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Nomura: US Downgrade May Cause Repo Market Liquidity Freeze

Tyler Durden's picture


Tired of all the lies that a US downgrade will have no impact whatsoever on unsecured funding be it money markets, repo or so many other shadow banking system components (full list is below)? So are we. Which is why we were very interested to read the following summary of a Nomura research report that a US downgrade "may cause a repo liquidity freeze." Remember the Ice-9 in money markets following Lehman? Well, it may not be quite as big as money markets (last at $2.7 trillion), but at $1.3 trillion, frozen Repos will certainly cause a lot of headaches, especially with a dramatic scarcity of short-term Bills available in the market place for replacement capital flow. For all those wondering why the Fed and the BIS have been writing paper after paper (here, here and here) warning about the potential complications arising from the shadow banking system, this is precisely the reason.

From Nomura, as summarized by Bloomberg:

  • Risk of U.S. downgrade and default may have more impact than the lack of debt ceiling resolution - may cause repo market liquidity to freeze and “keep money markets in risk aversion mode,” Nomura strategists led by George Goncalves write in note.
  • “A default scenario will severely disrupt the repo market by increasing haircuts, causing dislocations between securities with and without defaulted coupons and potentially freeze up repo liquidity all together”
  • A downgrade won’t “trigger forced selling” in money market funds since 2a-7 rules define any U.S. government securities as “first tier”: Nomura
  • Money funds may choose to reduce exposure to U.S.
  • Treasuries that could be “at risk of missing coupons in case of default”: Nomura

And here is a graphic breakdown of all the shadow banking system components. These are precisely where all the adverse side effects will be concentrated as soon as the headlines hit that the US is no longer AAA.

Those wishing to learn more are urged to read the following presentation from the FRBNY which in addition to manipulating capital markets makes pretty presentations.

Shadow Banking Fed


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Wed, 07/27/2011 - 12:32 | 1498243 Cassandra Syndrome
Cassandra Syndrome's picture

Repo Bitchez

Wed, 07/27/2011 - 12:41 | 1498280 Popo
Popo's picture

Just because their business model didn't account for this possibility, does not make it everyone else's problem.   One must point out that this is the *industry* of financial modeling.   Accounting for potential issues such as downgrades is *the whole* game.

Heads need to roll.  Banks need to collapse.  

We will rebuild.  (Without them).

Let's get the creative destruction started.  Bring it on.

Wed, 07/27/2011 - 13:04 | 1498365 AldoHux_IV
AldoHux_IV's picture

Agreed, and there are many short term solutions that would allow businesses to access commercial paper in order to keep the lights on-- the world under this current financial system is insolvent and there are far too many gimmicks out there perpetuating the illusion of solvency and the necessity to bury us further into debt.

Wed, 07/27/2011 - 12:33 | 1498246 bob_dabolina
bob_dabolina's picture

Nomura says Nomora' liquidity

Wed, 07/27/2011 - 12:35 | 1498254 Phillips Capital
Phillips Capital's picture

i see what you did there.

Wed, 07/27/2011 - 12:50 | 1498327 Jim in MN
Jim in MN's picture

With fo' on the floora

Gonna hit like a two-by-foura

Wed, 07/27/2011 - 12:39 | 1498258 malikai
malikai's picture

It won't happen. This drama is over tonight. Silver and crude are saying everything we need to know.

Wed, 07/27/2011 - 12:42 | 1498289 Popo
Popo's picture

SKF is still saying somebody's going to eat a shit-sandwich.   And that someone is probably a bank or two...

Wed, 07/27/2011 - 12:55 | 1498334 slaughterer
slaughterer's picture

Trying to tell the Turdites / ZHers to short silver into this event will guarantee at least a few dozen presses on the red downward arrow.  Watch my downward arrow count add up. 

Nomura report was wasted energy.   Default not going to happen.  Barbaric relics will be sold ferociously on any sign of progress in the deal.  Today was the proof.  Over night will be even worse as the Asians are given advance word of the deal via Timmy's red phone hotline to Beijing.         

Wed, 07/27/2011 - 13:17 | 1498412 Terminus C
Terminus C's picture

Is that because raising the debt ceiling is the solution to our indebtedness?  Silver and gold may retract on the news but only because people are retarded enough to think that allowing the government to borrow whatever it wants against the productivity of our great grand children is good for the system.

Default can happen or not happen, none of the fundamentals for silver and gold ownership changes either way.

Wed, 07/27/2011 - 13:18 | 1498413 traderjoe
traderjoe's picture

Silver bugs here don't day trade on the latest news flow. That's a suckers game, and you can have at it.

None of these deals change the long-term path of fiat. If, after watching this all, you think we will ever pay back the debt - well then I have a bridge to sell you. But personally, I only accept gold and silver for payment. You can take your broken and fraudulent promises somewhere else.

Wed, 07/27/2011 - 14:50 | 1498782 mt paul
mt paul's picture

fork lift long


nov 2008...


no change in position ..

Wed, 07/27/2011 - 13:04 | 1498364 geminiRX
geminiRX's picture

I love PMs, but I am fully expecting a large correction soon once the ceiling is raised. People expecting default next week will be very disappointed

Wed, 07/27/2011 - 13:41 | 1498498 Bastiat
Bastiat's picture

I suspect any momo chasers in PMs got their stops hit today.  As Traderjoe said above: it doesn't matter, long term.  A fiat market full of Sound and Fury. 

Wed, 07/27/2011 - 12:36 | 1498260 redpill
redpill's picture

Leaving the debt ceiling in place and prioritizing interest payments would ensure our credit rating and fiscal future remain sustainable.  It's the responsible thing to do.


Wed, 07/27/2011 - 12:45 | 1498305 lizzy36
lizzy36's picture

What it will ensure is about $200B comes out of the economy in August alone. Plunging the US into an immediate double dip.

You know what cold turkey does to a long term addict? Kills them.

I am not talking about the Stock Market here. I am talking about the real economy.

What is needed is a responsible plan that allows for withdrawl not cold turkey.

However, even i admit that plan ain't likely to come from Washington.

Wow what a clusterfuck. 

Wed, 07/27/2011 - 12:54 | 1498332 Rodent Freikorps
Rodent Freikorps's picture

No kidding. The problem is that in our system it is the addicts who are in charge of the stash.


Wed, 07/27/2011 - 13:02 | 1498358 GeneMarchbanks
GeneMarchbanks's picture


You can't kill something that is already dead. Don't get sucked into The Finality of these affairs. Maybe they pass some barely coherent piece of legislation or not. We'll still be here and mostly OK. Sure underwear changes will be needed, asthma medication re-filled, antidepression pills popped like M&ms but here damnit!

Until we're talking about who is being bombed, I'm staying cucumberishly cool.

Your Friend


Wed, 07/27/2011 - 13:09 | 1498382 redpill
redpill's picture

No long term deficit solution is even being discussed.  Nor will it be.  Therefore the only option left is to force them to make the necessary spending cuts to get our house in order today.

They could instruct the Federal Reserve to destroy the Treasury bonds they are holding and we'd lop $1.6T off the debt tomorrow.  Voila, there's your withdrawl allowance.


Wed, 07/27/2011 - 14:16 | 1498634 macholatte
macholatte's picture

Yes. Yes. Yes.

I've been asking about that same thing for quite some time in the hope that somebody knowledgable would contribute their perspective. Yet no comment.

At the end of the day, the $1.6T is not really "debt" because the interest the treasury pays is given back. It's an increase in the money supply and as such should be debt free. All the fees that were sucked off by the PD's due to the screwball way the transactions were handled (QE) made it expensive for the country and lucrative for the PTB.

Anyway, if someone out there has any insight on this, please comment.

{disclaimer: we disavow any liability for typoses withpout a spellchecker}

Wed, 07/27/2011 - 13:09 | 1498386 MachoMan
MachoMan's picture

Sometimes death is a more humane option for long-term addicts...  in that their kids have been taken away (and hate them), they have no job prospects or ability to earn a wage or other living, they cannot even drag skank ass anymore, their prospective physical health will be painful and their level of functioning has been permanently decreased, they're crazy, no one wants them, they have no place to go, and no prospects for improvement of life.

Essentially, what you're advocating is a slow death.  We're past the point of no return on both our on and off balance sheet debt...  coming up with a plan to take us off stimulus in a drawn out fashion does nothing to change this fact...  you can have a dollar collapse today or two years from now, but it's coming.

Our only solace is that we'll get to rummage in the trash bins with europe and japan...  hopefully we've stolen enough oil to mitigate others' relative ascendancy. 

Wed, 07/27/2011 - 13:24 | 1498441 traderjoe
traderjoe's picture

The system is performing exactly to plan. There was never any intent to pay back the debt. The debt is a FRAUD - with the interest payments the grift and debt-slavery and control the goal. Sovereign countries do not need to borrow 'money'!

See the United States Note - no debt, no interest.

Wed, 07/27/2011 - 13:24 | 1498442 Mercury
Mercury's picture

Actually, narcotics withdrawal won't kill you.  You'll wish it did but it won’t.

Alcohol, yes, Valium and other meds, possibly…but narcotics, no.

Anyway, the right analogy here is thievery, not addiction.


Wed, 07/27/2011 - 14:19 | 1498653 macholatte
macholatte's picture

addicted to thievery....... definition of kleptocrat

Wed, 07/27/2011 - 16:02 | 1499064 Newsboy
Newsboy's picture

Cold-turkey from (h)opium, causes, fevers, shivers, sweats, watery eyes, watery nose, watery mouth, watery stool, intestinal cramps, vomiting, insomnia and sometimes vivid hallucinations.

No death.

DTs from alcohol can cause seizures and death, same with barbiturates, but the worst thing for junkies is the fear as they start slipping into cold turkey. the fear will make them do anything.

"No choice, had to..."

Wed, 07/27/2011 - 12:37 | 1498261 JailBank
JailBank's picture

Sounds bullish to me.

Wed, 07/27/2011 - 12:43 | 1498291 Boston
Boston's picture


Wed, 07/27/2011 - 12:53 | 1498331 baby_BLYTHE
baby_BLYTHE's picture

Remember, when Andrew Jackson tried to end the Second Bank of the United States the central banker, Nicholas Biddle, reacted by violently drawing down the money supply- causing a Depression.

If the US were to default on the 1.6 trillion of treasuries the Federal Reserve bought, as advocated by Ron Paul, with money created out of thin-air. Bernanke and his fellow Board of Governors might react in a similar fashion to save the FED from going bankrupt, effectively putting a gun to the heads of every American.

Don't think for a moment these jackals will go down without a fight.

Wed, 07/27/2011 - 13:06 | 1498376 Cdad
Cdad's picture

Don't think for a moment these jackals will go down without a fight.

Umm...fine.  Bring it.  Average Joe rejected these bankers' primary weapon 2 years ago, namely the equity market.  While they have been printing money short term with it, there is zero long term positive view of the market that these morons have broken.

I rather think you are right...this will come down to a fight between the public and criminal syndicate Wall Street bankers.  That is as it should be, all things considered.

Wed, 07/27/2011 - 13:17 | 1498411 SheepDog-One
SheepDog-One's picture

I'll fight these hockey helmet wearin 'tards no problem! Bring it!

Wed, 07/27/2011 - 13:31 | 1498463 kridkrid
kridkrid's picture - These guys?  You sure?

Wed, 07/27/2011 - 13:22 | 1498428 Caviar Emptor
Caviar Emptor's picture

Little problem with that plan that begins with a big letter C and rhymes with Sina. 

Default plus a draw down of money supply and economic unfurling would provoke a big response from our biggest creditors. Don't forget Middle East as well in the mix. 

Gun might be to the Fed Heads

Wed, 07/27/2011 - 12:58 | 1498348 MsCreant
MsCreant's picture

The stolen opening riff also doubles for the ice 9 theme here: Ice, Ice, Baybee!

Wed, 07/27/2011 - 13:10 | 1498388 kridkrid
kridkrid's picture

Stop, collaborate and listen... I still hate Queen for stealing Vanilla Ice's riff, but now that Freddie Mercury has moved on, I'm getting over it.

Wed, 07/27/2011 - 15:22 | 1498886 DaveyJones
DaveyJones's picture

Vanilla, better teeth is not better talent

Wed, 07/27/2011 - 19:37 | 1499876 baby_BLYTHE
baby_BLYTHE's picture

Freddie Mercury is one of the all-time greatest front men.

Heavy Metal, today, would be nothing without his influence  

Wed, 07/27/2011 - 12:38 | 1498267 Subprime JD
Subprime JD's picture

The POTUS will probably use a broad interpretation of the 14th amendment to raise the debt ceiling in order to avoid default making all this analysis a waste of time

Wed, 07/27/2011 - 12:42 | 1498284 bob_dabolina
bob_dabolina's picture

Would make sense

The Politics of Kenya take place in a framework of a presidential representative democratic republic, whereby the President of Kenya is both head of state and head of government, and of a multi-party system.

Fuckin' Kenyans.

Wed, 07/27/2011 - 13:25 | 1498438 SheepDog-One
SheepDog-One's picture

Theyll 'avoid default'? Meh....depends on who youre asking. Dagong Rating Agency: "The US Has Already Defaulted" | zero hedge

Wed, 07/27/2011 - 12:47 | 1498315 JohnG
JohnG's picture

That gives us a constitutional crisis and a fair chance of impeachment.  Not sure if that's the way for potus to go.  But then....

Bizzarro land territory here.

Wed, 07/27/2011 - 12:58 | 1498337 Subprime JD
Subprime JD's picture

We are in the age of crisis. Debt crisis, energy crisis, constitutional crisis demographic crisis, food crisis etc etc. The years of spending, splurging, over consumption will lead to years of underconsumption, hardship and famine.

Wed, 07/27/2011 - 13:41 | 1498502 JohnG
JohnG's picture

Sadly, I agree.

Wed, 07/27/2011 - 12:58 | 1498350 Mactheknife
Mactheknife's picture

Three words from Jay Leno that would stop any impeachment process.. "President Joe Biden".

Wed, 07/27/2011 - 13:19 | 1498415 SheepDog-One
SheepDog-One's picture

Doesnt matter, it would bring great UNCERTAINTY and what do markets hate most of all?

Wed, 07/27/2011 - 12:40 | 1498278 Charley
Charley's picture

"There is no spoon."

Wed, 07/27/2011 - 12:42 | 1498286 Phillips Capital
Phillips Capital's picture


since money markets apparently have a risk of "breaking the buck" and getting their own "run on the bank", what do you advise as a "cash" holding in an IRA or 401k account? i read an article in reuters saying people are flocking into the 5 day treasuries... wtf. that is an idiotic idea if you asked me. should i just go into DBC and some other currency ETFs? 

Wed, 07/27/2011 - 12:53 | 1498330 Dr. No
Dr. No's picture

You have a 401K and/or IRA?  lol.  Just by having to ask the question should highlight the weakness of those retirement accounts.

Wed, 07/27/2011 - 13:06 | 1498371 OldPhart
OldPhart's picture

No shit, but a lot of us are locked in to them.  The only way to pull the funds is to quit.  Not gonna happen in this economy.

Wed, 07/27/2011 - 15:44 | 1498977 Phillips Capital
Phillips Capital's picture

Dr. No - This wasn't really a question about the account types, and I don't have the ability to change the account types since they are not mine.


Wed, 07/27/2011 - 23:31 | 1500280 jonytk
jonytk's picture

No you should invest in Greek bonds, they're safer and much more profitable!

true story.

Wed, 07/27/2011 - 12:42 | 1498288 A Man without Q...
A Man without Qualities's picture

It should be obvious that the ratings agencies will not be able to downgrade the US (frankly, they'd have done it already otherwise), because of the catastrophic effect it would have on the financial system.  All they are trying to do is push Washington to make a decent pretence of fiscal prudence - you know, promise to do something one day.  What should be deeply disturbing to everyone, is these muppets cannot even get their numbers right...

Wed, 07/27/2011 - 12:46 | 1498308 Dr. Engali
Dr. Engali's picture

There will be no down grade. Money markets would be crushed and break the buck. The dollar will be confetti and we will be AAA. It's all part of the play.

Wed, 07/27/2011 - 13:27 | 1498450 SheepDog-One
SheepDog-One's picture

I see, so there never will be a downgrade to our bankruptcy at all, because any form of reality entering the picture would be bad. Wow next stop, Miracleville!

Dagong Rating Agency: "The US Has Already Defaulted" | zero hedge

Wed, 07/27/2011 - 13:32 | 1498465 SheepDog-One
SheepDog-One's picture

Just remember Max Keisers words of warning from his Greece speech a while back, first Greece gets the shaft, next its the USA's turn. I believe he was right.

Wed, 07/27/2011 - 13:00 | 1498357 Dr. Engali
Dr. Engali's picture

The are crying for a bridge loan to pay their bills then governor moonbeam just signed into law a bill offering scholarships to illegal aliens.

Wed, 07/27/2011 - 12:51 | 1498328 RobotTrader
RobotTrader's picture



I'm hoping a liquidity freeze will cause a selloff in some of these mo-mo stocks like AMZN and NFLX

Seems like the entire street is now bailing out of anything and everything and piling into 3 leading tech stocks like lemmings

Here's the shocker:  Even with a 15% correction, these names will still be 3 and 4 baggers off the lows.  I wonder what kind of calamity it will take to get people to sell?

Wed, 07/27/2011 - 13:29 | 1498454 SheepDog-One
SheepDog-One's picture

One of these mornings soon, you wont be ABLE to sell at any price. Put that in your pipe and smoke it, you poofter!

Wed, 07/27/2011 - 12:54 | 1498333 Jim in MN
Jim in MN's picture

Nobody cares, unless the S&P goes down 10% or interest rates on mortgages go up 1%.

Nobody cares that they might.

Wed, 07/27/2011 - 13:00 | 1498356 slaughterer
slaughterer's picture

Remember the good old days of 666 point plunges on the DOW.  When can we get those back?

Wed, 07/27/2011 - 12:58 | 1498341 Mercury
Mercury's picture

Of course the repo market could freeze up.  The (inevitable) collapse has to start somewhere.

This isn't a fucking movie.

Wed, 07/27/2011 - 13:00 | 1498347 slewie the pi-rat
slewie the pi-rat's picture

why?  who cares?  this isn't the same as the real estate-based credit bubble.  this is the public debt 800-megaton gorilla BiCh.  let er rip.  clear the air.  really. 

these assholes are in the process of bankrupting ther entire world so they can foreclose on it. 

they tried to make a bomb;  and they blew themselves up.  and it got very cold.  so what?  don't get any of those exploding/collapsing central banksters on you!

as a species which prides itself on its spiritual dimention aka 'dimentia' are we really saying that we won't do the right thing and play against certain forces because we don't know how that works out for us compared to playing with them, at this point? 

so the shadow banking system blows up.  again. 

who cares? 

it's not my problem

do you think it is your problem?  why?  what can you do about it, except go to "fool me twice, shame on me," which is, as we know never advisable. 

or, does nomura know better?  why would that be?

Wed, 07/27/2011 - 13:16 | 1498408 Commander Cody
Commander Cody's picture

Unless your wealth is in 100% physical PMs don't forget that the thieves in government and the banksters have created debt bombs with your money.

Wed, 07/27/2011 - 13:36 | 1498447 slewie the pi-rat
slewie the pi-rat's picture

hey!  works for me!  what "wealth"? i've never advocated anything, since the zH tractor beam captured my pirate ship, except US mint-produced gold & silver coins  and supplies.  even if i had money,  i would still advise this in the here & now. 

prudence is the mother of all virtue

not that i care

Wed, 07/27/2011 - 17:12 | 1499347 DOT
DOT's picture

Bankster Bits !


For your dogs good health.

Wed, 07/27/2011 - 13:00 | 1498353 RobotTrader
RobotTrader's picture



Dollar shorts and FXE and FXA longs are getting a lesson in humility today.

Wed, 07/27/2011 - 13:03 | 1498362 Dr. Engali
Dr. Engali's picture

You can lose some battles and still win the war.

Wed, 07/27/2011 - 13:08 | 1498381 slewie the pi-rat
slewie the pi-rat's picture

L0L unless they shorted the U$D @ 76+. 

last week. 

Wed, 07/27/2011 - 13:30 | 1498409 johny2
johny2's picture



Wed, 07/27/2011 - 13:01 | 1498360 buzzsaw99
buzzsaw99's picture

Please. Nothing adverse will happen to tha gangstas.

Wed, 07/27/2011 - 13:06 | 1498372 apberusdisvet
apberusdisvet's picture

world derivative debt:  $2.4 quadrillion; 40X world GDP

US debt:  actually around $500 Trillion.

Neither amount can ever be paid.  The big reset button has to be hit; otherwise we will be forever debt serfs in the NWO..  And you thought Hitler and Mao were bad; you aint seen nothing pilgrims.

Wed, 07/27/2011 - 13:38 | 1498486 ZeroAffect
ZeroAffect's picture
Pressing the Reset Button. Learn how to spell D-E-V-A-L-U-A-T-I-O-N 

From the Fed: "There are other policy issues that might lead a country to change its fixed exchange rate. For example, rather than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost aggregate demand in the economy in an effort to fight unemployment."

Wed, 07/27/2011 - 13:09 | 1498387 High Plains Drifter
Wed, 07/27/2011 - 13:21 | 1498422 SheepDog-One
SheepDog-One's picture

Theyll pull a trick and avoid default? I guess it all depends on who you ask.

Dagong Rating Agency: "The US Has Already Defaulted" | zero hedge

Wed, 07/27/2011 - 13:24 | 1498437 gorillaonyourback
gorillaonyourback's picture

so the seller of the securities actually makes out,  does the seller have to buy back the depreciated securities?  Hows that freeze the market?

Wed, 07/27/2011 - 13:28 | 1498452 Caviar Emptor
Caviar Emptor's picture

Hey trader, trader...SELL!

Wed, 07/27/2011 - 13:31 | 1498459 airedalesrule
airedalesrule's picture

A down grade of long term debt would not effect short term ratings which drive investment policies of 2a7 funds and most other institutional money market investors. In the case of the short term ratings of the US Treasury, the  A-1+, P-1 would still hold.

Many of those investors, however, have policy provisions which may be impacted by a negative credit watch, so a shortened period of negative credit watch or immediate downgrade, will mitigate that impact.

No doubt repo and other collateral parameters (by operation of law, contractual or policy obligation) will be impacted. A lot of trading inventory will be squeezed out in a reduction of capacity. Inter bank liquidity will be stressed. How big is the question.

Tough to make a force majeure call on something everyone saw coming for months & months but the rule of law & precedent seem to have gone out the window (just ask senior secured creditors of GM or Chrysler). It will stay there. One anticipates (who put the banana in republic?) that they, meaning all the regulators, Congress, and the rating agencies, will make stuff up as they go along.

Recall the collateral call made by a bank that brought the Bear down? Who will take one for the team? No tubby buddies? How about a EuroPigBank?

The other side of the trade will remain: if the repo investor can not do repo, what's the alternative investment? Non-interest bearing deposits (in banks?!?)? C$ bills? Corporate commercial paper? Euro CD's or Euro commercial paper !?! Or Treasury Bills?

Negative short nominal rates for high grade corporate & industrial commercial paper?


Wed, 07/27/2011 - 13:34 | 1498475 SheepDog-One
SheepDog-One's picture

We got this! We're good! Our debt of $500 trillion is SOLID because dammit, we can PRINT MORE DEBT! WTF could go wrong? Rock solid, bitchez!

Wed, 07/27/2011 - 14:04 | 1498568 bob_dabolina
bob_dabolina's picture

If the investments get dumped who gives a shit? 

Investors dump junk bonds; the FED will buy them; investors dump muni's; the FED will buy them. 

This is a big non-event

Wed, 07/27/2011 - 13:34 | 1498472 monopoly
monopoly's picture

How many still do not get it. Just check out the malls, almost everywhere. People whipping out credit cards, off on a cruise, and thinking it will all be ok as soon as we raise our debt another 2 trillion. We are a nation of idiots.

Wed, 07/27/2011 - 13:37 | 1498483 SheepDog-One
SheepDog-One's picture

Its definitely a nation of morons, and the only ones I see buying anything are doing it with maxed out credit cards. Cruises? I dont know why anyone would go on one of those nightmares of guaranteed food poisoning and intestinal aparsites, but whatever america go for it youre in your last minute.

Wed, 07/27/2011 - 13:39 | 1498491 swissinv
swissinv's picture

Yes this is exactly what happens and a lot of banks will shut down due to liquidity constraints... I remember well the 2008 run for liquidity, and believe me this was nothing compared to what's coming. Don't expect any functioning funding lines - only banks with contigency funding plans will survive

Wed, 07/27/2011 - 13:48 | 1498511 Incubus
Incubus's picture

Who cares: yap yap yap yap yap yap yap -- ya fucking goddamned hens.  I just wonder how much more garbage can be shoveled through the trough until the (also) teat-sucking americans finally decide to say no more?


I don't think it'll happen.  I guess this is where we strut and fret our hour on the stage.  Next step: culling of the dunces who had faith in the social system and then onto classroom history books, where no one really gives a fuck anymore.


We're all dead, anyway.  Some of you just refuse to accept it...but you will.



Wed, 07/27/2011 - 13:46 | 1498517 ZeroPower
ZeroPower's picture

"especially with a dramatic scarcity of short-term Bills available in the market place for replacement capital flow"

Theres no scarcity, its just the rush of people that are long duration (Mr Gross some time ago) and realize the front-front-end is the place to be until shit gets resolved. Until of course they realize it never will, and boom, back to higher yields and interest rate hikes we go.

Wed, 07/27/2011 - 14:00 | 1498551 treemagnet
treemagnet's picture

Remember when we were young and used to fret about Israel attacking Iran and shit like that!.....Oh - by this September? 

We got plenty of shit to worry about besides being a known debtor and getting labeled as such.  Just a thought.

Wed, 07/27/2011 - 15:25 | 1498885 exportbank
exportbank's picture

The Postage Act of 1873 allowed for a silver coin to be minted with a stated value higher than the value of the silver content.

SO - the White House can ask the mint to strike 2,500 one billion dollar silver coins (same size as a silver dollar to save on tooling) and walk them to the FED. The FED then must then credit the Treasury with 2.5 trillon dollars.

The reality is - the US doesn't need the FED to create monies out of thin air - it has the power to do it alone.


Of course no sane policy would allow an economy based on "money out of nothing" but that's where we are.

Wed, 07/27/2011 - 16:05 | 1499075 davepowers
davepowers's picture

A freeze in the repo markets would bring lots of risks to the fore, including many that few if any have focused on.

Example would be in the securities lending market.

Take a state investment pool, where state agencies, city governments and school boards deposit their cash, and which has been conned into engaging in securities lending as a way to get a little (read - extremely little) extra return. A state investment pool of, say, $10 billion, borrows $4 billion in cash secured by 40% of the investment pool. The $4 bn is invested in a cash pool run by an investment bank. the state pool bears up to 100% of the risk of loss in the cash pool (but only gets between 8% to 35% of the earnings in the cash pool... yes, it's a con).

A quarter of the cash pool, or $1 billion, in invested in the repo market.

If that freezes up, suddenly the circulation of 'money' required to keep the whole securities lending game afloat comes to a sudden end.

The cash pool can't be redeemed, people start to realize how dangerous these securities lending schemes are, and we have another example of the S hitting the F. Only in this particular example, the 'people' on the reaming end of things are located in every city government and school board (and related taxpayers) in our example state. 

A rough analogy would be to the need to keep water circulating in a nuke reactor. Only in this case, nobody knows there was even a reactor because no body knows that the authorities in the state were playing dangerous securities lending games.



Wed, 07/27/2011 - 18:19 | 1499628 Plumplechook
Plumplechook's picture

Most of the sociopaths on here acutally welcome the prospect of a default.  In their warped perspective it's gonna be a cleansing process - like somehow giving the US economy a giant enema.  You know,  like letting Lehmans's collapse to prove a moral hazard point.   And didn't that work out well.

Thu, 07/28/2011 - 10:43 | 1501086 Grand Supercycle
Grand Supercycle's picture

S&P500 monthly chart originally posted Jan 2011 - shows a series of broadening patterns, aka megaphone wedges.

The three broadening formations reveal an unstable market where buyers and sellers battle for control.

The first two megaphones make clear the eventual victors.

Prepare for the next Black Swan which will be ‘unexpected and could never have been predicted’.

Tue, 08/23/2011 - 23:40 | 1593612 karmete
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