If there ever was any question as to what the purpose of the Fed's Reverse Repo liquidity facility was, or is (and considering we already explained it before in Fed Soaks Up Record $200 Billion In Year End Excess Liquidity [4] and Month-End Window Dressing Sends Fed Reverse Repo Usage To $208 Billion: Second Highest Ever [5]), the amount of reverse repos issued by the Fed to make banks appear healthier than they are and to cure whatever "high quality collateral" shortfalls banks are now chronically experiencing, should slam the door shut on any future debate just what the motive behind the Reverse Repo is.
Behold: a record $340 billion in reverse repos submitted by the world's financial institutions with the Federal Reserve, an increase of $200 billion overnight, and amounting to a record $3.5 billion on average among the 97 operations participants. Considering this is a clear quarterly event, it goes without saying that all the reverse repo is, is a quarter-end window dressing mechanism underwritten by Mr. Chairmanwoman itself.
[6]
That there was some $200 billion in excess reserve liquidity as of yesterday's market close (which today was handed over to the Fed in exchange for one day rental of Treasurys), or that banks actually have a third of a trillion gaping shortfall in collateral, hardly needs discussion.
Expect total reverse repo usage tomorrow to plunge by at least $150 billion as the banks will have fooled their regulator, which also happens to be the Fed, that they are safe and sound. Rinse, repeat, until the entire financial system collapses once again and people will ask "how anyone could have possibly foreseen this."
As we said last time [5]:
So step aside any sophisticated claims that the Fed's reverse repo is a means to extract liquidity when the time to raise rates finally comes: all this latest "tool" in the Fed's arsenal is, is nothing more than a Fed-mandated and endorsed mechanism with which the banks can fool regulators and investors that they are in a far healthier condition than they really are.
And judging by the humiliating episode involving Bank of America's made up numbers that punked the Fed into believing America's most insolvent TBTF bank was healthy enough to give be billions to investors, one of the parties most "confused" by what the RRP does, is the Fed itself.
Q.E.D.
Source: NY Fed [7] [7]
