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JPMorgan Blows Up The Fed's "We Can 'Control' The Crash With Reverse Repo" Plan

Tyler Durden's picture


This is a big deal. On the heels of our pointing out the surge in Treasury fails (following extensive detailing of the market's massive collateral shortage at the hands of the unmerciful Fed's buying programs), various 'strategists' wrote thinly-veiled attempts to calm market concerns that the repo market (the glur that holds risk assets together) was FUBAR. Even the Fed itself sent missives opining that their cunning Reverse-Repo facility would solve the problems and everyone should go back to the important business of BTFATHing... They are wrong - all of them - as yet again the Fed shows its ignorance of how the world works (just as it did in 2007/8 with the same shadow markets). As JPMorgan warns (not some tin-foil-hat-wearing blogger with an ax to grind) "the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit." The end result, they note, is "higher susceptibility of the repo market to collateral shortages" and thus dramatically higher financial fragility - the opposite of what the Fed 'hopes' for.


Via JPMorgan,

Reverse repos do little to alleviate UST collateral shortage

This week’s FOMC minutes provided important hints about the Fed’s exit strategy. The interest on excess reserve (IOER) rate will play a “central role” during the policy normalization process while the overnight reverse repo facility (ON RRP) would play a “supporting role” by establishing a soft floor for money market interest rates. The Committee expressed concerns not only about the potential size of the reverse repo facility, which grew rapidly since testing began last September, but also about conducting monetary policy operations with non-traditional counterparties.

Our colleagues Alex Roever and Mike Feroli have written extensively about the reverse repo facility and its impact on US money and rate markets. In this note we focus on the issue of collateral shortage and try to answer a rather narrow question: Are reverse repos alleviating collateral shortage? [Spoiler Alert: NO!]

In principle, the reverse repo facility reduces UST collateral scarcity as the Fed sells a security to an eligible RRP counterparty, thus supplying UST collateral to the market, and at the same time it drains “reserves” from the financial system which are replaced with reverse repos in the liability side of the Federal Reserve’s balance sheet. It is important to emphasize that this reserve drainage does not alter the overall liquidity injected by the Fed. It merely diverts this liquidity away from banks to non-banks, including money market funds and GSEs. But in terms of collateral shortage alleviation, we see limited improvement for several reasons:

1) The reverse repo facility has been growing rapidly but at between $100bn-$200bn currently is rather small compared to the $2.6tr of excess reserves in the liability side of the Fed’s balance sheet or the $4tr of securities in the asset side, $2.4tr of which are USTs.



2) This week’s minutes, coupled with the FOMC setting a still wide 20bp spread between the IOER and ON RRP rates, suggests that the Fed has little appetite to allow the reverse repo facility to grow to very high levels eventually. The minutes specifically mentioned that “participants discussed several potential unintended consequences of using such a facility and design features that could help to mitigate these consequences” and “a number of participants expressed concern about conducting monetary policy operations with non-traditional counterparties.”


3) The USTs sold to counterparties via the reverse repo facility are in the triparty system. Tri-party repo is a transaction for which post-trade processing is outsourced by the parties to a third-party agent. This ensures transaction efficiency and better mobilization of collateral but it does not change the legal relationship between the repo parties. With the ON RRP confined to the US tri-party system, the USTs sold to ON RRP counterparties cannot become available to other counterparties that are outside the tri-party system such as hedge funds and/or small/medium sized asset managers.


4) In addition the tri-party system applies to general collateral repo transactions so potential high demand for specific USTs, i.e. “specials”, will be difficult to be satisfied. This is because the USTs sold to ON RRP counterparties can only be re-used within the tri-party system and under general collateral repo transactions.


5) Higher margin requirements as a result of recent regulations on OTC derivative markets, for example, have caused a rise in collateral demand. But securities held within the tri-party system in the US are typically not allowed to be used to satisfy margin requirements. This means that the USTs released via the Fed’s ON RRP facility will not have the same effect in alleviating increased collateral demand stemming from higher margin requirements, than if the Fed had directly sold these UST securities to open markets.


6) Eligible RRP counterparties are currently 139 covering a wide range of entities—94 of the largest 2a-7 money market funds, six governmentsponsored enterprises (Fannie Mae, Freddie Mac, and four Federal Home Loan Banks), 18 banks, and the 21 primary dealers. That is, the Fed offers Treasury securities via its reverse repo facility to a wide set of counterparties including both banks and non-banks. But all these institutions together do not account for more than a quarter of the overnight tri-party volume. In other words, the current set of counterparties captures a modest share of the tri-party market.


7) The RRPs are expected to be collateralized by Treasury securities. SOMA’s holdings of agency debentures and agency mortgage-backed securities are available for use, but are not expected to be used in this exercise. That is, reverse repos have the potential to alleviate UST collateral scarcity but not agency collateral scarcity. Admittedly substitutability within the broader government collateral universe should reduce the importance of this last argument.

In all, we believe that the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit. And the still rising trend in UST repo fails since QE3 started in Sep 2012 suggests that the issue of UST collateral shortage remains. It is true that the repo fails are focused around specific issues, particularly hot run treasuries. It is also true that at times and in various tenors the fails spike as the desire to short USTs by certain investors exceeds the floating stock of these specific issues. But what is more concerning is the rising trend in fails which can be seen in Figure 2. The picture in Figure 2 lends support to the idea that the leverage ratio regulation has permanently reduced the appetite of broker-dealers to engage in repo markets. Via its reverse repo facility, the Fed is effectively facilitating the withdrawal of broker dealers from repo markets.

Similar to what happened in the US corporate bond market, the end result is not only structurally lower repo turnover (Figure 3) but also higher susceptibility of the repo market to collateral shortages (higher frequency of spikes in repo fails as shown in Figure 2).


*  *  *

But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds).

Crucially, it should be inherently obvious to everyone that the moves we see in the stock market is not about mom and pop choosing to invest in the stock market (or not) as the 'cash on the slidelines' fallacy is "completely idiotic' but about the marginal leveraged machine (or human) quickly jumping on momentum.

The spike in "fails to deliver" highlights a major growing problem in the repo markets that provide that leverage... and thus the glue that holds stock markets together.

Wondering why JPY and bond yields have diverged so notably from stocks in recent days... repo effects (it's just a matter of time before it hits stocks)...

So that explains why the Fed is so desperate to talk you into selling your bonds - most notably the short-end by demanding you listen to what Yellen said about raising rates... as that reduces the shortfall of collateral that repo needs and restocks the banks with repo-able funds.

*  *  *

Is that why a noted dove like Jim Bullard was so visibly hawkish last week? The irony of course of the Fed explaining how rates will rise faster is that it spooks stock investors who have grown used to exuberant liquidity supply and roitates them to bonds... which merely exacerbates the problem the Fed has.


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Sat, 07/12/2014 - 19:14 | 4950997 Cattender
Cattender's picture

Hell motherfucking Yeah!

Sat, 07/12/2014 - 19:16 | 4951006 algol_dog
Sat, 07/12/2014 - 21:15 | 4951266 Bananamerican
Bananamerican's picture

Yea, and my last EBay customer is requesting a refund because USPS never delivered the package!!!
End times I tell yaz!!

Sat, 07/12/2014 - 19:17 | 4951007 negative rates
negative rates's picture

Yea, the transient reverse repo, works every time.

Sat, 07/12/2014 - 19:30 | 4951031 Da Yooper
Da Yooper's picture

Can somebody esssss - plain that in english in 50 words or less?

Sat, 07/12/2014 - 19:40 | 4951043 buzzsaw99
buzzsaw99's picture

Let me sum up. Buttercup is marrying Humperdinck in little less than half an hour. So all we have to do is get in, break up the wedding, steal the princess, make our escape... after I kill Count Rugen. [/Inigo Montoya]

Sat, 07/12/2014 - 20:12 | 4951101 max2205
max2205's picture

Belgium will bailout the Fed.....

Sat, 07/12/2014 - 21:05 | 4951236 SWRichmond
SWRichmond's picture

We must have more Treasuries!  Quick, put the taxpayers deeper in debt!

Sat, 07/12/2014 - 21:46 | 4951316 zhandax
zhandax's picture

"Can somebody esssss - plain that in english in 50 words or less?"

The fed is cranking leverage down; whether they realize it or not.

Sat, 07/12/2014 - 22:15 | 4951375 buzzsaw99
buzzsaw99's picture

It sounds to me like JPM is complaining that they are having trouble piling leverage upon leverage to keep the bubble going and they are blaming the fed, The irony is that even if the fed acceded to their request it would cause many of their other positions to get blown out of the water. it seems a bit like they are all positioning themselves to play the blame game upon each other all too aware that everyone in the whole wide world hates their guts.

Sat, 07/12/2014 - 22:34 | 4951418 disabledvet
disabledvet's picture

"And all we got was an invasion of the Gaza Script...err...Strip."
they've not only missed this entire rally but they're best buddies have been short...and destroyed. Damn Skippy they have a problem with collateral! The Fed sure doesn't though.

An actual economic recovery wouldn't be bad though. Maybe JPM could speak to that now that they have to lend into something other than QE!

Sun, 07/13/2014 - 11:40 | 4952285 IANAE
IANAE's picture

looks like 2008 short-term funding liquidity crisis all over again... going to end badly when can't roll s/t borrowings, however collateralized... 


Sat, 07/12/2014 - 19:51 | 4951059 kaiserhoff
kaiserhoff's picture

Or better yet, an example of a specific transaction where this matters, for the benefit of the non-bond Dudes, like me;)


Sat, 07/12/2014 - 20:11 | 4951095 buzzsaw99
buzzsaw99's picture

i want to borrow ten billion to place a degenerate bet with JPM on interest rates, currency exchange rates, the market, whatever. JPM would love to lend me the money to collect a fee but all my cash is tied up in radio shack options (whatever). Now JPM can swap with the fed radio shack calls for treasury notes but i can't. so how the hell is dimon going to get his bonus for hookers and blow?

Sat, 07/12/2014 - 20:17 | 4951119 kaiserhoff
kaiserhoff's picture

It's a good thing you've got your great looks to fall back on, buzz.

You'd never make it in public relations for the banksters;)

Sat, 07/12/2014 - 21:49 | 4951324 zhandax
zhandax's picture

I hear public relations for the banksters gets combat pay these days...

Sun, 07/13/2014 - 04:11 | 4951752 bentaxle
bentaxle's picture

So how long do you reckon before the bankers have had enough? Two quarters, or is even that too long?

Sat, 07/12/2014 - 20:13 | 4951104 ugmug
ugmug's picture

The Opera is over. The fat 'Yellen' fell in the orchestra pit trying to hit the high yields and everyone smells smoke but all the exits are locked.


Sat, 07/12/2014 - 20:15 | 4951110 Da Yooper
Da Yooper's picture

OK now that makes sence ^^^^^^^^^^^^^^^^^^^^

Sat, 07/12/2014 - 20:59 | 4951216 long-shorty
long-shorty's picture

"Can somebody esssss - plain that in english in 50 words or less?"

Yes, Billy Ray Valentine can.

Sat, 07/12/2014 - 21:21 | 4951277 Bananamerican
Bananamerican's picture

"They panickin',
There won't be enuff money for the GI Joe with tha Kung foo grip. That's what all the Yellin's about"

Sat, 07/12/2014 - 22:07 | 4951360 Money_for_Nothing
Money_for_Nothing's picture

Fed/Banks/Dealers don't trust one another. Want colateral. At 40 to 1 leverage the collateral is hard to come by. This Fed will be criticized for the primary dealer run just like the bank runs in 1930's except corporations instead of individuals.

Sun, 07/13/2014 - 08:15 | 4951875 gmak
gmak's picture

Market players are leveraging by borrowing T-bills and T-notes from the FED and providing them as collateral against loans from other lenders. The cash is being thrown into margin accounts and leveraged again in buying financial assets. This is leverage on leverage and ALWAYS ends badly when the growth rate of the assets falls below the implicit interest rate and growth of the leverage. Re-hypothecation is the leverage on the leverage on the leverage. 

Financial assets need increasing amounts of leverage against them to grow at the same rate percentage-wise. The lack of collateral out there means the FED has to provide more. BUT the mechanism used limits the ability to re-hypothecate (or so they are saying, I believe).


Long story short: leverage on leverage on leverage is becoming leverage on leverage. If it falls to just leverage, then the asset liquidation is underway. ie asset prices will fall leading to margin calls leading to de-leveraging - and the rehypothecation means that someone will not have a chair to sit in when they need their collateral back.




If I'm a financial entity and I borrow from another (say a hedge fund using a highly leveraged margin account, or one F.E. doing a swap [derivatives] with another], a risk is created. The lender has to have capital allocated to that risk and this starts to strain the balance sheet (leverage) over time. To mitigate this risk, the lender asks for collateral, usually in the form of liquid t-notes and t-bills.

The FED has been buying up T-notes and T-bills in QE. So there aren't as many out there in private hands as there used to be. For leveraged asset "investors", getting their hands on these to use as collateral is critical. They borrow them from the FED (called a reverse repo) to give as collateral to their lenders (this is a tri-party reverse repo because the borrower of the notes and bills from the FED is not keeping them, but passing them on).


Here's the rub.

The dance of increasing leverage to buy equities and other assets has been kept going by the re-hypothecation of collateral. Apparently, a tri-party arrangement limits the amount of re-hypothecation which limits leverage. If leverage grows less than the growth rate of assets + the implied interest charges then it starts to unwind.

Sun, 07/13/2014 - 11:50 | 4952323 viahj
viahj's picture

what a mess we allowed those fuckers to weave.  ignorance + apathy of the people always comes back to haunt the people.  stand by.

Sun, 07/13/2014 - 10:22 | 4952073 RaceToTheBottom
RaceToTheBottom's picture

The room is getting too full of balloons for others to find a place to be blown up.

Sat, 07/12/2014 - 20:03 | 4951081 G.O.O.D
G.O.O.D's picture

this site has litterally thousands of chicken little the sky is falling articles, but this really is huge. I am not one to yell "bar the door and grab a shotgun Mabel", but this looks like the main hatchway gave in. This is way FUBAR.

Sat, 07/12/2014 - 20:33 | 4951158 garypaul
garypaul's picture

OK, so stocks down but bonds would go up? Am I right on that?

Sun, 07/13/2014 - 08:18 | 4951880 gmak
gmak's picture

That is the end-game, yes. As asset prices fall or stop growing, there are margin calls. assets are liquidated but at some point there are no more assets and still margin to cover. The collateral is 'seized'. The FED now wants its T-bills and T-notes back for some reason and the borrower of these has lost them as collateral. They have to buy the instruments from somewhere and no one wants to (or can) sell. Price goes up.

Sat, 07/12/2014 - 23:25 | 4951501 holdbuysell
holdbuysell's picture

Indeed. This seems to be up there with Matt King's "Are the Brokers Broken" report from 2008 that ZH brought to the foreground in 2011. Another must read.

Time will tell.

Sun, 07/13/2014 - 11:23 | 4952232 IANAE
IANAE's picture

Just read 'Are the Brokers Broken'... spot on for what was going on at the time and ominously predictive given how little has changed.

Accounting illusions aside, the key risk in short-term funding has and always will be the inability to roll it when the SHTF, triggering desperate fire sales and, ultimately, bankruptcies (or federally brokered acquisitions) for the affected firms with attendant risk of contagion.

Current situation re short term funding liquidity risk is, unfortunately, same as it ever was only moar... one could argue it will get uglier faster this time as the players (even Fed) see it coming.

Sat, 07/12/2014 - 23:50 | 4951539 emersonreturn
emersonreturn's picture

free francis

Sat, 07/12/2014 - 19:17 | 4951009 fonzannoon
fonzannoon's picture

what was he referring to that happened in the U.S corporate bond market?

Sat, 07/12/2014 - 19:23 | 4951024 ms8172
ms8172's picture

I want this to hit hard and......soon!

Sat, 07/12/2014 - 19:26 | 4951025 kaiserhoff
kaiserhoff's picture

I have always traded retail, nothing like this scale, but it looks more like a panic over counter-party risk than anything else.  At zero interest, doesn't cash work better than bonds as collateral? 

Sat, 07/12/2014 - 21:08 | 4951243 Winston Churchill
Winston Churchill's picture

Cash is too fungible.

Lest we forget,2008/9 was all about collateral in the repo market.

Fake collateral.Rehypothecated upto 42 times.

Nothing to see here,move along now folks.....

Sat, 07/12/2014 - 19:30 | 4951030 malek
malek's picture

No worries. I'm sure they can find some more made-up collateral as needed.

Sat, 07/12/2014 - 20:00 | 4951035 buzzsaw99
buzzsaw99's picture

note to JPM: the fed AIN'T SELLING SHIT for USTs. so get that whiny shit right out of your head. ps: boo frickedy hoo for your freaking derivatives-collateral "problem". You maggots got us to where we are today so suck it up big boyz.

Sat, 07/12/2014 - 20:14 | 4951107 max2205
max2205's picture

If the fed sells Ts then that takes money out of the

Sat, 07/12/2014 - 20:18 | 4951116 buzzsaw99
buzzsaw99's picture

not really. what it would do is drop bond prices which would be stock market negative which they do not want.

Sat, 07/12/2014 - 20:23 | 4951144 G.O.O.D
G.O.O.D's picture

Which starts the machines trading lower and with the repo broken it will escalate into free fall and you better get the fvk outa the basement because this shit is caving in.

Sat, 07/12/2014 - 19:42 | 4951047 Catullus
Catullus's picture

Just feeling out my understanding: the excess reserves held at the fed are meaningless at this point for the repo fails. The reserves aren't held as treasuries or agency debt, but rather credits at the fed (cash).

Getting closer to gold being used as collateral again....

Sat, 07/12/2014 - 19:53 | 4951055 buzzsaw99
buzzsaw99's picture

the problem is (from JPM's viewpoint) that the liabilities on the fed balance sheet are mostly big bank deposits which are also liabilities on their sheets. those maggots want counterparty collateral, excess reserves don't do jack, they already control those. worldwide pension funds, the billionaires, and the world central banks have cornered the UST market making quality collateral unavailable for the degenerate gamblers (cough, hedge funds, etc.) which comprise JPM's clients aka muppets. the fed won't lend (reverse repo, swap for trash, whatever :roll:) to muppets, and even if they did they would damn sure want them back which means it really isn't collateral which JPM can confiscate.

Sat, 07/12/2014 - 19:54 | 4951064 kaiserhoff
kaiserhoff's picture

Thanks buzz.  That's helpful, but depressing.  As the stomach churns...

Sat, 07/12/2014 - 19:57 | 4951068 buzzsaw99
buzzsaw99's picture

the problem with using gold or corporate bonds as collateral for hyper leverage is that the price on those can fluctuate if forced to sell into illiquid markets putting JPM at risk of a losing day which they never want to have.

Sat, 07/12/2014 - 20:08 | 4951091 kaiserhoff
kaiserhoff's picture

Yes, a losing day for Jamie would be tragic, but didn't BOFA set the record?  364 of 365 profitable or some such shit?

Let's have a pitty party for them.

Sat, 07/12/2014 - 20:16 | 4951113 seek
seek's picture

The irony being that if gold were priced appropriately, hyper leverage wouldn't be needed and the variation (as a percentage, at least) would be much smaller. (e.g. if we just unwound the 100X rehypothecation of gold, it'd be perfect collateral.)

Sun, 07/13/2014 - 11:33 | 4952254 RaceToTheBottom
RaceToTheBottom's picture

Yep, probably went past the point of no return with that about 40 years ago, no doubt at a recommendation of WS Banksters

Sat, 07/12/2014 - 21:47 | 4951321 AccreditedEYE
AccreditedEYE's picture

All of this is BS. The banks are openly clamoring for Vol (and looking very desperate in the process) They gained the most from Fed actions over the past 5+ years and now that Fed policy is driving their business model 6 feet under, they want change and quick. Not gonna happen.. Take any opportunity that this creates on the downside Monday to short the crap out of the VIX spike and get long risk.

They are trying to play everybody again.

Sat, 07/12/2014 - 22:17 | 4951384 garypaul
garypaul's picture

You say: "Fed policy is driving their business model 6 feet under" [banks]

But then you say: "get long risk"

Isn't that a contradiction?

Sat, 07/12/2014 - 23:41 | 4951521 AccreditedEYE
AccreditedEYE's picture

As ZH and others have illustrated, the banks need vol in order to make profits. Asset turn over and market stress create a need to "get out at any price". You read up and see how banks make money in this kind of environment.

As the Fed crushes Vol, risk moves higher in chase for yield and return. Banks getting what the wished for and now it's not working for the anymore.

Sat, 07/12/2014 - 19:59 | 4951072 Hughing
Hughing's picture

The Fed intends to starve the bubble out through repo shortage.

Sat, 07/12/2014 - 20:04 | 4951083 buzzsaw99
buzzsaw99's picture

on the contrary they plan to lovingly support the bubble by NOT SELLING Ts!

Sat, 07/12/2014 - 20:03 | 4951080 GooseShtepping Moron
GooseShtepping Moron's picture

Wow. First Goldman and now JPM. It looks like the big banks are starting go off-message here, since maybe "mutiny" is too strong a word. I had a feeling that the banks would rediscover some courage, some independence, and some convenient sense of civic duty as we converged on the close of this monetary experiment. Convenient or not, it is welcome. It's good to have some power that can serve as a counterpole to federal overreach, even when that power happens to be a bank.

Sun, 07/13/2014 - 00:18 | 4951575 Bananamerican
Bananamerican's picture

Are you out of your effing mind?
Banks can make just as much, if not more money, on the way DOWN

Sun, 07/13/2014 - 00:58 | 4951629 Savyindallas
Savyindallas's picture

Banks with a  "sense of civic duty" ?  Are you kidding? They're about as likely to exhibit civic duty as Goldman execs are to voluntarily give up part of their bonuses.

By the way, Banker "bonuses" is about as obscene a word as i can think of . Everytime I hear the word it makes me sicker than the thought of eating a dogs diarhea.  That's the revulsion I get.

Sun, 07/13/2014 - 11:57 | 4952356 viahj
viahj's picture

me thinks that the big banks are setting up the Fed to be the bad bank.  the privelage of ownership.

Sat, 07/12/2014 - 20:10 | 4951097 techstrategy
techstrategy's picture

Fellas, it is simple really.  Sell trading scams (all low float, high multiple option driven theta skimming operations -- AMZN, NFLX, LNKD, TSLA, etc) and convert it to gold.  Gold is 33% cheaper today in NFLX terms than just two short months ago (because geopolitical risk is gone and NFLX now owns the world...).  We can use their bubbles and trading games against them.

Sat, 07/12/2014 - 20:13 | 4951103 Skeptical_Investor
Skeptical_Investor's picture

None of this makes the slightest sense. The Fed's reverse repos work by having banks and other approved counter-parties temporarily buy Fed- owned securities with cash under a contract that obligates the Fed to buy the securities back after some defined time period at a defined higher price. The price difference defines an effective interest rate paid by the Fed. The purpose of the process is to remove cash from the banking system to support a desired increase in the Fed Funds rate. Since the collateral here is the QE securities on the Fed's balance sheet, there is no issue regarding the availability of the collateral. The issue is the possibly very high effective interest rate that the Fed might need to offer to pull in the cash!

Sat, 07/12/2014 - 22:10 | 4951366 Catullus
Catullus's picture

But if the excess reserves are already at the fed, you're not draining the system of cash. It's already at the fed. You're simply lending out the securities, which are being used as collateral in repos.

Tyler has been saying that there's a lack of good bonds to lend. The fed could loan the bonds out, but JPM is saying it won't be effective.

Sun, 07/13/2014 - 12:07 | 4952387 Skeptical_Investor
Skeptical_Investor's picture

The excess reserves at the Fed consists of cash that are assets of the banks that made the deposits at the Fed. These reserves are available to lend to other banks if other banks need more reserves to iniitiate more loans. If the Fed wants to raise the Fed Funds Rate, it needs to tie up the $2.6 Tn of excess bank reserves first. The reverse repo can help if the Fed sells its QE assets to banks, which pay for these assets with the excess reserves, making the reserves unavailable to lend to other banks. The Fed hopes that through a combination of this reverse repo process and paying enough interest on reserves held at the Fed, they can tie up the excess bank reserves and support an increase in the effective Fed Funds rate to some value above zero. Most folks don't recognize that there is a difference between the announced Fed Funds rate "target" and the "actual" Fed Funds rate in the marketplace. If the Fed tomorrow announced that the Fed Funds rate was increased to 2%, nothing would happen. The actual Fed Funds rate is the rate that banks change each other to lend their excess reserves. With the huge excess reserves in the banking system, no bank will pay another bank much more than 0% to borrow reserves. The problem the Fed has is that it will need to pay huge amounts of interest on effectively risk-free loans to the banks to tie up the existing excess reserves if they need to raise the actual Fed Funds rate. Congress and the public will go crazy in such an event and step on the Fed. Once run-away inflation starts, the Fed will be powerless to stop it without effectively committing suicide. See the article at

Sat, 07/12/2014 - 20:42 | 4951179 Yancey Ward
Yancey Ward's picture

Clearly, what the Fed needs to do is to have a reversed reversed reverse repo.  That should work!

Sat, 07/12/2014 - 20:56 | 4951207 SweetDoug
SweetDoug's picture




I just read that whole article and I got maybe, about 5% of it.


Enough to know, it sounds like we're all effed now!


Surely, in this day and age of kompooters, somebody hasn't, isn't, won't write a game simulation strategy program, that one could plug into it, all the variables, you know, like the big weather prediction apps supposedly do, like SimCity! and let'er rip?


If I've got the brains to think of this, I'm pretty sure TPTB can think like this, or at least, somebody has, in the past.


So what's the outcome when we plug in the real world stuff we're doing now?


I thought so…



Sat, 07/12/2014 - 21:04 | 4951233 qpqsb
qpqsb's picture

This is way above my head. Does anybody have any idea what this might mean for interest rates? 

Sat, 07/12/2014 - 21:56 | 4951338 stormsailor
stormsailor's picture

like your avatar, the market looks full, round, perky and i'm pretty sure they are going up.

Sat, 07/12/2014 - 21:33 | 4951298 starman
starman's picture

When you own the market you control the market. 

Sat, 07/12/2014 - 22:29 | 4951381 QQQBall
QQQBall's picture


So the USTs stay within the system... With lower quality collateral outside the system - is this contraction in potential leverage? Also, securities in the repo agg\reement cannot be repledged as collaterial?

Sat, 07/12/2014 - 22:33 | 4951414 Carpenter1
Carpenter1's picture



There will be no event here, unless they want one.


Haven't we learned by now that worthless paper will never bring down this ponzi scheme? This can be solved by lying, bribing, and printing, therefore it will have no effect. 

Sun, 07/13/2014 - 01:32 | 4951653 garypaul
garypaul's picture


Sat, 07/12/2014 - 23:25 | 4951500 Atomizer
Atomizer's picture

Thank you Tyler. As explained earlier today, repos was my weakest link. Keep pushing reality. 

Sun, 07/13/2014 - 00:45 | 4951581 hobopants
hobopants's picture

So reverse repo only provides liquidity to a sizable minority of the big boys, but leaves near 80% of the market in the cold? That other 80% rely on old fashion purchases and since the fed is buying up the majority of GOV debt issue at the moment, there is not enough "high quality" collateral to go round?

Won't they just change the definition of high quality collateral to include whatever levered up assets hedge funds "own" to circumvent this?  I mean shit, what does it matter at this point? How about Fund(s) buys stock on margin, then uses that same stock as collateral to buy other stocks on margin. Seems to fit their thinking perfectly... 

Sun, 07/13/2014 - 00:27 | 4951591 MASTER OF UNIVERSE

What we have here is a failure to communicate.

Sun, 07/13/2014 - 00:36 | 4951603 teslaberry
teslaberry's picture

you fucking zh'rs you make me laugh. you don't think the fed can find a backdoor to pump a few hundred billion into the market without you knowing?


the rule of law is over. in 2008 law and order was thrown out the window. you think some bullshit ass metric or money conduit short circuit will stop the fed?


why is it so hard to believe that hyperinflation is possible?it's happened before. all that is required is for the fed to keep shoiving cash up the ass door of the markets. 


you think the bis and the fed are above hyperinflating this shit on their peasantry?

it's happened before it can happen again. 


what is hyperinflation other than an asset grab by the powers that be?  it is an attempt to starve out substantial numbers of peasants. 


why is that so tough? the fed doesn't have to maintain 'control'. they simply have to keep printing.

Sun, 07/13/2014 - 00:44 | 4951611 hobopants
hobopants's picture

Cash isn't the problem, collateral is. High quality collateral is mainly US debt. Less defict spending + fed buying hand over fist means collateral is scarce. It's ok if you're a member of the club, because then the fed will lend you some to borrow against, but if you aren't in that "Club" then you are screwed, no more borrowing means no more buying = stock crash.

That's what I got out of it anyway... 

Sun, 07/13/2014 - 01:49 | 4951664 garypaul
garypaul's picture

So all this lengthy article said was: the Fed will have to do more QE.

Anybody know when they might start that? Are we talking weeks, months or years?

Sun, 07/13/2014 - 01:56 | 4951667 fuu
fuu's picture

When are Jamie's treatments?

Sun, 07/13/2014 - 02:02 | 4951674 garypaul
garypaul's picture

Thank yooop.

Sun, 07/13/2014 - 04:37 | 4951760 hobopants
hobopants's picture

Actually I think it said the Fed has to stop QE. Imagine if you want to borrow money to buy stuff but the lender only accepts collateral for loans in bananas.

Well the FED is buying up all the bananas with QE and only lending those Bananas out to an approved list of friends. Now if you have a bunch of positions that used to required two bananas, but thanks to changing rules now requires three bananas, where do you get those bananas from if the store is sold out because the FED has bought them all?

If you can't get the bananas, you get a call and pop goes the bubble.

Thats how I (could easily be wrong) understood it (but with UST instead of tasty fruit).

Sun, 07/13/2014 - 05:15 | 4951782 Wahooo
Wahooo's picture

There's a fruit store on our street
It's run by a Greek
And he keeps good things to eat
But you should hear him speak!
When you ask him anything, he never answers "no"
He just "yes"es you to death, and as he takes your dough
He tells you
"Yes, we have no bananas
We have-a no bananas today
We've string beans, and onions
Cabashes, and scallions,
And all sorts of fruit and say
We have an old fashioned tomato
A Long Island potato But yes, we have no bananas
We have no bananas today.

Sun, 07/13/2014 - 16:14 | 4953176 garypaul
garypaul's picture

The part that I don't understand is that the bonds are issued by the treasury and bought by the Fed, so why can't they just issue more treasuries?

Sun, 07/13/2014 - 17:24 | 4953295 hobopants
hobopants's picture


Treasuries represent actual debt taken on by the US Gov in excess of tax revenues. So when the defict shrinks, so to does the issue of treasuries. As bizarre as it sounds, the government would actually have to borrow more to increase the defict, or the fed would have to cut back on buying the bonds(QE) to increase the amount of avliable UST and thus the amount of available  collateral.

The treasury can't issue more without the government spending more, and for whatever reason that isn't happening.


Sun, 07/13/2014 - 19:36 | 4953736 garypaul
garypaul's picture

Thanks hobopants! I guess the idea of the government NOT borrowing and spending couldn't register in my brain LOL

Sun, 07/13/2014 - 10:51 | 4952151 the grateful un...
the grateful unemployed's picture

all credit trades pretty much equally, which is why the junk ust spread is nil. whats the future of collateral, can the Fed have it both ways, inflate the value of the asset market, while pinning bank borrowing costs to ZIRP, or laymans terms i just bought a 20000 car on zero APR. one of two metrics is wrong, the car isn't worth 20000, or interest rates must go higher. and if interest rates do ramp up, will the value of that asset, in this case a car, drop in value.

for the answer consider the familar metric in housing, the three variables in the value of a home, are the cost to build, interest rates, and the value of the land on which the house sits. in a constant value economy, if any of these variables go higher, the value goes down to balance the equation. this is how point of sale pricing models are done, the Fed is future pricing models (their liability is a deferred asset) the Feds real problem is they have achieved price stability, (market flat) while their stated objective is 2% inflation. the Fed is a shark it must swim or die, and it must have meat (real collateral it chews out of our hides) when Bernanke said he wasn't worried about inflation, he meant he wasn't worried about starting it, that would take 15 minutes, although it won't be as simple as raising rates.

Sun, 07/13/2014 - 11:56 | 4952338 RaceToTheBottom
RaceToTheBottom's picture

So basically, the National Parks are for sale.  I have been saying we would get eventually to selling real assets.

With all the economies having bought into the Fiat bandwagon, who is going to buy Yellowstone?  

Maybe Blackrock, or whatever it is called....

Sun, 07/13/2014 - 09:47 | 4951983 Herdee
Herdee's picture

I think it's their way of helping low volatility stay in the market as long as possible.If they're afraid of stocks being overpriced and coming into a parabolic move the market has to have high volatility with it.You can see that on any blow-off tops or parabolic moves up.The ATR needs to be high with it along with a high ADX.The market has a long ways to run and it's in a strong trend because foreign sovereigns and mutual funds are now buying up stock in public corporations instead of buying U.S. Government debt that they don't trust any longer.Central Banks are also quietly hoarding gold but trying to keep a low profile.You can see the effect on currencies spreads like EUR/USD.Very tight because The Fed is afraid of a lot of problems beneath the surface,hence the smokescreen.

Sun, 07/13/2014 - 10:30 | 4952093 the grateful un...
the grateful unemployed's picture

the reverse repo policy is an attempt to prop up money markets before the crash. in 2008 some MMs (non Treasury) went negative NAVs and the customers lost money. the fed can create phatnom collateral all day, and that phantom collateral crowds out and devalues real collateral. the real value of gold is therefore a lot fucking higher than anyone imagines (gold being one of the few forms of real collateral, critics say gold does nothing it just sits there, but it isn't taxed like land, and has no real storage cost or perishable quality like corn or wheat) if only the fed would PRINT money instead of issueing electronic script and then inviting all sorts of market schemes (bubbles) for those who hold this phony collateral to borrow against it. all the REPO devices are leftovers from the pre2008 era, and can be reinvented to solve the feds liquidity needs, so they change the punchbowl, cheap beer for champagne. wtf is this swill? and the new cocktail waitress ain't much either, i thought we were at Hooters happy hour? happy hour is over ducklings.

Sun, 07/13/2014 - 11:52 | 4952336 WillyGroper
WillyGroper's picture

Suppose this was the "shit" El-Erian was speaking of?


Sun, 07/13/2014 - 12:55 | 4952590 Livermore Legend
Livermore Legend's picture

G Mak....excellent work......Exactly....Contrary to belief, there are limits, even for the Fed....Mathematics are in Control.......

I explained this last year, and we are now coming against that, as you detail nicely.... 

Sun, 07/13/2014 - 13:01 | 4952610 Livermore Legend
Livermore Legend's picture

TeslaBerry.....I like many of your comments, and you have a lot right...But you are DeadWrong on "Hyperinflation"....Ain't gonna happen...Re Read What G Mak had to say... It is an excellent explanation of what is happening.....It is all about Rate of Change....That is Mathematics, and nobody can change Math, not even "Backdoor" gimmicks as you suggest..... 

I explain this in "Zugzwang"....... 


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