Why Banks Didn’t Lend to the Repo Market When Rates Blew Out: JPMorgan CEO Dimon

“Does that mean that we have bad markets?”

This still doesn’t show who or what triggered the fire in the repo market in mid-September when overnight lending rates more than quadrupled and briefly hit 10%, but it confirms who sat there and watched the fire and fanned it though they could have extinguished it.

During the earnings call today, JPMorgan Chase CEO Jamie Dimon told analysts that the bank had $120 billion in cash on deposit at the Fed in the morning of those days, and that during the day, those deposits would fall to $60 billion as JPM would draw money out of that account for its daily business purposes, and that by the evening that cash balance would go back to $120 billion. “We have a checking account at the Fed with a certain amount of cash in it,” is how Dimon explained this.

Banks earn interest on cash they deposit at the Fed. When the repo rates blew out in mid-September, the interest on excess reserves (IOER) was 2.1%. At the end of the FOMC meeting on September 18, the IOER was lowered to 1.8%. JPM could have made more money lending to the repo market at 5% or more.

While this amount – fluctuating between $120 billion and $60 billion – was “still huge,” it wasn’t enough from a regulatory point of view to lend into the repo market, Dimon said.

At the end of 2018, a similar thing happened. Repo rates spiked to 6% while banks dressed up their balance sheets for regulatory purposes, and rather than lending to the repo market, kept their cash at the Fed. But JPMorgan withdrew cash it had on deposit at the Fed and lent it massively into the repo market to make some extra money. And this calmed the market down.

But at the end of 2018, JPMorgan “had more cash than we needed for regulatory requirements,” Dimon told analysts today (transcript of the earnings call via Seeking Alpha). So as “repo rates went up,” JPMorgan withdrew cash from “the checking account which paid IOER” and lent it to the repo market. “Obviously makes sense, you make more money.”

But this year in mid-September, JPMorgan’s cash account at the Fed fluctuated between $120 billion and $60 billion “during the course of the day,” he said and added:

“That cash, we believe, is required under resolution and recovery and liquidity stress testing. And therefore, we could not redeploy it into the repo market, which we would’ve been happy to do. And I think it’s up to the regulators to decide if they want to recalibrate the kind of liquidity they expect us to keep in that account.”

He is blaming the regulators. But it shows that JPMorgan’s cash on deposit at the Fed had been drawn down to the range of $120 billion to $50 billion, when a year ago it was much higher.

“There are a lot of reasons why those balances dropped to where they were. I think a lot of banks are in the same position, by the way,” he said.

Banks are free to offer higher interest rates to attract fresh cash that would then give them leeway to lend to the repo market. There is still some competition for deposits in the industry, Dimon also said, but it’s way down from what it was last year. And so, because banks such as JPMorgan, aren’t trying hard enough to pull in fresh cash by offering higher interest rates, their reserves are running a little low.

“But I think the real issue, when you think about it, is: Does that mean that we have bad markets, because that’s kind of hitting a red line in that checking account,” he said.

“You’re also going to hit a red line in LCR, like HQLA, which cannot be redeployed either,” he said.

LCR means Liquidity Coverage Ratio. HQLA are High Quality Liquid Assets, at the top of which are the excess reserves (cash) that banks keep on deposit at the Fed. LCR is defined as HQLA divided by total net cash flow.

These regulatory requirements that Dimon is moaning and groaning about were put in place to prevent a rerun of the drama that occurred when the US banking system was in the process of collapsing during the Financial Crisis.

“So to me, that will be the issue when the time comes,” he said. The bank could sit on cash that is parked at the Fed, and “when the time comes” cannot deploy it into the repo market or into other areas that might be blowing out, because the Liquidity Coverage Ratio and the amount of High Quality Liquid Assets (such as excess reserves) might fall below the regulatory minimum.

“It’s about how the regulators want to manage the system, and who they want to intermediate when the time comes,” he said.

In other words, the Fed needs to decide if it wants the big banks to lend when “the time comes” – such as when the time came in mid-September – or if it wants the banks to keep their cash on deposit at the Fed, and have the New York Fed’s trading desk step in and sort out the market.

However, if JPMorgan had raised its interest rates on CDs and savings accounts earlier this year, instead of lowering them, it would have attracted plenty of cash that it could have lent to the repo market when time came in September. But offering higher interest rates is anathema to banks – and they only do it under duress of competition. And if the Fed promises rate cuts, the whole industry backs off competing for deposits, and some banks, such as JPMorgan, ended up drawing down their reserve balances.

The Fed has a new strategy to end the repo market blowout and un-invert the yield curve. Read… 10-Year Yield Jumps, Yield Curve Steepens, on Fed’s Plan to Buy $60 Billion a Month, But Only Short-Term Treasury Bills

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  89 comments for “Why Banks Didn’t Lend to the Repo Market When Rates Blew Out: JPMorgan CEO Dimon

  1. JZ says:

    They did it because they want to force regulation change?
    They did it because they want to force out QE4 and steepen the curve?
    They did it because the collaterals in repo are bad?

    Nobody knows.
    One thing I know for sure, they did/are/will F everybody up.
    Bankers, Land lords, Medical Insurance, Expensive schools that load students with debts are the 4 rent seekers that are eating societies alive. My suggestion to put life into this Zombified society?
    1. End FED, let banks die when they F up, no bailouts.
    2. No exam for doctors. Patient can go to who ever they trust. If they get mistreated, be responsible for themselves.
    3. Ban Fannie and Freddie. Ban 30 year mortgages. Maximum 7 years.
    4. Ban student loans. If parents can NOT pay, NO school. Learn from youtube, debt free.

    • If you’re gonna be radical, why stop there? Let’s ban all mortgages and make it illegal to rent out homes based on the belief that a home should be a place for you to live in, not to speculate in or make a profit. (This has been true for the “Co-Ops” in Tucson, Arizona since the 60’s. The real estate is owned by a corporation and each shareholder of the corporation has the right to occupy a specific unit in the collectively owned residential structures. The result has been unbelievably cheap housing, except when there is a nationwide housing bubble and speculators come in with cash to scoop up the places.) We’ve gotta ban car loans, too. If we also ban all forms of insurance and incentivize corporations to hire kids between 14 and 18, we can get rid of the horrendous waste of time known as high school, as corporations can assume the educational responsibility after middle school. At that point, the cost of living should be reduced enough that the average retirement age is around 28. After all, can you really name an occupation that isn’t basically just another form of rent seeking in today’s world?

      • GP says:

        “home should be a place for you to live in, not to speculate in or make a profit.”

        That would be wonderful and there are many easier ways of doing that than mandates.

        Right now rental owners get to deduct depreciation of asset (even though it’s market price goes up – MACRS). They get to deduct mortgage interest and maintenance costs as expenses. Take those away and there is hardly any incentive left to own rentals.

        As with any drug, withdrawal symptoms would be severe but the patient would ultimately be better off.

    • GP says:

      Who is “they”? JPM? Can’t blame them if they really just had $60B cushion.

      “But offering higher interest rates is anathema to banks” – obviously, banks are in business to maximize profits not run charity. Banks did offer multi year CDs at rates higher than treasury counterparts. Competition is a beautiful thing.

      Totally agree on getting rid of unethical Fed safety net for the banks.

    • Gold is just..gold says:

      Hey JZ – you’re a bit of a radical!

      Pretty soon you’ll be a paid-up member of that rat-bag collection of nuts that demand minimum gubermint (end career politicians & all their slimy associations), personal responsibility – and no handouts, ever…

      Then, G** forbid, you’ll latch onto the absurd proposition of ending the Fed and the printing of fiat money and restoring gold/silver to their proper place in the big scheme of things.

      Get help soon… please..

      • bungee says:

        Gold is just..gold,
        It IS absurd. There’s not a chance. It’s depressing to think in a purely Austrian, monetary idealism because it will never happen. It isnt reality and never has been. People DEMAND debt. Always have. Always will.
        But there is (hopefully) a good chance we’re gonna trash the dollar, and those imbalances will be fixed. Much easier.
        (This is all assuming your post was sarcastic of course. If you were serious then you are right)

    • rhodium says:

      I’ve learned more on the fly at work consulting information readily available online than I did sitting in a number of night classes. Too bad there’s still no good option to prove your knowledge outside of wickedly expensive credentials that put you on an arbitrarily higher pay scale just because of socially programmed ideas. The problem more is culture and the fact that people always confine their thinking to what they think is normal. Anyway though, if you couldn’t finance a house except at extremely high monthly payments like you suggest, and your alternative is saving up a lump payment for something with a little more sq ft, then the fv vs pv equation changes dramatically since people need shelter and I’m pretty sure you’d end up with most people living in apartments. I mean whatever, but debt, while being an incredibly tricky beast especially with all the unknowns in life, is actually kind of useful. Ultimately though it’s creditors who need to be held more accountable, bankruptcy should always be an option for debtors, and creditors need to suffer the consequences for making a bad bet. It was their money after all, and they were dumb enough to give it away.

    • Paulo says:

      No exam for Doctors?

      There are cheap flights to the Philipines for ‘psychic healing’. Prayers are free, too.

      So, that Youtube trained surgeon botched the job and we try someone else? I don’t think it works like that, at least I sure hope not.

      Good luck.

    • sc7 says:

      Congratulations, you’d spiral the economy into a severe depression that would last 20+ years overnight.

    • Wes says:

      It seems that the investment banks are working overtime trying to have the Volcker rules overturned.

    • JZ says:

      I pushed things to extreme to see how folks here would respond. It is a but radical, but I was hoping to see “fuck the rent seekers, we can take ourselves when rent seeking system fail”.
      I am all for risk management, but the FED, the bailout, the government sponsored Fannie and Freddy and the government sponsored student loans and government regulated medical care and insurance all do one thing. Put profit into the hands of rent seekers and socialize the risk to the mass. I know if this system is destroyed, our life will be bad for quite a while, but it is the right thing to do to clean the rent seeker up for our children.
      But even the sun decays slowly, so let’s just add some debt, enjoy now and let our children deal with it later which will do he same and let their children carry on, build the system until rent seekers become both oxygen and parasite. Hey, even the sun decays.

    • Jack says:

      “2. No exam for doctors. Patient can go to who ever they trust. If they get mistreated, be responsible for themselves“

      I personally liked this one !

      Advocating for ( witch doctors) is great:)

  2. Doc says:

    Easy to see why Dimon hates regulators and regulations. JPM is a 3 time felon with a fourth charge pending. Under Dimon, JPM collected two felony convictions for facilitating Madoff’s ponzi scheme. JPM got another felony conviction for rigging the LIPOR market. And the fourth charge is a pending RICO case about rigging in the metals markets.

    Yep, easy to see why Dimon hates those regulators.

    • Old Dog says:

      Dimon has an opinion on everything except his compensation ($31m + bonuses) and how to help his own employees.

      In April, during a confrontations with Congresswoman Katie Porter, JD was unable to offer any financial advice to a teller who works at his bank and is unable to make ends meet.

      I don’t know if inequality has ever been as extreme as today but we sure live in a Gilded Age.

      • Old-school says:

        His pay isn’t outrageous as a percentage of profits. I think they earned $32 billion. The bank is just so huge.

        Our CEO made several million per year and the company earned way less than $1 billion.

        As successful businesses get large they get almost too big to manage. I think he is good CEO. If you want banks to be smaller don’t give them your business, use a asset manager or a credit union.

      • Econ_teacher says:

        Two words:comparative advantage. Katie’s bank teller needs to work on hers. Econ is a bitch.

    • Wisdom Seeker says:

      Felony conviction for a corporation should result in the breakup of the corporation, complete wipe of the board and C-suites, zeroing of shareholders and to-the-bone haircuts for bondholders.

      For zombie banks, “Decap and Recap” – Decapitate and recapitalize.

      • HowNow says:

        Good idea, WS. How about having the corporation, which “is a legal person and has rights” as defined by Mitt Romney, effectively be thrown in jail. In other words, the company will be on pause – can’t be operational for 10, 20 or 30+ years. That may get some attention on Wall Street, in board rooms, and in the executive bathrooms.

    • Vespa P200E says:

      Jamie LOVES silver!

      JPM under his rein has cornered the physical silver market via shorting the papers and steadily hoarded more physical silver over the last few years to 153 million oz.

      BTW – Buffet made a killing hoarding and selling silver and held 130 million oz at its peak in 1998.

      Time to stack folks!

      • robt says:

        Actually, Buffet bought silver, about 130 million oz in about 1998, despite his usual rant about precious metals being worth nothing (especially gold), then sold futures at 7 bucks for the whole lot, and got stopped out when silver hit 7 in late 2005, after holding it for 7 or 8 years.
        He didn’t make that much per oz – his cost was about 6 bucks. ‘Coincidentally’, the iShares SLV was started with 130 million oz. in 2006.

        • Vespa P200E says:

          Ah if Warren had held on 3 more years as it silver was at same price 10 yrs ago around $17.5 and peaked around $47 in mid 2010…

          Who would have thought Warren’s stacks started SLV?

          JPM’s hoarding increasing all the while shorting futures paper to suppress the price now that 3 of their PM traders from BS days are indicted for years of manipulations and and hopefully let the market price physical silver.

        • Tomahawk says:

          I heard the JPM hoard was mostly bought at the top end of the market in a panic buying binge to stave off bankruptcy. They had to go to the regulators and change the rules several times during the run up to the 2010 peak. You think when it comes time to sell that hoard they’re gonna take a loss?… I don’t think so haha.

  3. Brian C says:

    There are very few financial instruments that banks would get overextended on to the point where they bumped into their liquidity ratios. I would bet $100 that every single investment bank was leveraged long treasuries going into September. If you shrunk the liquidity ratios, they would have just been more leveraged. They would have happily taken that 6% repo money if they could have unwound their positions. They couldn’t. That’s exactly why the liquidity ratios exist.

  4. andy says:

    Either way, plenty of money for everybody.

    • A/C in SD says:


      Kipling had something to say about that way back when……

      In The Gods of the Copy Book Heading we read “And though they had plenty of money, there was nothing their money could buy.”

      Well, we have plenty to buy in today’s economy, but most of it is junk and trinkets. While no one knows the future, and to some it looks pretty bleak, Kipling may just prove to have been a visionary. Stay tuned….

      • Lisa_Hooker says:

        Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
        And the hearts of the meanest were humbled and began to believe it was true
        That All is not Gold that Glitters, and Two and Two make Four
        And the Gods of the Copybook Headings limped up to explain it once more.

  5. NARmageddon says:

    Reuters has a report out today that tells the other part of the repo squeeze story that JP Morgan was being quiet about:

    JP Morgan and other big banks bought into GSE MBS in a big way in 2019-Q1/Q2 and so far have racked up 1B$ in profits. Part of the crybaby/QE4 bank propaganda can bee seen as a push for even higher profits on this trade. Likewise, one big reason that JP Morgan is reportedly down about 150B$ in reserves, which is part of the reason for the Sep 2019 repo squeeze, is that big banks used their reserves to go big on RMBS purchases. It’s all starting to make sense.

    But Fed so far is holding back and refusing to buy long term bonds of any kind, not just RMBS. Will there be snap-back and a spike in mortgage rates?


  6. The Fed parks reserves on account for the banks, so it’s a matter of how they use them. Sort of like you dad buying your car insurance so you have more money for the girls. There are only two explanations that carry water, one the rate was too low, and the other that the collateral was no good. Makes no sense that the same collateral was suddenly impaired, but it does work that way, and that makes more sense than saying rates were too low but today they are just fine? Interest rates are just the symptom, a credit downgrade is out there somewhere. Imagine if you will trade wars give way to credit downgrade wars?

    • Petunia says:

      Another possibility in repo, they don’t like to talk about, is that the collateral will not be redeemed and the other party will keep the cash, because they need the dollars. Maybe a big bank in Europe or Hong Kong. The banks know who needs cash because they call up and ask for it.

      • They do count busted Repo trades, and a spike in that category will raise some eyebrows. Your point supports the premise, cash is worth more than the collateral. That is the classic definition of a liquidity crisis.

        • Petunia says:

          In a liquidity crisis cash is always worth more than the collateral which is why I think investing in gold, for the average person, is a waste. You can’t spend gold until you turn it into cash.

        • Frederick says:

          You don’t invest in Gold because Gold is money You store wealth in gold and average or not it works pretty darn well if you look at the statistics over the years

        • bungee says:

          You can’t spend gold until you turn it into cash.
          So? You cant spend anything until you turn it into cash. (Gold happens to be very easy to turn into cash.)

      • Kiers says:

        Hong Kong…! HSBC has been borrowing repo to the tune of 34% of their balance sheet!!!

  7. NotMe says:

    They did not lend because the interest rates need to rise to attract cash and they are not permitted to rise lest the inventory of loans held by dealer banks be devastated. Basically the whole of bank assets of loans, bonds and debt instruments would collapse due to price discovery.

    It is equivalent to a bank run triggered when depositors find out all their deposits have been lent to Argentina.

    • DR DOOM says:

      Our money is a liability to the fed . Debt is their asset and product. Don’t over analyze , apply the Yogi B. Rule . If you don’t think too good don’t do much of it.

  8. Nat says:

    …wait I thought that 50 to 120 billion was “excess reserves” and that JPM can do whatever it wants with them from its “checking account” at the FED. I thought the regulatory mandated amount of money to have on hand was covered entirely by the mandetory reserves and that all of the excess reserves were, well, in excess of that mandate.

    • Wisdom Seeker says:

      Exactly. What we’re learning here is that “Excess Reserves” aren’t Excess. And so why exactly are taxpayers paying the banks 1.8% interest on these Excess Reserves? If it’s really like a “checking account at the Fed”, shouldn’t we be paying the banks the same interest they pay on our checking accounts, i.e. ZERO?

      (Yes, it’s taxpayer money – the Federal Reserve remits its profits to the US Treasury, and interest on excess reserves comes directly out of those profits. The profits come from the interest paid by Treasury on the Treasuries held on the Fed’s balance sheet.)

      Congress should advance a bill mandating that IOER to a given bank cannot be higher than the lowest interest rate paid by that bank on its consumer checking accounts.

    • Petunia says:

      You need to go back to the Bear Stearns collapse to see why the fed eliminated the private repo market and replaced it with IOER. The fed took full control of the repo market because the beginning of the GFC can be traced back to BS not being able to repo, despite having 18B in collateral.

      Now the fed wants them to go back to private repo and the banks don’t want to because they make a safe return on IOER without taking any risk or doing any work.

      • Nat says:

        I get all of that, what I don’t get is Jimmy claiming that he can’t use 50 to 120 billion in *EXCESS* reserves because mandates keep him from using *EXCESS* reserves. What mandates would those be that apply to the *EXCESS* reserves (as opposed to the mandatory reserves, which I understand)?

        • Petunia says:

          I understand your point and I don’t know what provision he may be referring to, but Dodd Frank is big and convoluted, it wouldn’t surprise me if there is a regulation, or maybe reserves means all reserves. I know the fed defines tiers of capital but I don’t recall them defining tiers of reserves.

      • DawnsEarlyLight says:

        Probably because all that ‘collateral’ was, and still is CRAP!

  9. Iamafan says:

    More important question is who needed to borrow a lot of money that Sept 17 when repo blew up?

    Buffett has $200 billion, why don’t we ask how he lends it?

    Lending is risky. So let the lender decide. In repo, the collateral could have been reused so you care much about the borrower.

    • Wisdom Seeker says:

      September 17 is so last-month. Now we should be asking who STILL needs money and is outstripping the repo facility caps today!

      • Iamafan says:

        I “assume” the same folks. Borrowing was overnight or 2 weeks only.
        Time’s up.

        I am afraid that this isn’t just a matter of liquidity. There might be some solvency issues on the side.

      • HR01 says:

        Wisdom Seeker,


        O/N rates still showing stress.

        Quotes for yesterday, Oct 15:
        EFF at 1.90% (10 basis points above IOER)
        BGCR (Broad General Collateral Rate) at 1.96% but spiked to 2.35%.
        TGCR (Tri-Party Gen. Coll. Rate) at 1.95% with a high of 2.06%.
        SOFR (Secured O/N Funding Rate) at 2.00% but spiked to 2.40%.

        Will today’s POMO ($7.5B in T-bills) provide the cure? This observer has doubts. Seems like this is mere shuffling of the deck. Might actually do more harm than good.

        • Iamafan says:

          The DESK (NY Fed) O/N Repo had an average rate on 1.823-1.824% while GCF FICC had an ave of 2.170% yesterday.

          If you were a BORROWER, wouldn’t you prefer to repo with the “desk”. It’s cheaper. You use the same collateral. Thank you Fed.

  10. Old-school says:

    This topic is above my head as the banking system is too opaque for me to grasp. Two thoughts come to mind:

    1. David Stockman has always criticised Fed policy ad doing nothing for the real economy, but supplying the fuel for speculation. My understanding is a lot of leverage is used in the wall street treasury trading maybe 10X.

    2. We can all make a lot of money if you don’t have to worry about liquidity. Just go all in on long term investments and if things go against you get someone to give you liquidity to tide you over. I smell a rat.

    • DR DOOM says:

      Old school ; This is by design . Here’s a good beer drinking topic. Was Guttenburg and his press impact on the ruling clerics of his day as Bitcoin and gold hybrids will be to the CB’s of the fiat world?

      • Petunia says:

        Bitcoin is the Beanie Baby of the new millennium. In another 20 years people will vaguely remember it was a thing a long time ago.

      • I doubt Gutenburg understood the implications, but he did have the concept down, every man should be able to read the bible. The bible as God’s word was irrefutably owned by the priestly class, (like money as legal tender for all debts public and private). Of course there had to be a mercantile system in order for consumers to purchase bibles. That may answer two questions, how many derivations of bitcoin are possible, and does the destruction of money as a store of value obviate mass culture and restore the authority of the ruling class, or do away with the need for them altogether?

  11. Old-school says:

    I guess there is risk in repos. I remember reading an investment book 30 years ago that said always check your mutual fund to make sure they are not using repos.

    • Wisdom Seeker says:

      Still true today. A lot of funds are using repos today. They call it “lending securities to earn additional income”. So you have to read carefully. They are required to disclose but not to make it obvious.

      • Petunia says:

        Most “investors” don’t understand that short selling shares is a repo transaction. The funds make money lending the shares to the short sellers for a fee, when the short is covered the shares are swapped back.

  12. timbers says:

    JPMorgan should be nationalized.

    All the big banks should be nationalized.

    If the Fed has to intervene to do what it what the banks won’t do, what’s the point of having TooBitToFial, highly concentrated semi-monopolies subsidized by tax payers and empowered by rent granting laws?

    Nationalize the TooBigToFial banks.

    Meanwhile, the Fed is expanding it’s Not QE, QE.

    And the first act after nationalization should to cap Dimon’s salary at $250k…IF he is allowed to stay.

    • Unamused says:

      And the first act after nationalization should to cap Dimon’s salary at $250k…IF he is allowed to stay.

      Dimon is a happy, happy guy. He can’t be indicted.

      Dimon is why psychopaths should be screened out as children to prevent them from entering the financial industry.

      His biggest mistake was not getting elected to high office, with Lloyd Blankfiend as his running mate in case he needs a pardon, but he can probably live with it.

    • GP says:

      I am curious. What are the perceived benefits of nationalization or of breaking up banks? Corruption, motives for profit exist in both cases.

      Banks are incentivized to take extreme levels of risk because of implicit safety net provided by the Fed. Take that away (or at least have them pay market price), and banks would automatically start covering their risks.

      btw, good luck finding a good CEO who will work for 250k :)

      • Jack says:

        Yes GP you’re quite right, Timbers advocacy for nationalization of banks is Not the solution to our problems.

        a business exists to make profits by selling a “ needed” service or product.

        That said business fails when it reads the market ( its customers and investors) wrongly.

        Creating more government (public) entities will remove the incentives to conduct profitable business. ( you just have to look at the abject failures of communist countries).

        That being said, what we have in the US and the so called capitalist societies is Neither capitalism nor communism , it’s a terrible amalgam of the worst of these two doctrines!!!

        We won’t be landing safely until we allow the transparency and real market forces to take hold .. only then honest business/s will prevail while corrupt rotten cores will decompose to become fertilizer to new ideas!!


      • Memento mori says:

        ….btw, good luck finding a good CEO who will work for 250k :)…
        I don’t know if you meant it as a joke but no bank CEO is worth more than 250k and in a less corrupt society the majority of bank CEO should be rotting in jail.
        The greatest bank CEO are without any doubt central bank presidents , guys like Greenspan, yellen, bernank Powell or Draghi as by all consideration they are bosses of all other private banks. Yet their salaries are less than 250k. How do you reconcile that with millions that private bank CEOs make, it certainly is not competence.

        • GP says:

          NFL quarterbacks – are they worth more than $250k per season?
          Hollywood movie stars – worth more than $250k per movie?
          Should we go tell them?

          Bernanke, Yellen et al were central planners, economists – not bankers. Running and keeping a business profitable year after year is way tougher than looking at charts and playing with other people’s money.

      • Econ_teacher says:

        Let them fail. We should all pay for our arrogance. Ignorance always has a price. We failed in our duty as citizens. The piper will be paid. The question is: do we put on our big boy pants and take the pain or do we let our heirs pay it slowly, in minimum payments, with all the interest (opportunity cost) that entails?

  13. ZEPPO says:

    Keeping money on hand at the FED is part of the “stress test” evaluations. Banks were still getting their ratings cut in 2011-13. Cash flow was drying up to service underwater derivatives margin calls. Then the banks got smart by transferring their derivatives risk onto the backs of the taxpayers. A little known text in the Fed by-laws allowed them to be placed under FDIC umbrellas. People forget that major investments banks failed in 2008……until they applied to become commercial banks. Then they could access the “repo” markets, aka, the Fed’s overnight borrowing windows.

  14. Michael Engel says:

    The Fed click emergency funds to zombie banks.
    The zombie banks buy US treasuries, financing the govt.
    The Fed buy US treasuries from the banks and the zombie banks
    make easy money on plenty alcohol reserves and excess reserves
    Its a great party.
    The banks like it so much, they ask for more, for a recharge.

    • Iamafan says:

      Nice musical chairs, or 3 card monte, depending on your neighborhood.
      The Treasury prints, the dealers bid, then the Fed buys. Perfect garbage recycling. Meanwhile the savers get hammered.

  15. tommy runner says:

    maybe this was the first gut check since ‘muni’s’ were accepted as hqla, and perhaps banks want to use them as reserves, but they don’t really believe that shits a ‘High Quality Liquid Asset’.. ‘we want the money Lebowski’

  16. Spencer says:

    Hi everyone

    Long time reader.

    I have rudimentary understanding of most of the articles published on this excellent web site


    I just dont understand the dynamics of the repo rate…banks parking at the fed etc..

    Could anyone point to a good 101…

    Thanks in advance

  17. Eastwind says:

    I learned a ton from this article:


    There is some good explanation of how a bank’s repo trading desk works. It intermediates between lenders and borrowers, keeping a matched book (like a sports bookie).

    The lenders can’t lend directly to the borrowers because the lenders are, for example, money market mutual funds that have prospectus limitations requiring them to lend only to investment-rated institutions.

    So the bank’s repo desk makes pairs of transactions. It borrows from the money market funds and lends to the borrowers that don’t have investment-grade ratings, and makes money on the spread. Banks don’t need cash to do this.

    But Dodd-Frank and Basel III regulations mean that both of the two transactions a repo desk makes count against leverage ratios. So banks now have placed limits on the size of the book a repo trading desk can carry for the day. When the desk hits that limit, they shut down for the day.

    So my take-away for the cause of repo-apocalypse was that:

    – the problem wasn’t that there weren’t too many borrowers asking for too much money

    – the problem wasn’t that there were too few lenders lending too little money

    – the problem was that banks stopped intermediating and the lenders weren’t allowed by their own rules to lend directly to the borrowers

    The cause is an unintended consequence of post-2007 regulations combined with the typically-small spreads the banks can make by intermediating repo transactions.

    Banks have to limit the size of their balance sheets now (because we no longer want TBTF banks) and also limit their leverage ratios (to pass stress testing). Intermediating a pair of repo transactions drives up the leverage ratios because both of the two paired transactions count as leverage for the bank.

    But there is nothing that limits the number of borrowers and lenders who want to participate in the repo market. When the demand from borrowers exceeds the limits of bank repo desks, the market stops working, even though the lenders have money to lend.

  18. CreditGB says:

    It is curious that commenters propose all kinds of rules for how or why I invest in real estate or other assets.

    If I buy a home to just live in, to appreciate and sell, or to rent it out, it is none of your business.

    Where did all this “I know best on how to regulate you” mentality ever get started?

  19. Michael Engel says:

    1) JPM should be nationalized.
    Cargil should be partially nationalized.
    The Koch bros deserve to be 100% nationalized.
    The US National Oil sector like the rest of the world.
    Health for all, paid by US Cargil & US Koch.
    2) Twenty years from now most workers will be black & Hispanic.
    They will have their own issues.
    The will refuse to finance aging white baby boomers with their
    own money.
    Social security will do an inverse nationalization.
    You guys, will see what u deserve, in a wet dream.
    3) China will nationalize US assets in China and will do a stealthy
    Wyckoffian distribution on their UST assets, because their Dr. Schacht have no intention to pay US debt.
    Barter and RMB will replace the dollars.
    4) Iamabot.

    • Econ_teacher says:

      Why do you trust the Government to run these entities when they cant even apply the rule of law to them? It’s a big club and you ain’t in it. -Carlin

  20. Iamafan says:

    Today’s Front Ending not-QE, Outright Bill Purchase


    13 week CUSIP 912796TB5 had a purchase qty of $3,370,000,000
    Dealers bought $25,818,205,000 last 10/15 to be issued 10/17.
    This is tomorrow’s WHEN ISSUED.

    Reminds me of QE.

  21. kiers says:

    Every damn thing is “window dressing” on wall street (shark street). End of quarter leverage? No problem do some repos, bingo you have a healthy cash balance to pass audit. Intraday balances are window dressed too?!?! So the Fed is paying IOER based on “when it checks” at the “end of day” but during the day, the balance could be zero!

    Just send them to Mars please. We will honor them. Send them to Mars.

    BTW, the “financial times” provided “cover” for window dressing, pointing their larded fingers at “RTGS” ! I kid you not!

    No mention of their own banks’ culpability;
    this from Risk magazine: https://www.risk.net/risk-quantum/7068046/hsbc-leads-foreign-banks-in-fed-fund-and-repo-borrowings

  22. Brant Lee says:

    Wish I had a banking account with the FED. NO bounced checks, YAY!

    • WES says:

      Brant: Sorry we serfs will never be allowed to use banking accounting rules to run our household budgets!

      Our honesty vitally under pins their dishonesty!

  23. NotMe says:

    OK, my question is what sorts of assets qualify for IOER. The term liquid assets, could include some pretty dodgy garbage, depending on whose eye is beholding such as MBS.

    That might explain why the primary dealers are holding assets under IOER and not running it into the repo market. IOER is holding non repo assets.

  24. WES says:

    Seems like there are still a few kinks to work out of the system by the Fed on the road towards “not appearing” to monitize 100% of government debts.

  25. Mean Chicken says:

    Seems the decision has been made to allow New York Fed’s trading desk step in and sort out the market. These broker banks only know/need a few tricks, it’s not about making an honest living.

    Perhaps this beats watching as JPM hangs Lehman out to dry?

    Yes, socialize losses and privatize gains.

  26. Iamafan says:

    Was JPM a net borrower or lender at repo?

    The assumption is dealers are net borrowers. Usually they are the collateral providers (seeking to finance the Treasuries they bought at auction).
    So which net lenders were absent or demanding more interest.

    Looks like repo for the week will hit $197.7b on the Fed’s balance sheet.
    I wonder if this isn’t just a big smorgasbord of the Fed.

  27. JB says:

    great commentary and follow up anomaly reporting . this is definitely the fed info goto site . But what what we are really are exemplifying is just how dependent the current rube Goldberg financial system is on “just in time financing” .

  28. I’m glad Wolf is covering the repo mess. Pam and Russ Martens are also looking:


    When overnight loans between banks cost +5% it’s an alarm going off. It means the creditworthiness of one or more banks is iffy. Remember, banks don’t need (nor do they lend) deposits, they simply lend money by making ledger entries as necessary. But in a highly-leveraged lending environment, imbalances can magnify rapidly. Even banks with a reasonable equity position can be ‘underwater’ in a matter of hours. Should the banks not trust each others’ balance sheets, the loans aren’t made and markets seize up.

    A culprit here is the $1 trillion in securities with ridiculous negative rates held largely in the EU. The amount of mispriced risk puts investors on edge. Fingers are on hair triggers which means surges in demand for liquidity. Nobody wants to be caught out (or gated).

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