Fed Withdraws Whopping $58 Billion In Liquidity In Latest Reverse Repo Test

Tyler Durden's picture

It appears there is just a little excess liquidity sloshing around out there. Moments ago the Fed announced that as part of its most recent overnight reverse repo "liquidity withdrawal preparedness test", some 87 entities provided the Fed with a whopping $58.2 billion in overnight liquidity in exchange for Treasury collateral at a 0.01% stop out rate. This was the largest amount in liquidity soaked up (or, alternatively, collateral provided) by the Fed in its recent history of Temporary Open Market operations going back to 2012.

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Tsar Pointless's picture

The Pittsburgh Pirates host their first playoff game in 21 years tomorrow night. I never thought I'd live to see them in the playoffs again. I honestly never thought they would.

Let's go Bucs!

Jack Napier's picture

Whopping? The Fed wipes their ass with $58 billion. They gifted (not loaned) their primary dealers $16 trillion under the table alongside TARP according to a GAO audit. TBTF banks are sitting on all these dollars they aren't using so what's the big deal if they kicked some of it back? The Fed can conjure more up anytime they face insolvency anyway.

Dollar Bill Hiccup's picture

That was 58bn in a day. 20 trading days of that, i.e., 1 month, and you've got a trillion + ...

NotApplicable's picture

Wouldn't it be the same $58B unwinding then rewinding every day?

strannick's picture

Shadow Banking 4eva. Fed prints money. Buys Treasuries from bankrupt Treasury, and Russia and China. Then Repos out the Treasuries to leverage up the Shadow Banking system. what could go wrong. Got gold? Russia and China do...

Pure Evil's picture

Your just not very patriotic.

Buy treasuries now before they pass a law forcing you to buy them while confiscating your liquid assets to force compliance with the law.

(Somehow this sounds all too familiar)

Popo's picture

How does the Fed hope to conduct a scientifically-valid test the day before a government shut down?   If the markets plunge, what will the attribute the plunge to?  The government shut-down, or the reverse repo move?   Or are they trying to assist a little crash in celebration of the government shut down?    If the latter sounds too conspiratorial, consider that there is zero hope of a successful test today.  So one is forced to question what their point is.

Seer's picture

Thank you for this/that!

It should be clear even to the blind that it's all pure insanity.  We're only fooling ourselves.

MiguelitoRaton's picture

Is the Fed ensuring market pain upto and during the government shutdown to support the free-spending party in power?

pods's picture

Well think about the % of people who know what a reverse repo is vs the number who have been scared shitless about the sun not coming up if the government shuts down.

Either on purpose to show negative effects of a shut down or there really is so much liquidity sloshing around they are providing safe harbor in case something tanks to their owners.


Riggers's picture

Can we have a third group? How about I don't really know what a reverse repo is or what it means entirely but I'm fairly sure the government shutting down fits nicely in my agenda of getting rid of this govt. Since they aren't really shutting down but are only going to pay "basic" functions.. I still don't understand why they are paying UNnecessary functions in the first place. I'll be happier than a goat in a green field if they'd shutdown for good under those terms.

TheRedScourge's picture

If they fail to come to an agreement to raise the debt ceiling, all that happens is a spending cut (and possibly a tax increase) such that the budget instantly becomes balanced. No sort of "shutdown" occurs, merely something we all (unless we're on federal aid) would like to happen anyway.

Dollar Bill Hiccup's picture

"Repo" is a loan, collateralized by securities. It is a Repo or Reverse Repo, depending on who is the one getting cash (taking a loan) or securities (receiving collateral and making the loan).

If the FED performs a reverse repo, they are taking a loan of cash from banks and giving banks US Treasury securities as collateral. By taking cash from the banks, the FED is effectively withdrawing liquidity from the banking system.

That's the very short answer. Wall Street likes to make things appear complicated when in essence they are very simple. If things appear complicated, higher fees and more manipulation are possible.



Jannn's picture
Must Read: Building a strong economic and financial security barrier for China


Bay of Pigs's picture

So everything is okay then?

max2205's picture

Humm....love dem taters....

Winston Churchill's picture

I for one wonder if that collateral is the toxic RMBS the FedRes has been buying up ?

mkkby's picture

Huh?  This is a reverse repo.  Fed is selling, not buying.

It seems many folks including Tyler don't understand reverse repo.  It is ANOTHER LOOSENING OPERATION.  This time for the non bank/shadow banks.


xtop23's picture

Edit: I reread the post you were responding to and realized my response wasn't necessary.

hankwil74's picture

Translation in plain English for someone w/o an MBA would be greatly appreciated. Thank you in advance fellow ZHers.

Dr. Engali's picture

The fed is providing firms that need collateral (probably to meet margin calls) a way to get it. What they are saying is "you bring us cash 'excess liquidity' and we will give you bonds." Which is insane since the fed is printing money 'providing liquidity' to buy bonds. It's a big game of shells to support the ponzi scheme.

LostPolarBear's picture

Why would a firm need these bonds as collateral?  Couldn't they just use their "excess liquidity" cash as the collateral?



Dr. Engali's picture

Cash is not fungible and can't be re-hypothecated 10 time over. It is simply a credit on the balance sheet that can be levered.

kito's picture

doc i see this as the fed testing the waters on potential pullback of qe. trying to gauge market responses to a lessening of liquidity in the market. how can we say its not their way of trying to gauge impact on the shadow banking system?

mkkby's picture

You are DEAD WRONG.  Listen to the doc.  This is a loosening operation for the shadow banking system because collateral is tight.

kito's picture

i  listen to the doc, especially since i lost a sandwich bet to him. 

Dr. Engali's picture

It's collateral the system needs, cheap collateral. The fed already saw what the result of tapering will be and it scared the shit out of them.

kito's picture

these repos remind me of jurassic park, where the t-rex tests different parts of the fence in order to find a way out. looks to me that ben is trying to gauge system response to liquidity withdrawal in order to find a way out.

Dr. Engali's picture

They may be. Nobody knows for sure except for the fed. The best we can do is try to piece together what we believe is happening.

xtop23's picture

+1 great response and so simple most miss it.

Its Only Rock N Roll's picture

Spot on.  The bonds can then get rehypothecated out the wazoo.  This is the answer to the "non-tapering" and extraction of  collateral further out of the system right now.  They are worried about a panic due to government shutdown would be my guess.

Boy is this FUBAR and going to end badly. 

Never underestimate the hubris of a central banker thinking they can solve every problem with some tricky little gimmick. 

chdwlch1's picture

I have always wondered how much the $58 billion (in this case) can be levered up to.  I know that fractional reserve banks can loan out $9 for every $1 in deposits, but what if they loan those $9 to other banks?  Can the "new" loans then be levered again...and again...and again...

What is the total liquidity that can be created with the original $58 billion?

hankwil74's picture

Please explain further if you don't mind. Doing my best to educate myself on these matters and appreciate simple terms. Thank you in advance.

Riggers's picture

All banks are allowed to loan out up to 10x their deposits. IE the money people deposit into their checking and savings. In essence they can create 9x the deposits out of thin air! So say you deposit 1000 at the front counter, they can go in another room and loan out $10k. This is how the banks failed when 2007 hit. They had loaned depositors money out as bad mortgage loans and when the loans did not get paid then banks did not have the liquidity or means to pay people when they demanded their deposits to pay bills or withdraw or whatnot. They had to shutdown and the government stepped in and covered deposits over $100k (singles) or $250k (couples). At least I think that's what it is. I don't worry about FDIC insurance because I don't have any money anyway. lol

Dr. Engali's picture

Let's say you have a brokerage account and you are holding some bonds in that account. The firm can then pledge those bonds as collateral to another firm and lever up. You don't know any better because your statement says you still have the same amount of bonds. That's called re-hypothecation. Now let's say you want your bonds at the same time the opposing firm wants the bonds that have been pledged to them. Suddenly your firm is in a pickle because all they have is cash. They have to go some place and get bonds. Well the fed is giving them that place.

Edit. This is a result of the system crash in 08. Everybody had stuff pledged everywhere and nobody knew who owned what or whether or not the pledges could be honored. That's called counter party risk.

Bay of Pigs's picture

Thus the case for owning physical gold and silver.

ImReady's picture

I am an idiot but..Isn't this the type of maneuver Lehman used shortly before it's demise? A short term boost to balance sheet making it appear that it was not as leveraged as it was(just long enough to publish financials)? A last ditch effort to appear solvent?

Dr. Engali's picture

Yes this is exactly what they were doing to make their balance sheet look better.

manhattanexile's picture

It IS quarter end, so I suspect this is the usual lying...I mean "balance sheet dressing up" that happens.


Guess the issue here is that MORE of this (in $$$ terms) is happening than in prior periods

Unknown Poster's picture

EOQ book adjustment, but these are non-banks collecting interest on their cash. Lehman was hiding their over-leveraging, and with new regulations banks don't want to borrow for EOQ reporting. The books will look different in a few days.

Riggers's picture

Well since we know what happened when they produce their financials can't one just do the backward figures and figure out what the numbers WOULD have been if not for the reverse repo?

Dr. Engali's picture

But I was told that there wasn't any liquidity in the system and therefore the fed must print. I think that I've go cross eyed thinking about it.

NotApplicable's picture

Excess liquidity where you don't need it.

Parched landscape where you do.

Won't anyone think of the poor, central planners?

Quonk's picture

Liquidity is high but velocity is in a waterfall:  http://research.stlouisfed.org/fred2/series/M2V

Good luck getting a loan from Chase or any other TBTFMotherF...they've got it good and they have us right where they want us.

Dr. Engali's picture

I know. This reverse repo test says a lot about money velocity. If it ever picks up.... look out.

fonzannoon's picture

If I just buy the dip I should be fine. This whole thinking thing went out the window 3 years ago.

Bay of Pigs's picture

What's shakin fonz? Never heard that funny story you had.

Seer's picture

It's nothing more than padding to the books so that the numbers don't require them to shutter.  That is, this is just paper holding them up.  Nothing to be envious of!  They're likely always walking around with brown streaks in their undergarments...

Ham-bone's picture

Ummm - I thought Fed sold off most or nearly all it's short term debt in Op Twist...silly question but where does the Fed get (buy) unlimited short term debt to trade for cash???  Buying from PD's to sell to others???  Is this truly a reduction of cash or just a handoff???  Thought Fed was very long end heavy???

In principle, is this any different than re-running Op Twist using POMO to buy long end while selling short term debt???  Yeah, yeah Op Twist was using proceeds of short end sales to buy long end but jus saying?  Isn't this jus a variation of what Fed has done before???

Kreditanstalt's picture

...so what's the significance of this?