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Today The Fed Soaked Up A Record $95 Billion In Excess Liquidity Sloshing Around
Once upon a time, back in 2010 and 2011, the Fed's Primary Dealers would engage in a furious game of window dressing at the end of every quarter, when they would sell their risky assets, and convert them into cash to appears idiot accountants and even greater idiot regulators, a phenomenon which could be followed on the Fed's Primary Dealer asset holding page, and which we would showcase periodically such as on the chart below from October 2011.
Well, in the intervening period, when the Fed managed to soak up another $1.3 trillion in "high quality collateral", and replace it with fungible reserves (used exclusively as collateral for marginable risk-on positions) courtesy of QEternity, something changed. Whether it is a regulatory matter, or simply liquidity preference, but holding Treasury paper has become more attractive to US financial firms (mostly Primary Dealers) than holding cash.
Enter the Fed's recently announced (read more here) Fixed-Rate Reverse Repo facility, which earlier today saw its greatest use to date in history, when a record $95 billion in Treasury paper was repoed out to the street for a 3 day term, at an 0.03% annual rate. Since there were 68 bidders in the operation, the average participant had an extra $1.4 billion in cash lying around to give to the Fed in exchange for holding Treasurys into year end.
So for all those wondering about all those sophisticated technical and fundamental reasons why the Fed is pushing hard on the Reverse Repo pedal, and how this is indicative of the Fed's far-sighted approach of how to best executed a tightening when the time comes, turns out the FRRR facility was nothing more than yet another way that the Fed allows banks to paint their books for t month, quarter and year end purposes.
But while the Fed enabling its real owners is nothing new, what is perhaps more troubling is that earlier today there was $95 billion in excess liquidity floating around. With a B.
So yes, keep repeating that there is no liquidity bubble (which incidentally, is about $2.5 trillion or the size of US banks' excess deposits).
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I've got some liquidity the Fed can suck -- er, soak -- up.
THIS IS USELESS, FOR IT WORKS ONLY AS LONG AS THERE IS DEMAND FOR US SOV RISK. WHEN SHIT HITS THE FAN (I.E. NO DEMAND FOR TREASURIES) REVERSE REPOS WILL SIMPLY ACT AS A FLOOR ON TREASURIES PRICE (I.E. AS A CAP ON NOMINAL RATES...NOMINAL, NOT REAL). TAKE IT TO THE EXTREME NOW: SUPPOSE THAT THE LEVEL OF EXCESS RESERVE DRAINAGE IS SUBSTANTIAL. IT WOULD MEAN THAT A SIGNIFICANT AMOUNT OF DEPOSITS AT US BANKS WOULD NOW BE BACKED BY US TREASURIES REPOED. NOW PUT THAT IN CONTEXT...THINK WHAT WOULD HAPPEN IF ALL THIS OCCURS WHEN US SOV RISK IS REPUDIATED...SEE? AND THIS IS EXACTLY WHAT THE FED THINKS WOULD ALLOW THEM TO GET AWAY WITH QE...NO WAY!
what a great idea
we have lots of unwanted liquidity
2 trillion of it
dollars?
pfft!
what we want is treasurys! because of their yield!
hugs,
all the domestic^H^H^H^H^H^H^Hforeign banks holding excess reserves
After a month or so they will release twice as that. Mark my words.
Can someone say "trap?"
making up for the $10 billion reduction in QE? money for everyone!
Tinker, Taper, Soldier, Spy
Your honor, don't thank me but I've decided to reduce my crime by 15 percent
"soaked up" - the tampon analogy is apt
I think the Chinese might want some of that. Oh its dollars... never mind.
Thanks for bringing the issue up. One thing is for banks to engage in window dressing, another is to have the NY Fed enabling it. This should be discussed in Federal courts, where these people belong, not in zerohedge.
Why buy treasuries and hurt the stock market when your friendly NY Fed will loan them to you for free in exchange for "cash". Hell, why not short treasuries with the assistance of the NY Fed?
But let's not forget that most of those treasuries go to money market funds (at least in theory) and to the tri-party repo world. What garbage does the money market give to the NY Fed at 100 cents on the dollar, is it really cash? Or is it European garbage commercial paper?
11 of the banks on the reverse repo list are foreign banks.
...assuming the last branch is also not ompletely corrupt
but Citizens United was a big clue
and then there's the sorry for the kidnap and torture sheep herder but we must dismiss your tort case...state secrets and all
and the this medical thing is unconstitutional so we'll just call it a tax
now waiting for the "this isn't a search" opinion
indeed masbraz... what are those prices that the banks sell their MBS (or whatever shitpaper is passed off as MBS) to the Fed for? Is it 100 cents on the USD or .. where are those prices available? Do those trades get cleared / reported by Markit or any other "clearing / settlement house" ... DTCC ?
Banks are not considering holding treasuries more attractive than cash, to the contrary. US banks hold $100 billion less in treasuries than a year ago, per SIFMA. If anything, they short them, or turn the collateral over to parties (hedge funds) who do the shorting. You can't have it both ways, pump the stock market up and have treasury prices go up - if the risk asset goes up, the safe one goes down.
There you go, large US financial institutions, with the help of the NY Fed, short the bonds of their own country.
Merry and lovely group of human beings...
Flag as wrong. With money printing the nominal values of all assets increase, when measured in the currency being inflated.
quick someone post a link to cookie monster going at a plate of cookies!
Regulatory shenanigans, one day a quarter the books have to pass the smell test.
I can't wait until this shit implodes. It's going to be shades of the MBS fiasco again where people were saying "Where's the note?" Instead, it's going to be "Who's balance sheet is it on?" Even better yet, the Fed is going to be caught up in the shitfest.
I think I had better get stocked up on popcorn.
I'm going to look into changing my name legally to "The Bank of RafterMan'" I'm almost positive I can thusly get sweet, sweet billions of electric cash. I'll just take 90 billion, they won't even notice such a small entry.
You need to put an N.A. after that. I would suggest RafterManFMJ Bank, N.A. The N.A. stands for National Assossiation.
the fat lady is warming up and about to get on stage
Looks like Tyler listened to our fellow poster madbraz yesterday. Well done.
http://www.zerohedge.com/news/2013-12-26/not-european-recovery-you-were-...
Props to madbraz, well done.
this reverse repo stuff is confusing for the layman which is why it scares me..........
Ill be paying more attn to madbraz posting here from now on......they scare much like this one did when I read it.
from trav7777 ZH 2010
''I've tried in many instances to explain synthetic debt so I'll give it another crack. The CDS sellers did not hang onto the coupon. They securitized it.
This technique permitted net notional outstanding and credit to grow far in excess of what any real economy would have permitted. It also goosed the shit out of GDP.
There were derivatives based upon equity tranches of CDS payment streams. Nobody has any fucking clue where this paper trail runs, but these toxic shitpiles are out there all over the world, just waiting to implode if not liquified. CDSs are like bonds in reverse, except without the capital. They are ideal for synthesizing securitized debt instruments to maintain fee flow. They've been a license for Wall Street to print fucking money.
Only idiots like AIG were stupid enough to not net out. GS stands only in the middle of most of these things, having written the CDSs then tranched and sold off the payments, taking fees and a skim with them. These mfers even tranched up tranches. Pile a bunch of equity tranches into another CDO and call the supersenior of that CDO^2 AAA+.
This is what grew credit and how the banking titans got rich...by manufacturing demand for FRN product far beyond the organic demand, creating their own credit originations and skimming the flow of money across their derivatives desks.
When the music stopped, they all nearly died not because of real exposure but because too much of this shit was clogged up in their off-sheet SIVs. None of them had stopped the manufacturing of debt and they were on-hook for liquidity events as a result of having to service product in the middle stages of manufacture.
Think of it like this...a drug dealer buys a lot of raw material for meth on credit. His meth lab gets blown up or burns down. He's got a liquidity problem. That's literally what happened to Wall Street. The end market froze completely and they still owed for the raw materials in their SIVs.''
Happy Holidays
Thanks DCG.
madbraz's post is clearly written by someone who has used the CDO / CDS / CMO strucures before and understands how banks funds themselves on a daily basis. Excellent post. Thanks.
This amounts to the Fed. telling primary dealers that they are slowing bond purchases, and that they would like their continued uptake/participation at Treasury auctions. ( to keep yields low)
In return, all those excess reserves 'Primary Dealers' have with the Fed. can be used to gamble with for almost zero short term risk. (interest)
The spice keeps flowing with the illusion that the Fed. is drawing down QE infinity.
Does this count as double plus good QE this month? $180,000,000,000 in December? The banks are getting free money here right?
Exactly my question as well.
Also, does this then count as un-taper?
I really expected this article to get more comments.
It's good to be king.
You can buy the world with a few keystrokes.
Mortals have to produce.
Shitbags just add zero's onto the ledgers.
And the economy is saved.
I can't wait until the price of gas drops $.50/gal and I get a job as a result of this.
It has to Lenny, it just has to, Benny told me it would.
It will drop to $.50/gal, sooner than later, as that will be when $.50 will really mean something. (P.S. it won't be in fiat currency terms either)
This encapsulates the Fed's pipe dream and the Deflastionistas argument against a hyper-inflationary event. The illusion that the Fed can safely contain any leakage of liquidity into the market at large, let alone catastrophic money flows; and that the extra liquidity is strictly being applied to offset toxic assets on their balance sheet.
Priority recipients of OTC Fed dough are putting into global equities, evidence of enough of "leakage..," let alone the sort of spillage that stands to diluge the market at the worst possible moment, namely the next Black Swan when all stops get blown simultaneously and when money managers are inundated with panic messages from all their clients at once.
Any pronouncement from the Fed brings to mind Bernanke's famous pronouncement back in '07 stating blithely that home prices in the US had not declined for over 75-years roughly weeks before home prices started their precipitous decline.
Caveat Emptor.
SELLLLLL!!!
(He who moves first.........)