Fed Prepares For Bond-Fund Runs, Looking At Imposing "Exit Fee" Gates

Tyler Durden's picture

It was two short years ago that the Fed, in its relentless attempt to push everyone into the biggest equity bubble of all time, did something many thought was merely a backdoor ploy to forcibly reallocate capital out of the $2.7 trillion money market industry and into stocks when, as we wrote in July 2012, it contemplated imposing suspensions of fund redemptions to "allow for the orderly liquidation of funds assets." Or in other words "gate" money markets.

Since then various iterations of this proposal have been attempted, either by the Fed or the SEC, however due to stern industry push back (and the relatively modest amount of money at stake) the attempt to force investors to rotate their funds out of money markets (because it is quite clear that if the Fed is hinting at gating issues with a given asset class, it is only a matter of time before the hint becomes a reality) has failed, and as a result the total amount of notional capital held at money market funds has been largely unchanged in recent years.

Here comes attempt number two.

Only this time it is no longer aimed at money market funds, but that other most hated, by the Fed, asset class: bond funds, whose relentless inflows, we shouldn't have to remind readers are the main reason why the propaganda myth of a recovery, and the resulting con game, keep crashing and burning, as it is impossible to spin a 2.5% 10 Year yield as indicative of anything remotely resembling a recovery, and shows at best, a semi-deflationary world. Said inflows also are recurring evidence that whatever retail money remains unallocated, continues to go into the one asset class which is actively disparaged by the Fed at every opportunity.

In brief, if anything, the Fed would prefer that all retail investors pull their money out of bonds funds (and money markets of course), and invest them into 100x+ P/E biotech stocks. Because after all, today's stock market is nothing but the biggest Fed-propped Ponzi scheme in existence.

And in order to achieve that, according to the FT, "Federal Reserve officials have discussed imposing exit fees on bond funds to avert a potential run by investors, underlining regulators’ concern about the vulnerability of the $10tn corporate bond market."

FT justifies this latest unprecedented pseudo-capital control by sayng that "officials are concerned that bond-fund investors, as with bank depositors, can withdraw their money on demand even though the assets held by their funds are long-term debt and can be hard to sell in a crisis. The Fed discussions have taken place at a senior level but have not yet developed into formal policy, according to people familiar with the matter."

“So much activity in open-end corporate bond and loan funds is a little bit bank like,” Jeremy Stein, a Fed governor from 2012-2014 told the Financial Times last month, just before he stepped down. “It may be the essence of shadow banking is ... giving people a liquid claim on illiquid assets.”

The Fed's justification for this latest bazooka approach in forced capital reallocation:

Exit fees would seek to discourage retail investors from withdrawing funds, thereby making their claims less liquid and making a fire sale of the assets more unlikely.

"Oddly" there is nothing in the Fed's proposal about gating the most overvalued asset classes of all, equities, or say, biotechs and momo stocks, where the drawdowns, when they happen, are so fast and vicious, the bulk of hedge funds are still down for the year precisely because they were all led like obedient sheep into the Div/0 PE slaughter. Also, memory is a little fuzzy, but in the days after Lehman, it was equity hedge funds that promptly gated all their investors.... not bond hedge funds, which in fact were scrambling to deal with the influx of new funds.

Also, it goes without saying that "discouraging investors" from withdrawing funds is the last thing on the Fed's mind, which knows very well that when it comes to investor behavior all that matters is how the Fed's future intentions are discounted.

And with this unprecedented step, the Fed is sending a very clear message: it may be next year, or next month, or next week, but quite soon you, dear retail bond-fund investor, will be gated and will be unable to pull your money.

The only thing that was missing from the FT piece was a casual reference to Cyprus.

So what is the obvious desired outcome, at least by the Fed? Why a wholesale panic withdrawal from bond funds now, while the gates are still open, and since those trillions in bond funds have to be allocated somewhere, where will they go but... stock funds.

In other words, now that the Fed is pulling away from injecting tens of billions of liquidity into the market every month, it is hoping the investing population will pick up the torch. And since it has failed to incite the mass reallocation of funds from bonds to stocks, the Fed is willing to use every trick in the book to achieve its goal.

Sure enough, "introducing exit fees would require a rule change by the Securities and Exchange Commission, which some commissioners would be expected to resist, according to others familiar with the matter." However, those commissioners would be promptly silenced when a joint effort between the NSA and the Fed were to threaten the release of embarrassing photographs or conversations to the general public. And watch how all dissent promptly disappears, and the Fed once again demonstrates it is increasingly more helpless in not only preserving the biggest asset bubble in US history, but at modeling and nudging human behavior.

Sadly for the Fed, America is now on to its endless bullshit experiments. Because absent an executive order from Obama demanding that Americans invest every spare Dollar in a Ponzi scheme, this too attempt to forcibly reallocate capital from Point A to Point B will fail.

Which, however means one thing: since the Fed is so desperate it has to float trial balloons of this nature in the financial press, the untapering can't be far behind, and with it QEternity+1.

Finally, just like in Europe with its revolutionary NIRP experiment, it will also confirm that the real economy has never been worse than it is now.

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Citxmech's picture

Hey, stop giving them ideas. . . 

deKevelioc's picture

Yes, it's done in Indonesia and the Philippines all the time.

shitco.in's picture

In Switzerland they charge 1-2 CHF to use the bathroom.  Seems ironic that number 1 costs 1 CHF and number 2 costs 2 CHF. 

mayhem_korner's picture

What's next? Exit fees to leave the bathroom after taking a piss?


Ever been to Charlotte-Douglas airport?

WmMcK's picture

Charlie handed in his dime at the Kendall Square station
And he changed for Jamaica Plain
When he got there the conductor told him, "One more nickel"
Charlie couldn't get off of that train

Kingston Trio - M.T.A. Lyrics

RaceToTheBottom's picture

Entrance fees;

Exit fees;

Progressive taxes;

Sell the National Parks;

It's all for the children....

alien-IQ's picture

yeah...Jamie Dimon's children. Because, let's face it, they're the only "children" that benefit from this farce.

Pee Wee's picture

Jamie Dimon's children can fight their own fights, there won't be anybody else left.


CuttingEdge's picture

Biggest problem for Dimon's kids is the whole (informed) world and his grandfather think their dad is a cunt, and no amount of wealth will take that away. Hate to live with that shitstain's rep hanging over me all my life.

MeelionDollerBogus's picture

You forgot the fee-processing fee!

valley chick's picture

If you don't hold it, you don't own it. 

Dr. Engali's picture

Damn and that MyRa idea sounded sooooo good too.

youngman's picture

Here these guys sit as sor t of the head of the Market.....a free market..or so its supposed to be...but then someone comes up with this idea...and they all have group think and think its a good idea.....WTF....are they really that out of touch..or that stupid....they know that this will destroy the myth of a free market....as they have been for the last 5 years....whatever..

Bemused Observer's picture

You gotta wonder why anyone with a working brain would voluntarily keep their money in ANY of these markets...it's kinda like handing your drug-addicted, alcoholic brother-in-law your last 20 bucks and expecting him to bring home milk and eggs...

Pee Wee's picture


Colonel Klink's picture

Jesus Christ why don't they just lock the fucking doors?  Oh that's right, it's next.

headhunt's picture

That is when the sheeple realize they are now officially a comrade of the communist state

ebworthen's picture

Why are morality and ethics never a part of these FED conversations?

"We have to do X because of y" but never "should we do this and what are the consequences?"

They can talk all they want and Fidelity can run retirment commercials all day but they won't restore trust.

Pee Wee's picture

Because only the innocent pay for moral and ethical mistakes.  Just ask the bees.

NotApplicable's picture

Because they're criminals, that's why. There are no mistakes being made here.

EVERYTHING is proceeding according to Plan A. (which is, break everything in your way, while taking what's valuable)

headhunt's picture

They justify it with 'for the greater good' - of course that is their own greater good.

cherry picker's picture

It is said, "In God We Trust"

We forget, that God also created evil, or so it is written.

In this world, we are fortunate to find a balance, unfortunately, right now it seems the pendulum is swinging to the evil side.

techstrategy's picture

They have permanently destroyed trust, which is why none of their traps, like this one trying to compel bond investors into scam stocks, will work.  They been engaged in glorified theft for so long, they don't realize that people have developed a subconscious understanding that the Fed and Wall Street are always trying to either skim from you or sell you what they are trying to dump...

MeelionDollerBogus's picture

You're confusing 'morality' with 'moarality!'

Let The Wurlitzer Play's picture

If a worthless bond falls tozero does it make a noise?

alien-IQ's picture

No...but you still have to pay an exit fee.

HamRove's picture

I think secretly....some investors love it in the back door.

Yen Cross's picture

    When this bastard lovechild of Chairsatan & Mr. Yellen blows the only thing long retail investors are going to be is Rope & Pitchforks...

   If investors were to liquidate bond funds for fear of exit fees who do you think would be on the "buy side" of those transactions? The fucking scumbags at Maiden Lane, that's who.

fonzannoon's picture

thats exactly right. I said the same above. Those fees are there to get that money to move, not prevent it.

Miffed Microbiologist's picture

Gosh I hope so Yen. The people I know who are heavily invested in stocks are the professionals of the upper middle class. They drive nice cars, live in McMansions and run about 58-62 years in age. One spouse often has a fat government pension waiting in the wings.

They truly don't know what will hit them and are not the pitchfork-wielding type. It will be interesting to see how they deal with this. None,I am familiar, are remotely into prepping or a sustainable life style. I wouldn't be surprised if some just laid down and starved.


Nick Jihad's picture

Those public sector pension plans are going to suffer when this bubble bursts. Illinois and New Jersey are basically refusing to fund their public pensions now, even before the shitstorm commences.

MeelionDollerBogus's picture

So whoever is running ticker GLTN manufacturing guillotine blades, no takers, only ropes & pitchforks?

GooseShtepping Moron's picture

One of the main problems with manipulated markets is that the manipulation takes no notice of events outside the economists' field of view. When econometric data becomes a substitute for reality, and when even the data itself is manipulated, then clearly no realistic policy can be forthcoming.

Citxmech's picture

I think the main problem with "manipulated markets" is that they are not "markets" - by definition. 

GooseShtepping Moron's picture

In the real world there is no such thing as a perfectly unmanipulated market. A free market is a theoretical construct that will not survive its first real transaction. And this is a good thing, for life is essentially political in nature, not economic. Politics is stronger than economics in the determination of the world. However, economic and other realities do set a practical limit to how much manipulation a market will bear before it breaks.

In the comment above I was alluding to the fact that economists today have transgressed those limits because they now see their own economic data as a world unto itself which either adequately represents or even supercedes the real world. In fact it does neither.

Sean7k's picture

Well, since most wealthy people have bonds and use them as a steady source of income, especially tax free bonds, could this be a way to keep the value of bonds stable in the case there is a run on bonds? I'm sure the wealthy class would hate to have their premier asset lose value...

Nick Jihad's picture

The hold-to-maturity types are not so concerned with the ups and downs of market value. Of course, when you're in a mutual fund, it may not matter so much what your personal time horizon is.

Handful of Dust's picture

"It's like shoot'n fish in a barrel," Grampa used to say.

sosoome's picture

No need to ruin a perfectly good barrel. Just drain it and watch the fish jump around.

gdiamond22's picture

Thanks for the sell signal, .gov

Emergency Ward's picture

Next month they will reverse course.  Ha ha ha ha, they will laugh.

machineh's picture

If you don't know who is the Judas sheep leading the others to the slaughter -- IT'S YOU! -- Uncle Warren

litemine's picture

Ok.....this is a question following this thread.

When you buy a stock, (knowing that the Company is sound) you purchase a percentage ( small as it is) and as long as that company produces something in demand no matter what you still own that percentage of that company. The SHF the economy fails and facebook/twitter all fail. you lost your investment . But holding say a factory that produces copper wire. Copper may have cycles but it should always hold value? That is what I see, those who invest in the market take you chances research what you own then hold? This to me will store some value keeping a small piece out of the BANKERS/FEDS hands.    Food production is like that but the PTB are all over that like Monsanto which the IMF forces down all other Countries Throat including the USA.  The control they have......talk about a Dumded down Population as still many join the American Mercinary Army to be Enforcers................Fubar.............We shall see.    Snowden tried to warn......The flag waving got in the way of TRUTH. 

Cthonic's picture

  " But holding say a factory that produces copper wire.  "

Your small 'ownership' share.  Yes let's talk about that.  You'll have zero influence with the board, so no control over timing or amount of any dividend payouts.  Management won't give you any material information about the state of the business or otherwise give a shit about you, only caring to hit what targets are necessary to get their options to pay off, or some crisp new options awarded by the board at a much much lower basis.  You won't be able to organize shareholder activism with other owners without spending stupendous amounts of cash to find them.  Your legal fees will be out of pocket, theirs will be a corporate expense.  If times are rough, the management team and board may play some inside ball and do some dubious borrowing, sweatheart asset sales to controlled entities, or seriously dilute your shares with a secondary equity offering.   If they go bankrupt, creditors and lawyers get first dibs on any proceeds, which there probably won't be any, seeing no one will want an outdated copper wire factory with depreciated & unmaintained equipment, property tax liens and a hostile local workforce.  Face it, most people don't own shares, they rent them.  The difference between a typical 'investor' and a trader is duration.  Unless a shareholder possesses the wherewithal to organize a private buyout of the underlying, they'd be delusional to consider themselves an 'owner'.

SgtShaftoe's picture

Their efforts to mitigate a disaster virtually guarantee one.  These fucking jackasses are so drunk on their own power, they think they're infallable, but will find out soon enough how wrong they really are. 

SheepDog-One's picture

Oh it's all good, well unless anything happens or you want out, then we're going to have to take our pound of flesh.

Emergency Ward's picture

"Federal Reserve officials have discussed imposing exit fees on bond funds to avert a potential run by investors..."

Wouldn't that cause a run?  Maybe, but I don't have a Princeton PHD so what the fuck do I know?

Citxmech's picture

It's pretty sad when the scripted narrative doesn't even make internal sense.  

Kinda like the talking heads on the news trying to explain why we are talking about fighting ISIS in Iraq, a supposed enemy of Iran and Syria, but at the same time, training and arming ISIS in Syria against Assad. . .