Earlier today, when discussing the launch of the "Lehman crisis playbook" in response to the Global Covid Crisis, we listed the alphabet soup of measures the Fed may launch which are a replica of the measures adopted in the aftermath of the Lehman collapse. These included the AMFL, the MMIFF, the TAF and last but not least, the PDCF, or Primary Dealer Credit Facility, which as Rabobank said "would provide overnight funding to primary dealers, similar to the way the discount window provides a backup source of funding for depository institutions."
Just three hours later, at 6pm ET, the Fed, as expected, announced the establishment of a Primary Dealer Credit Facility (PDCF) "to support the credit needs of households and businesses." What the Fed really meant is that it is now launching a way for dealers to monetize the stocks they own, as the facility will be collateralized, among others, by "equity securities."
As the Fed announced, the PDCF "will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020" and will be in place for at least six months and may be extended as conditions warrant.
But here is the punchline:
Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.
This means that as of this moment, equities - which are worth zero in a worst case scenario - are eligible collateral for Fed liquidity.
Here are some more details on the eligible collateral:
Collateral eligible for pledge under the PDCF includes all collateral eligible for pledge in open market operations (OMO); plus investment grade corporate debt securities, international agency securities, commercial paper, municipal securities, mortgage-backed securities, and asset-backed securities; plus equity securities.
Who will determine the value of the soon-to-be-bankrupt stocks pledged as collateral?
The pledged collateral will be valued by Bank of New York Mellon according to a schedule designed to be similar to the margin schedule for lending by the Discount Window, to the extent possible.
This means that dealers can now buy stocks at what are still massively overinflated valuations thanks to trillions in central bank liquidity, knowing they can then turn around and pledge them to the Fed at a collateral value that is determined after several rounds of single malt between the fund and some NY Mellon back-office lackey who will write down pretty much anything in exchange for a free dinner, and even if the stocks crashes the Fed will still assign whatever value BNY Mellon decides it is "worth", basically giving the dealers not only a costless purchase but also a free put option!
That said not all equities are eligible as collateral: "the following equities would not be eligible: exchange traded funds (ETFs), unit investment trusts, mutual funds, rights and warrants"
For those who many not remember, the PDCF was one of the biggest bailout abortions of the financial crisis, one which we discussed extensively in describing how dealers abused the Fed as they pledged totally worthless stocks for which they got "par" value. For more see:
- An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility
- How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility
We now look forward to Congress never asking Powell the only question that matters: how on earth are stocks "money good" securities and hard value collateral.
We also look forward to the market asking just which Primary Dealer(s) is in such dire financial straits that it now needs what is effectively a bailout from the Fed (we have a few ideas).
The 2-page term sheet of the PDCF is below (pdf link).