bad place. The post yesterday about bank profits after taxpayer support is subtracted says volumes about how things really are.

Thu, 02/21/2013 - 16:23 | Link to Comment ekm
ekm's picture

Thx a lot for sharing that information.

Thu, 02/21/2013 - 16:27 | Link to Comment fonzannoon
fonzannoon's picture

I am just playing devils advocate here a bit ekm, not in any way trying to be a dick. But regardingthe comment about DB shutting operations etc...what bank isn't?

Also, you start taking the S&P down 87 style and you have undone all the good work the bernak has done with his wealth effect. Why wreck that?

Thu, 02/21/2013 - 16:30 | Link to Comment ekm
ekm's picture

Answer: CRUDE OIL.


Shortage of crude oil = starvation.

Thu, 02/21/2013 - 16:34 | Link to Comment ekm
ekm's picture

Somebody has to carry the bag.

Same as for MFG, they'll load the shit into DB and shut it down.

Same for Lehman or Bear stearns.

Thu, 02/21/2013 - 16:39 | Link to Comment fonzannoon
fonzannoon's picture

we should be shorting high end steakhouses.

Thu, 02/21/2013 - 16:52 | Link to Comment FoeHammer
FoeHammer's picture

I say it's high time to get real local!

Thu, 02/21/2013 - 16:41 | Link to Comment seek
seek's picture

There's a difference from a gradual wind-down and a panic shutdown, and I'm seeing a panic shutdown of the group I worked with.

As far as S&P, da Bernank is playing a world's largest game of whack-a-mole. Priorities of what gets whacked (manipulated) have been changed, and that's being reflected in the markets the past week.

I would read into the priority change that something more urgent, and thus scarier -- than the current economy has come up, so wealth got put on back burner. My guess is it relates to the "shadow" crash many of us saw happening in last 2012 starting to surface in bank balance sheets, and the economic headwinds are so strong that need to shift strategies.

Thu, 02/21/2013 - 16:46 | Link to Comment ekm
ekm's picture


You are a treasure of knowledge.

Thu, 02/21/2013 - 16:56 | Link to Comment seek
seek's picture

I figured there'd be a news story reflecting what I saw someplace -- this one captures part of what's going on pretty well:

Thu, 02/21/2013 - 17:02 | Link to Comment ekm
ekm's picture

thx a million

Thu, 02/21/2013 - 16:48 | Link to Comment resurger
resurger's picture


Customer deposits (Even high networth deposits) can not keep up with all this leverage .... 

Thu, 02/21/2013 - 15:39 | Link to Comment DrDinkus
DrDinkus's picture

Tylers....while you guys are miles and miles ahead of me intellectually...this is just dealers shorting the 6-8 year sector in the morning, and covering from the Fed...essentially free money....gotta find yield somewhere in repo mkt...

Thu, 02/21/2013 - 15:41 | Link to Comment Winston Churchill
Winston Churchill's picture


Anything happening in the REPO mrket that may be causing this cash flow crunch ?

Surely this a symptom not a cause of something.

Thu, 02/21/2013 - 16:08 | Link to Comment ekm
ekm's picture

Losses on swap bets by primary dealers.

The problem is that the money provided to them for losses is going to the winning counterparties which are piling up on crude oil.

Thu, 02/21/2013 - 15:43 | Link to Comment DrDinkus
DrDinkus's picture

and, as proof of this...the repo market has opened lets say .21/.20 this AM....last traded at .15...   dealers short these issues at negative carry, borrow from the FED at 5 bps, earn the spread (today, about 15 bps on 22 bn and change...$90K for the entire dealer community. peanuts, yes, but like i money)

Thu, 02/21/2013 - 15:44 | Link to Comment Pairadimes
Pairadimes's picture

This might be new information to the Chairman:


Thu, 02/21/2013 - 15:45 | Link to Comment Iconomissed
Iconomissed's picture

We gonna need more whacks

Thu, 02/21/2013 - 15:49 | Link to Comment buzzsaw99
buzzsaw99's picture

a loan that doesn't show on the books? why that would be :gasp: fraud

Thu, 02/21/2013 - 16:05 | Link to Comment Kitler
Kitler's picture

It would be but it isn't until they say it is and they won't.

Now repeat after me:

There is no inflation, there is no fraud, the economy is recovering.

There is no inflation, there is no fraud, the economy is recovering.

Thu, 02/21/2013 - 15:52 | Link to Comment maskone909
maskone909's picture

good fuckin read thx tyler.

Thu, 02/21/2013 - 15:54 | Link to Comment Confundido
Confundido's picture

No cash? Sell gold! Paper gold, I mean...

Thu, 02/21/2013 - 15:54 | Link to Comment Dr. Engali
Dr. Engali's picture

This is the kind of analysis that puts the Hedge far above the rest. 

Thu, 02/21/2013 - 15:56 | Link to Comment caimen garou
caimen garou's picture

bad back and my cash shortage due to winter storm Q along with my  daughters homework went missing!

Thu, 02/21/2013 - 15:57 | Link to Comment FoeHammer
FoeHammer's picture

It's really called SOMA Securities Lending Program?!

"Swallowing half an hour before closing time, that second dose of soma had raised a quite impenetrable wall between the actual universe and their minds."

Thu, 02/21/2013 - 15:58 | Link to Comment Z'
Z''s picture

Went to learn more about SOMA lending at the following:

The thing I didn't see is what the Fed is accepting as collateral.  My question is, could a Primary Dealer use garbage securities as collateral, knowing that these securities would lose value in the immediate term, thus sticking the Fed with the loss?  What are the repercussions... would the Fed call in the loan on the new reduced market value of the security?  My general question being, could the SOMA window be used to unload trash collateral onto the Fed, for losses to be washed away unnoticed?

Thu, 02/21/2013 - 16:06 | Link to Comment DrDinkus
DrDinkus's picture

No, the fed only accepts treasuries as collat, the money has to match, down to the dollar. the pledged collateral is returned the next businss day. this article lacks a basic understanding of the repo market.

Thu, 02/21/2013 - 16:13 | Link to Comment LawsofPhysics
LawsofPhysics's picture

indeed, go ahead Ben, fix it all in 15 minutes and let yields rise motherfucker.

Thu, 02/21/2013 - 16:14 | Link to Comment Z'
Z''s picture

Thanks for your reply, Dr.  It is much appreciated.

I have learned much from ZH, and like others here am thankful for the insights to be gained.

Thu, 02/21/2013 - 16:16 | Link to Comment Winston Churchill
Winston Churchill's picture

Given TBTJ history in regards to REPO's,what makes you think those treasuries

are not already pledged in multiple places already ?

Screw  the cat,we have Schroedlingers collateral everywhere.

Thu, 02/21/2013 - 16:28 | Link to Comment LawsofPhysics
LawsofPhysics's picture

See my post below.  What exactly is collateral in a "mark to fantasy" accounting world?

Thu, 02/21/2013 - 17:44 | Link to Comment steve from virginia
steve from virginia's picture



For all practical purposes, the Fed is obliged to accept the same collateral as the primary dealers, that is the gist of this article. Even with commercial collateral offered under 'quite flexible terms' there is a liquidity constraint.


The Fed has taken up the lion's share of available risk free securities already, there is a collateral shortage. This is due to years of QE/open market operations: the Fed is causing its own difficulties!


Bernanke has only one button on his desk: 'LEND'. He pushes it over and over.


The Fed demands differing haircuts for securities that it deems 'risky'. It can turn up its nose at a primary dealer offering and demand something else but the cupboard is getting pretty bare.


It isn't the Fed's stringency that is constraining liquidity but competition from elsewhere (I'll leave out the gratuitous $117 Brent remark). Market housekeeping requires bursts of liquidity, why now?


I dunno ... end of the world, maybe?


BTW, Gary Gorton (Minnesota Fed) published some articles RE repo:

Thu, 02/21/2013 - 20:04 | Link to Comment Z'
Z''s picture

Great link Steve, very informative, thanks for providing it (post 3264897).  Gorton has a thorough knowledge and yet conveys the concepts in a way that is understandable for people outside the field of finance.  Really a worthwhile read.

If one hovers over the blue terms in the link you provided, further detail is given.  Hovering over the term "M3" yielded the following:

M2 is a broader measure that incorporates M1 but also includes assets such as commercial bank savings deposits, deposits at credit unions and noninstitutional money market funds, among other components. M3 was broader still, but publication of M3 figures ceased in March 2006 when the Fed determined that M3 no longer conveyed “any additional information about economic activity ... not already embodied in M2.” The Fed also ceased publishing one of M3’s components, repurchase agreements.

So in 2006 the Fed ceased publishing M3, and supporting component data that could be used to calculate M3.  Seems like the repo data might have been useful in sensing trouble before the 2008 crisis.  Water under the bridge, obviously, but I found myself wondering what the motivations were for that change in policy.  Trying to find an answer to that question, I found the following article... interesting to me because it is a March 2006 article and already it speaks of "the beginning global systemic crisis," in relation to USD/oil.

I just pulled a thread and am left with a pile of lint at my feet.  Every question only leads to new questions.

Fri, 02/22/2013 - 09:37 | Link to Comment helping_friendl...
helping_friendly_book's picture

What about Maiden Lane I, II, and III?

Thu, 02/21/2013 - 16:00 | Link to Comment Seasmoke
Seasmoke's picture

It is getting chilly out there again

Thu, 02/21/2013 - 16:00 | Link to Comment LawsofPhysics
LawsofPhysics's picture

You buy the shit, no you buy it...


Hey, mind if we look at that collateral bitchez? (spoken in a "mind if we dance with your dates" kind of way)


Is this where "capital" goes to die?

Thu, 02/21/2013 - 16:07 | Link to Comment ekm
ekm's picture


Shadow banking is where excessive "capital" goes to die.

Thu, 02/21/2013 - 16:10 | Link to Comment robertocarlos
robertocarlos's picture

Get out of debt. Cash is king. I am officially out of debt now and I will try to stack  bit of cash and a bit of gold and silver. Only my fair share of gold, (one ounce) and silver though. The rest of my cash will be spent on stuff.

Opps: I forgot you need dollars to get out of debt and there ain't enough of them. So carry on. 


Thu, 02/21/2013 - 21:51 | Link to Comment hswalj
hswalj's picture

I am buyin' topsoil.

Thu, 02/21/2013 - 21:54 | Link to Comment tip e. canoe
tip e. canoe's picture

why buy it when you can make it yourself?

Thu, 02/21/2013 - 16:05 | Link to Comment Edward Fiatski
Edward Fiatski's picture

SOMA vs. Soylent Greent when the bitch of an economy collapses? Hmm, choices, choices.

I pray to the Heavenly Lord Jesus Christ and his Father Satan Bhaal that the liquidity providers that hath bestowed upon me 50x leverage, don't suddenly go "BROKE".


Thu, 02/21/2013 - 16:03 | Link to Comment ghostzapper
ghostzapper's picture

Thank you Tyler.  Personally I understand every ounce of this but realize some may not.  You don't get thanked for the service you do for our country in exposing this giant house of cards. 

Ok, patriotic slobbering and ass kissing done for now.

Still don't see gold and silver heading to the moon . . . . . at least not yet.  benny doesn't support them and the charts have been and continue to say don't get long . . . . . . yet.  But, I agree with all of the supporting rationale for the metals that ZH presents.   

Thu, 02/21/2013 - 16:04 | Link to Comment Rustysilver
Rustysilver's picture

I HOPE that they run out of toilet paper, too. That would be nice.

Thu, 02/21/2013 - 16:09 | Link to Comment lakecity55
lakecity55's picture

Isn't this the tiny technical glitch that caused the 2008crash?

I seem to remember way back it actually started with a liquidity shortage between dealers or banks and that exposed the overall deal which crashed the 'economy.'


OK, I see there was a change after Lehman. But....

Thu, 02/21/2013 - 16:22 | Link to Comment Winston Churchill
Winston Churchill's picture

It was more like the shadow banking system suddenly becoming aware

they were funding their own  defrrauding in the REPO market.The Notes being

used as collateral had already been sold mulitple times into RMBS trusts.

The eleventh time wasn't quite a charm for TBTJ..

Thu, 02/21/2013 - 16:41 | Link to Comment lakecity55
lakecity55's picture



Thu, 02/21/2013 - 16:58 | Link to Comment helping_friendl...
helping_friendly_book's picture

It was the TED spread that caused the calamity. They stopped REPO transactions and credit froze up because nobody knew what garbage the other guy had on their books.

TED Spread is .1661 today.

I am convinced the whole crisis was planned for "W" final gift to the American people. They set it up and now look at what we have. A com[plete farce.

Thu, 02/21/2013 - 17:27 | Link to Comment steve from virginia
steve from virginia's picture



Those mortgage backed securities weren't so Triple-A after all ...


Oops, sorry, those Treasury securities aren't so Triple-A after all ...

Thu, 02/21/2013 - 16:07 | Link to Comment israhole
israhole's picture

Simple, print more money until there is enough.

Thu, 02/21/2013 - 16:08 | Link to Comment fonzannoon
fonzannoon's picture

looks like the great selloff off 2013 is coming to an end. hope everyone btfd.

Thu, 02/21/2013 - 16:40 | Link to Comment Caracalla
Caracalla's picture

Anyone BTFDing today is just throwing away their money.  The sucker is going DOWNNNNNNNNNN

Thu, 02/21/2013 - 16:10 | Link to Comment John McCloy
John McCloy's picture

Because as we have all known for years the cannibalization pool is getting smaller. Who is left to steal from after the mass 2008 BKs and consolidations? The markets have gone from 900-1500, the level of cash entering markets via 401ks and mom and pop investors is still declining because the money has already been pilfered in the past decade and the job market has continued to shrink.
So we know part timers are barely staying afloat and not buying stocks and the baby boomer reckoning outflows are enroute for the next 20 years and nobody can save a fucking dime to save their lives because they are getting 0% savings rates and free pens at the banks.
Hedge funds who have not had PD status and 0.25% access to Fed rates have been getting death marched out of business so now they only have themselves to fight about scraps over. It's gonna be the wild wild west.

Thu, 02/21/2013 - 16:14 | Link to Comment lakecity55
lakecity55's picture

Free Pens. I have a buddy in bank security. Apparently, institutions are not up-keeping their security stuff. It may actually be easier to rob a bank. Gee, does that mean the Ferns inside are.....worthless?

And, this guy does regional work.

I think the company is "Corzine Security."

Thu, 02/21/2013 - 16:58 | Link to Comment dwdollar
dwdollar's picture

That's not really a problem since actual cash is a rare commodity at local branches.

The main reason they have large vaults and security is too keep the illusion of vast amounts of cash stored on-site.

Thu, 02/21/2013 - 16:10 | Link to Comment Whiner
Whiner's picture

FEED MEEEE! Leon! Feed me.
Little Shop of Horrors

Thu, 02/21/2013 - 16:12 | Link to Comment robertocarlos
robertocarlos's picture

See moar.

Thu, 02/21/2013 - 16:14 | Link to Comment bnbdnb
bnbdnb's picture

CITI go boom.

Thu, 02/21/2013 - 16:17 | Link to Comment czarangelus
czarangelus's picture

The whole economy is a circle jerk on the deck of the Titanic with the taxpayer as the soggy muffin

Thu, 02/21/2013 - 16:19 | Link to Comment SilverMaples
SilverMaples's picture

When do we start buying groceries with "federal reserve ES notes" ?

Thu, 02/21/2013 - 16:21 | Link to Comment Quinvarius
Quinvarius's picture

Ohh...ohh....QE5...stealth version

Thu, 02/21/2013 - 16:21 | Link to Comment seek
seek's picture

Awesome post, Tyler. ZH original content is always my favorite thing to read here.

Thu, 02/21/2013 - 16:40 | Link to Comment resurger
resurger's picture

Is it possible to pledge Zimbabwean Dollar securities for S&P 500 USD loans or any junk bond can secure the SSRT?

Beside having this Borrowed VS pledge transactions not appearing on the Balance Sheet, IFRS & FASB states that by 2013 (or maybe now by 2016) HTM bonds are market at facevalue and the AFS are also marked at FV if the "Intention" is to keep it in your core portfolio... which means they get full face value for the loan am assuming + they are considered risk free collateral that recieved no haircut. 

Another thing the bid rate is the difference between the loan rate and the securities (collateral rate), if the value of those securities drop is there a margin call? Or the fed will make sure that those bonds will never ever lose value and we have to believe the IFRS & FASB and maybe shutdown accounting departments and risk managment all at once.

What happens when the PD run out of securties? Will we see SSRT Double-Counting, Triple Counting, Quadruple counting and re-re-re-hypothecate the security till the jig is finally up.

This is just so much ponzi .

Thu, 02/21/2013 - 16:31 | Link to Comment Toobigtofoil
Toobigtofoil's picture

Why did the only quarter end window-dressings occur in 2010?

Thu, 02/21/2013 - 16:33 | Link to Comment Sutton
Sutton's picture

I had my money in Primary Dealer MF Global.

Never had a problem.

Thu, 02/21/2013 - 16:37 | Link to Comment Goggles Pisano
Goggles Pisano's picture

Not possible for Primary Dealers to be short cash. If they get low, they just steal client money (like MF Global). No investigation, no jail.

Thu, 02/21/2013 - 16:38 | Link to Comment Shell Game
Shell Game's picture

Best schooling one can find on the internet.  Thanks, Tylers..

Thu, 02/21/2013 - 16:42 | Link to Comment tony bonn
tony bonn's picture

this is the way we rehypothecate, rehypothecate, rehypothecate

this is the way we rehypothecate so early in the meltdown

Thu, 02/21/2013 - 16:59 | Link to Comment Albertarocks
Albertarocks's picture

So tell me again... what do I have to do to borrow $5 billion at the rate of 0.05%?  Because I'm quite interested in taking out a loan like that.  I need a new car and a private island and shit like that.  Make that two islands.  Oh, and I'd like to buy a nice big boat with an infinity pool on it and stuff.  And I'd also like to fill that boat up with puts on European banks.  So how do I go about getting that loan again?

Huh?  Whadaya mean I'd have to goose Pelosi?  Uhhhh... let me think that one over.  That's a pretty damned tall order for just $5 bil.  I'll get back to ya.

Thu, 02/21/2013 - 17:47 | Link to Comment robertocarlos
robertocarlos's picture

It's not a boat, it's a yacht.

Thu, 02/21/2013 - 17:07 | Link to Comment Manipulism
Manipulism's picture

Who the fuck cares anymore?

Let them all eat whatever and die.

Thu, 02/21/2013 - 17:23 | Link to Comment steve from virginia
steve from virginia's picture




 ... Ummm, the dealers have a collateral problem not a liquidity problem.


How can this be news when very little in the real world is worth anything?


Exhibit A: (Gold sales = margin calls?)


Sometimes the accounting gimicks get in the way of good business decision making ... like over the past 30 or so years.


Ya think?

Thu, 02/21/2013 - 17:27 | Link to Comment Skin666
Skin666's picture

Nailed again Tylers!


Another donation is coming your way...

Thu, 02/21/2013 - 18:11 | Link to Comment janus
janus's picture

first class, TD!

ZH is a thing to behold...what an article...what marvelous thinking.

NOBODY...not a single goddam outlet, no matter how doing this level and quality of financial reporting.

donate, bitchez!

we all do our part.

11 dollar bills/

you've only got 10s,


Thu, 02/21/2013 - 19:31 | Link to Comment flow5
flow5's picture

How stupid. Here's lterally a trillion dollars of proprietary "intellectual property".  It is the "Holy Grail" courtesy of LJP (Ph.D. economics, Chicago, 1933)

The first column is the roc in the proxy for real-output (exactly 10 months for the last 100 years). So stocks are still a buy.

The second column is the roc in the proxy for inflation (exactly 24 months for the last 100 years). So gold is a sell.

The surrogate for MVt is required reserves on the BOG's H.3 release, ignore all seasonally mal-adjusted figures.

The roc in the proxy for inflation peaks this month.

2012-09 ,,,,,,, 0.033 ,,,,,,, 0.158
2012-10 ,,,,,,, 0.018 ,,,,,,, 0.150
2012-11 ,,,,,,, 0.025 ,,,,,,, 0.138
2012-12 ,,,,,,, 0.038 ,,,,,,, 0.125
2013-01 ,,,,,,, 0.043 ,,,,,,, 0.148
2013-02 ,,,,,,, 0.043 ,,,,,,, 0.155 spike
2013-03 ,,,,,,, 0.053 ,,,,,,, 0.138
2013-04 ,,,,,,, 0.043 ,,,,,,, 0.133
2013-05 ,,,,,,, 0.033 ,,,,,,, 0.135
2013-06 ,,,,,,, 0.025 ,,,,,,, 0.128
2013-07 ,,,,,,, 0.025 ,,,,,,, 0.108
2013-08 ,,,,,,, 0.018 ,,,,,,, 0.070

The roc in the proxy for real-output is still climbing. Stocks should resume their upward path after the seasonal pressure ends in the next 2 weeks. No disclaimer is needed for the gospel.

Thu, 02/21/2013 - 21:57 | Link to Comment hswalj
hswalj's picture

Say what? Dude I be pourin' me another drink.

Thu, 02/21/2013 - 20:02 | Link to Comment flow5
flow5's picture

Bankrupt you Bernanke" is incompetent. And everyone's got the wrong idea.

Seasonal adjustments have their roots in the fallacious "real bills" doctrine:

"In the original federal reserve act of 1913 "It was anticipated that credit extended by the Federal Reserve Banks to commercial banks would rise & fall with seasonal & longer term variations in business activity"

And: "From the beginning, the Federal Reserve was reasonably successful in accommodating the seasonal swings in the demand for currency—in the terminology of the act, providing for “an elastic currency”."

The FOMC is tasked to provide yearly seasonal adjustments as business activity waxes (the FRBNY's "trading desk" injects reserves) & wanes (mops them up). And the problem is the FOMC doesn't recognize that the theory & mechanics are the same for seasonal mal-adjustments & the "real Bills" arguments.

The Fed screwed up during the holidays. They always do. This year is worse than others. This delays any concerted effort to manage "expectations". When will the Fed be "back-on-track"? - probably, once again, thru sheer luck (or when both inflation & the economy simply "stall-out").

Monetary policy objectives should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real-gDp. Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, & for (2) inflation indices (for the last 100 years), have been mathematical constants.

However, the FED's target (interest rates), is INDIRECT, varies WIDELY OVER TIME, & in MAGNITUDE. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact (& since Oct 2008, the Fed's new IOeR policy has emasculated this "open market power"). The consequence is a delayed, remote, & approximate control over the lending & money-creating capacity of the banking system.

The money supply (& commercial bank credit), can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate on governments; or thru "floors", "ceilings", "corridors", "brackets", etc). In other words, Keynes’s liquidity preference curve is a false doctrine.

Irving Fisher's "equation of exchange" is a truism: roc's in MVt = roc's in n-gDp. Roc's in bank debits (our means of payment money times its rate of turnover-MVt) can serve as a proxy for all transactions (aggregate monetary purchasing power). I.e., without the IOeR policy, member bank legal reserves should grow at no greater rate than would allow rate of increase in monetary flows to equal the rate of increase in real output.

There is evidence to prove that [roc] in nominal-gDp can serve as a proxy figure for [roc] in all transactions (the R2 was always > .95 up until the Fed discontinued the G.6 debit & deposit turnover release in 1996). Rates-of-change in real-gDp have to be used as a policy standard. This is, & always has been, the "Holy Grail".

Thu, 02/21/2013 - 20:38 | Link to Comment vote_libertaria...
vote_libertarian_party's picture

My theory is that they sold a bunch of bonds that SHOULD be receiving monthly payments (people paying their mortgages) that aren't.  But they still have cash outflow requirements.




Fri, 02/22/2013 - 02:16 | Link to Comment smart girl
smart girl's picture

Thanks; great article as always. So proud of you boys.

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