LTRO "Bazooka" Is Epic Disaster As Banks Scramble To Redeposit "Free Carry" Cash With ECB, Lose Money On "Inverse Carry"
When on Friday we penned "And This Is Where The LTRO Money Went" we said that the final nail in the "Carry Trade" theory was that instead of using the LTRO "Bazooka" cash to collect meaningless pennies in front of a steamroller, Europe's banks turned around and deposited it right back with the ECB after the bank's deposit facility soared to a 2011 record €347 billion, €82 billion more than the day before. Today, any residual doubt of where the LTRO cash proceeds went is eliminated, as the ECB has just confirmed that what goes out of one pocket comes back in the other, as the ECB's deposit facility has just exploded to not a 2011 record, but an all time record high €412 billion, a €65 billion increase overnight, and €167 billion higher in the past two days alone, which effectively accounts for practically all of the LTRO's free €210 billion.
And to those who foolishly claim this is a seasonal year end cash parking, we present the full history of the ECB's facility usage since it exploded on the scene in 2008. P;ease go ahead and show us when in 2008, 2009 and 2010 there was a spike in year end facility usage. We have all day. But wait: there's more! In another independent confirmation that all hell is about to break loose, we just saw the 1 Year Bund drop sub zero again. As a reminder, the last time it was there was in the last days of November, just before the global central bank cartel had to come in and provide a global liquidity bailout for Europe's banks. So: back to square minus one ladies and gentlemen of an insolvent Europe?
But the biggest slap in the face of Sarkozy is that instead of banks pocketing the "guaranteed" 2-3% in carry trade between the 1% LTRO rate and the soveriegn bond yield, banks are losing 75 basis point on this inverse carry trade, where they take LTRO cash and deposit it with the ECB where it yields... 0.25%!
ECB Facility Usage (source):
And 1 Year bund yield:
(11 votes)
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Iran did it.
Is it just me, or is the half-life of these emergency bandaid measures getting shorter and shorter? You blink twice, and the Eurozone finds itself in a worse position than prior to the quick-fix.
In a comment posted two or three months ago, I suggested, as pure hyperbole, that when the effects of the emergency measures didn't even last long enough to issue a press release about them, the can kicking would be augmented by an agreement to roll back the calendar by one year. Keep watching, because the descent by TPTB to full spastic pants-shitting retard will make an official calendar rollback appear sensible.
Krugman was right of course. (this is a surrogate post for MDB)
Very nice indicator 4th. Another indicator is when people run out of superlatives to describe something ordinary.
In the age of Hyperbole, the understated man is king.
ori
/the-plan/
I, for one, am looking forward to 2011.
pretty funny
I wish I got 0,25% of 400 billion for 1 month... For free...
Read TFA, bozo.
They are paying 1% and receiving 0.25%.
This doesn't add up, why would they do this?
In a monetary system that lacks a taxing authority, the only way to stick the people with the bill is either through sovereign bond interest or through currency debasement. If the governments are unable to tax enough to pay for the bonds, debasement is the only other method that works.
The banks can now leverage these deposits and move into other instruments. We can now wait and see what shows up where next...
.
Because they think their losses would be larger than .75% if they did anything else with it.
I wish i get 400 billion at 0.25% for a year. That should be enough to corner the silver market unleveredged.
The objective is to keep things afloat until the bonus checks clear.
Excatly as Richard Maybury of the Early Warning Report predicted a couple years ago.
Stupid back button....
Just speculation..
I think the banks are waiting for the last auctions of the year to put this cash to work. I think the expectation that they are just going to pour funds into securities in this thin of a market is foolish.
It's all the fault of George W Bush.
So - they are in so desperate need for more liquidity - they just park it into ECB digital shelters. What a farce.. at least it cannot add up inflation from there - for now.
Ahh... yes it can, you're assuming the credit of the ECB is a standard of value, rather than bank credit.
Dont' they need to park it because of the upcoming Basel II requirements? I'm assuming if they park it, they don't have to dilute shares, to meet Basel II, thereby diluting bank execs option packages.
upcoming would be Basel III (3).
Interesting the 7-day "parking" rose to some insane amounts, also. Just I might go to sleep until 01/01/2012
All shells -- no peas
Oh boy. thin volume , on this news eurusd should hit 1.40.
has anyone else noticed in europe that banks keep large sums (anything above 5000€) for much longer now (almost a week) when you wire money?
That looks like a huge sum of free money for the banks.
yep, in my case for instance I had a small problem (technical mistake) with a money transfer and it took about 14 days to sove it. these 14 days the money were in the bank system....
So long and thanks for all the fish!
I love the sarcasm....'got all day'....'wait theres more'
Nearly coughed a raisin out me nose...
This week more stories on negative margins on all those 'phlat-screen TV' loss leaders?????
German bonds are the new US bonds! Really bankrupt but the market haven't figured it yet.
You seem to be the first one to get this here.
We Germans have 2 billion € in public on-balance-sheet-debt. We have bailout obligations of roundabout 400 billion, I think.
We have massive demographic problems. Public spending is out of control. Welfare spending is hilarious. Counties and cities are broke. A social study recently warned of public unrest aka London iPad riots at some point in the future in Ruhrgebiet (our rust belt).
Young people, even educated, are more or less locked out of good paying jobs. Time-limited, contractor jobs only.
It's almost impossible to have two kids on one middle-class-income. Your wife has to work, too. And it better be not a McJob. Cost of living is going trough the roof. We are a nation of renters. Leveraged financial instititutions and dubious companies like Annington buy up all the condos and raise rents in order to make management, creditors & stockholders whole (massive wealth transfer).
Oh yeah, and our so called manufacturing base is also going down (look at all the greentechs, they've gotten run over by China with cheap solar cells and so forth). Volkswagen, Mercedes-Benz & BMW are all massively vendor-financing with their own banking entities (VW Bank, BMW Bank, Mercedes Bank). Channel stuffing to the point where you have not a single parking spot available for your current car when visiting a BMW dealer (I have experienced this myself).
We are repeating the American mistakes at a very, very fast rate (McJobs, education bubble, real estate bubble in some parts of the country), yet our tax rates are not at historic highs but near historic highs. Not much room to go without risking capital flight, in my opinion.
How anyone can buy German bunds at all is beyond me.
aka London iPad riots
Why do you say iPad. They were Blackberry Messenger Riots
Either way they'll have to resolve to eating them. How do you like your Android; with ketchup or mustard?
One more thing, a friend of mine works at the BMW motorcycle plant. His opinion is that most parts come from other countries by now, they basically just stitch it together here in Berlin. But he thinks that's dangerous, as you have to deliver BMW quality if you ask for BMW pricing.
And he's just a temp worker there for the past year. He's been a temp for the last few years. He wouldn't be able to afford the BMW motorcycle he's involved manufacturing.
Sounds more like China, doesn't it?
It's all inflation, whose pressure makes itself felt everywhere, all the time. There's the headline, visible price inflation, and then there's the other things you mention: working mothers, temp work, no jobs, quality dilution, and much more. These other things decrease our quality of life just as surely as higher prices, but less visibly.
What you see at BMW now was already happening with Volvo cars in the early 1980s, as more and more parts were made outside of Europe. Even the Chinese sub a lot of stuff out to still-poorer countries, like Vietnam and the Philippines.
The world still associates 'made in Germany' with high quality, and for good reason, but keep in mind that Britain and the US once enjoyed similar reputations.
You know Germans make good stuff. Sham-fucking-WOW!
actually it sounds more like Amerika.
Everybody can buy a BMW! Just apply for a loan and sign with blood.
BMW Bite My Weenus . INDU futures are down 11, the PPT must have had too much eggnog.
Maybe unrelated, but I just got a class action lawsuit notification in the mail yesterday. It was regarding high-pressure fuel pump and turbo wastegate failures in BMW's N54 engine. When I owned my 135i I had to get two HPFPs replaced before I sold the car. It's a shame, too, because it was a great car besides.
What year was the car? I have a 2010 335i, drive the crap out of it (daily driver), and have never had problems with the drivetrain (just the radio had to get replaced). Great car.
Communicating vessels. China's living standards will rise, Germany's will fall. That's what you get when you have "global free trade". It's very profitable for huge corporations but not for the majority of the locals in the developed part of the world. Yet those locals have been voting for governments who advocated "free trade". Idiots.
waoh - 1 of a million who got it finally ... sure you are not european
Look at my avatar. That's me on my R1. If you wait a minute my friend on his S1000RR should be along. It's a badass bike. It's just ugly IMO.
They opened up a new BMW dealer in Asheville NC and bikes seem to be selling well there. Makes me scratch my head. At the grand opening there was an Aston Martin and a Ferrari in the lot so maybe it's the really wealthy peeps buying the BMW bikes.
Thanks for the update. I live in Belgium, where the economic situation is similar (except our state bonds are not considered that safe, and we have neither Merko nor Kozy to represent our parochial interests).
Regarding bunds as the new T-bills, I guess that bankruptcy is relative. Germany isn't solvent, it's just less insolvent than the other big players. It's like black holes; they're all voracious points of no return, but some might be 100 solar masses, while others are a million.
All Belgium needed was a new government. Everything is going to be great now that there is a gay socialist in charge. And if that doesn't work you can get Van Rompuy to straighten the country out; he should be a national hero.
Assuming your land(over)lords have a large mortgage on the apartmet building, would it be possible to organize a renter's holiday? If everybody in the complex got together and refused to pay rent for a few months, the loan might go into default and be forclosed upon.Evicting everyone in the building at the same time would be rather difficult and costly.
Not many investers would want to purchase such a troublesome property.
Using all the cash they saved from not paying rent, the tenants could then put a sizable downpayment on the (distressed) property and purchase it for pennies on the dollar.
Just a thought.
Great idea. But you would have to do this in secret and quite quickly for it to work.
And even if it worked, the cops would come knocking with ``conspiracy to commit fraud`` arrest warrants.
And when they do come knocking, make sure your dogs are kept safely hidden, lest they end up dead.
you forget the healthcare...
Fucking shocking.. could it be this actually is structural rather than liquidity crisis? Woah man, trippy..
Wait, if the cash is deposited at the ECB , doesn't it mean the ECB has more cash to lend out? Say at a 1:20 ratio?
412B * 20 = 8.24T
Are we saved?
Indeed. #WhatCrisis?
Boringly predictable world we live in, huh?
How long before banks realize that they can increase their cash reserves infinitely simply by making loans to themselves at zero interest?
Oops, I guess I shouldn't have given them any ideas.
They're saving that card for the Q1 debt rolls... kick the can again by having the broken shadow banking system prop up the broken regulated banking system, all financed by taxpayers through the broken central banking system... one big banker circle jerk.
Indeed. All the doomers again and again. And 2012 hasn't even begun!
Damn! I like the way you think! Sure you don't work at a central bank?
ECB should device new ways to increase its profits like this, which it can then distribute to Eurozone Central Banks as profits, that can be invested as IMF contributions, to be lent to Eurozone countries.
Sounds like a profitable plan. Too bad the profits are in Euros...
HYPERINFLATION WILL DRIVE GOLD TO UNTHINKABLE HEIGHTS
We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments. Thus most of these assets are also worth-less.
Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.
http://www.mmnews.de/index.php/english-news/7063-hyperinflation-will-drive-gold-to-unthinkable-heights
Hyperinflation is already going on. Check out the True Money Supply. Gold and silver down. #WhatCrisis?
http://papermoneycollapse.com/2011/12/the-nightmare-after-christmas/
http://mises.org/content/nofed/chart.aspx
Shut up and go eat an iPad. The Fed says there is no inflation silly and they are always right.
Do you have to shout? Do you really think what your saying is news to anyone here? Stop it!
Bah, this is getting old.
So we actually have the ECB issuing Promissory Notes against itself to build up its Deposit Base. What exactly are the legal aspects of this ? We have Central Banks funding local commercial and investment banks with funds transferred from the ECB which itself has no backstop; and those Commercial and I-Banks are then depositing these funds with the ECB on the other side of its Balance Sheet.
There is some circularity but it also has echoes of re-hypothecation. This is very peculiar legal territory and I wonder if anyone has a real grasp on what the implications of Domino-Default really are ?
It's probably illegal, but the perps are bankers, so who gives shit?
Euroland can be looked at in two parts. One is the beauracratic monster part, which we all know and hate, and there's the policy side. This policy side is essentially under anarchy, run by tryants. Germany and its French poodle issue diktats and everyone else in euroland simply follows orders.
In short, there are no laws governing finance in euroland. None that are honored, anyway...
So the ECB is pocketing the lended money, countries are assuming banking debt.
when is bailout number2 ?
http://www.ecomm-unity.com/group/financial-crisis-worldwide
The timing of the LTRO was quite weird, as obviously the banks couldn't do anything with the cash now, when there's zero liquidity. Guess it was for the year-end books. So obviously they park it with the ECB for a couple of weeks. We'll truly see the effect on the markets in January, when (how / if) the new cash is deployed. For the time being, they might just be waiting for any sellers to be back into the market so they can actually buy something. They might even be dumping a mil or two to depress market levels and get a better entry point in January... Who knows.
Good points. Unless something major changed immediately after they LTRO, they wouldn't have borrowed so much just to earn -ve carry... Perhaps they're holding the funds with the ECB until existing funding needs rolling over?
Who know's whether they'll eventually buy sovereign bonds (some analysis here* quoting Peter Tchir suggests they won't) - but it's too early to say, and even if they don't directly buy them, the LTRO funds will ease banks' funding requirements at the margin (which as another ZH article recently pointed out will be pretty massive in 2012) & support bond markets overall.
* http://blogs.wsj.com/marketbeat/2011/12/20/ltro-will-help-short-term-funding-but-backdoor-qe-it-probably-is-not/
banks are losing 75 basis point on this inverse carry trade, where they take LTRO cash and deposit it with the ECB where it yields... 0.25%!
Is no one going to play the Henny Youngman card and ask how they make their money? (On volume, for you younger readers)
so the banks are making "money" by parking it at .25% when it was suppose to bail out their broke arses? So there is still a liquidity issue? So now the ECB can lend out even more "money" ? Is this merely a circle jerk with the banks making "money" ? I am new at this and trying to understand it.
What Tyler is saying is that the banks are paying 1% (100 points) but receiving only 0.25% (25 points) and are thus losing 75 points. They could make a 2-3% profit by taking that money and putting it into govt. bonds instead (thus making Sarko happy, as he can finance his debts while having the ECB line his bankers' pockets).
The only rational reason for the bankers not to go for the sure profit is that they think they will need the cash soon, and don't want to have to sell distressed assets (govt bonds, of which they already have many) into a falling market. It's the same reason that you or I might hold cash, even with inflation taking some % of it all the time: we might need to meet a sudden expense and not find a market for other stuff that we could sell.
Got it ...thanks!!!
it is a wee bit like all the 'consumers' who bought with a credit card before Christmas and are lined up at the return counter now and getting cash back.
I remember a check thing going around in the late 60's where you cound have several bank accounts and stagger a check from one bank to the next and suddenly have 20,000 in cash in your hands and no actual money in the bank. See, old ideas never die they just evolve.
What you describe is called 'check kiting', and is a scam as old as checks.
JK Galbraith said something to the effect that all financial innovations are new ways of packaging old scams so that they are neither recognized by the public nor forbidden by regulators.
With all due respect Tyler the banks aren't losing anything in the inverse carry trade, because they pledged worthless garbage to begin with.
Correct about the garbage, but they are losing even more. The garbage money was lost already, this -0.75% is on top of that.
And by the way that's 0.25% more than the bastards deserve!!
Either banks have become more insaner than they usually all are, or everything is going exactly as Sith Ponzi forsees it...
Yeah. That's the thing that really scares me. It's bad enough to contemplate that they might be losing control. It's much worse to think that the results thus far have wildly exceeded expectations.
Screwy freaking world.
I think exceeded expectations have been met in GR and IT, ... so far ...
Yes you can see that in the dramatic way or ... in a more positive one ;
Banks raised money at a 0.25% interrest rate...pretty cooler no?
They've all declared they won't reinvest in sovereign in full, like unicredit said.
The LTRO window opened recently is a 3 year term, when the offer arrive, you have to strike. So basically, you take the money first and after that you think about how to spend it.
So banks have some cash... we'll see how they will use it.
But when you get a loan, if you give the money back, the loan is cloded, well in that specific case it is, and you cannot use the credit line anymore. So what to do? you borrow, and you place the proceeds at the ECB. Ok the operation cost you something, but frankly, where to find moey on the market at that rate???
Uh, what?
Let me essplain. You tak-a zee money and reroute it beforz the bank cycle charges you interest but then give it back for zee payment on zee money in da cloud.
haha not far :-)
but again, and it's my opinion the LTRO, when it come to banks and their balance sheets is pretty good. In my case it's an opportunity i wouldn't have missed i IF I were a bank. It's an 1pct loan with a 3 year term...and no matter if your are unicredit or rabobank...
Proceeds may be used to call a lot of Jr Sub debt not yet elligible to Tier one capital ratios. So yes this is not deleveraging, but it is reducing the cost of the leverage...and this is not bad. The question of timming these operations and the way banks will use these funds in the end is up to them. Important is, they have the ability. Is it sufficent, i don't know. Nobody knows and a lot should admit that. the press call it a Bazooka, nobody at the ECB does... the press isn't driving the ECB...
My only hope is that banks will use these funds to fuel the real economy and not to play with accountability. This is christmas, i'm allowed to hope...
Because here stand the true fight for the old europe...and the US (don't forget you are alos in a big mess you guys...) : creating value, not opportunity state jobs.
Nobody will deleverage a state or a group of states as you deleverage an Hedge fund. Nobody will change the strategy of a group of state as a fund manager can update it's fund prospectus. And finally creating value suppose support, financial support and budget discipline (wich is already embedded in the European Masstricht treaty, yes Maastricht is in Holland...)
Europe wil not blow up as a whole this is not Hollywood, Will Smith will not save the world neither, Muse won't play any music for the soudtrack...but the movie will last for decades! Far better than the 3 episodes of the lord of the rings displayed in a row no? This is a recession, this is a sovereign debt crisis, this is I think the beginning of better managed europe...world?
So yes in a way, in the short run, we may be (are) all cooked, but I think the last silver bullet has to be played, and this silver bullet, again, in my opinion shouldn't be an "excel circular reference" accountability trick, but a huge project financing scheme.
So I doubt the LTRO was by design a tool used to massively help banks to purchase sovereign bonds, but to get fresh money by using all type of collateral (read italian gov bonds). Eurobanks are in a deleveraging/capital raising mode and LTRO is if not a capital raising tool, a way to minimise financial costs...and fuel the economy, and if needed support the Q1 issuances...even they will be very reluctant to do so.
So all in all, and even if we disagree on some points sometimes;I wish you all an excellent 2012 year an especially @ ZeroHedge where i'm sure the activity level will be at DEFCON 10 for years to come. Keep up the extremely high level contributions it's a true pleasure to read.
And for my old Europe, I wish Ghandi for president and Dirty Harry as prime minister.
Again all the best for 2012 Everyone.
Cheers,
Ben.
Are you typing this from a cafe in Amsterdam, by any chance?
COUGH COUGH!!! Why would that COUGH matter COUGH?
so pull all your cash and buy gold n silver.
It's not a crazy move by the banks. It is completely logical to keep that cash on hand in order to bolster their "capital". Who else are they going to deposit the cash to? Each other? That makes no sense. They deposit the cash with the ECB and hypothecate that to create more money for lending. If they can lend out 10times what they have deposited in the ECB then the 0.75% loss they make with the ECB is more than made up for by the interest they earn on their newly printed money.
They deposit the cash with the ECB and hypothecate that to create more money for speculating.
There - fixed that for you.
Sorry, Tyler, you're completely wrong. This inmcrdibly handsome and intelligent man has the irrefutable evidence (pretty blue charts) to prove the massive, massive impact of LTRO on bond yields. All that debt that needs rolling over in 2012 is going to be Hoovered up by the now supercharged "private" banks:
http://seekingalpha.com/article/315625-the-ltro-has-had-considerable-pos...