What’s Behind the Fed’s Bailout of the Repo Market?

Whose Bets are Getting Bailed Out by the Fed’s Repos & T-Bill Purchases?

This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

The repo market blew out in mid-September. It had already briefly blown out at the end of 2018, then settled back down. But the issues started bubbling up again. By the end of July, the repo problems made their way into the Fed’s meeting, as we learned when the minutes of that meeting were released in August.

The repo market is huge. According to the Securities Industry and Financial Markets Association SIFMA, the average daily repos and reverse repos outstanding in 2018 totaled nearly $4 trillion. Repos accounted for $2.2 trillion, reverse repos accounted for $1.7 trillion. The Fed is now playing in both, repos and reverse repos.

So the repo market – with about $2.2 trillion outstanding – blew up in mid-September and repo rates spiked to 10% before the Fed stepped into it to calm it down and keep some financial outfits from blowing up. Perhaps the Fed was fretting about contagion spreading to the rest of the financial system and potentially cause some real damage.

The Fed was certainly fretting about control over its monetary policy. The Fed has a target range for the federal funds rate, an overnight rate at which banks borrow from each other. Via this market, the Fed’s monetary policy is supposed to be transmitted to the repo market and other short-term credit markets. But when the repo market blew out, it started to push up the federal funds rate, and the Fed looked like it was losing control over its monetary policy.

So, yeah, the Fed pulled out the big guns to get this under control. But in the process of intervening, the Fed may well have bailed out some players, large or small. And we’re going to look at this today, and how certain speculators benefited from the Fed’s action.

Since the repo market blew out in mid-September, the Fed has instituted two new policies:

One, it’s once again actively intervening in the repo market mostly by buying Treasury securities and mortgage-backed securities. These mortgage-backed securities were issued and guaranteed by Fannie Mae, Freddy Mac, and Ginnie Mae. In return, the Fed is handing out cash. Its counterparties are obligated to buy back the securities when the repo matures, which is either the next day, or some date in the future, such as in 14 days. This is when the repo unwinds.

Until 2008, the Fed constantly intervened in the repo market as standard operating procedure of its monetary policy. But during the Financial Crisis, it started doing QE, and then started paying interest on the ballooning excess reserves, and repo rate manipulations were no longer needed, and it abandoned them.

The second new policy coming out of the repo blowout is the purchase of Treasury bills, with are Treasury securities with maturities of less than one year. The Fed does this to push up the amount of excess reserves at banks, in order to regain control over the federal funds rate and the repo rates.

And the amounts have started to balloon. On the Fed’s balance sheet through Wednesday, October 30, there were $215 billion in repos, up from zero two months ago. They included overnight repos that unwind the next day, and 14-day repos.

In addition, the Fed has started buying Treasury bills. And by now it is carrying $51 billion on its balance sheet.

Those two policy-moves alone added about $260 billion in assets to the Fed’s balance sheet since mid-September. This is far faster than during QE-3. It’s a huge amount in a very short time. So who might the Fed be bailing out?

Banks are lenders to the repo market. They can borrow in it too, but they can source their funds more cheaply elsewhere, such as via deposits. But other financial firms rely much more on the repo market to fund their speculative bets – and here we’re talking about hedge funds, private equity firms, Real Estate Investment Trusts, and others. For them, the repo market is the cheapest source of funding.

What they do is borrow short-term in the repo market, and invest this cash in long-term investments in a highly leveraged manner.

So I’m just going to look at one of these companies, AGNC Investment Corp, which is funding all its long-term investments in the repo market. It’s just one of many examples. I’m not picking on it, and I have no opinion on it. But it is publicly traded and has to file its financial disclosures with the SEC, and so I can get this data since it’s public, and we can see how this works and what kind of company is on tenterhooks when the repo market blows out.

I’m neither long nor short the stock, and I have no opinion on it. I have seen no data that indicates that this company had any kind of trouble in the repo market. It may have sailed through the repo turmoil without any issues. I’m just using it as an example of who is relying on the repo market and for what purposes.

AGNC is a Real Estate Investment Trust. In essence, AGNC buys mortgage-backed securities issued and guaranteed by the government-sponsored enterprises Fannie Mae and Freddy Mac, and by the government agency Ginny Mae. It also buys Collateralized Mortgage Obligations. These are long-term assets.

And it funds those purchases mostly in the repo market. It makes money off the difference between the higher yields on mortgage-backed securities and the low cost of borrowing in the repo market.

It’s essentially trying to create profits in a highly leveraged manner by borrowing short term at the lowest rates available in the US for a company like this, namely the repo market, and investing in higher-yield long-term securities. This works more or less — until the repo market blows out.

If repo rates spike to 5% or 10%, as they did, suddenly a company like this loses money. And if the repo market counterparties are unwilling to play this game, then any company in this boat would suddenly no longer be able to fund its operations and its leveraged bets, and all heck could break loose. A company borrowing in the repo market to fund long-term investments could blow up in no time.

How much money are we talking about here?

AGNC lists $106 billion in total assets on its 10-Q filing with the SEC. Of them, about $93 billion are mortgage-backed securities guaranteed by Fannie Mae, Freddy Mac, and Ginny Mae. The second largest asset are about $9 billion in receivables from reverse repos. Plus, it shows $1.2 billion in Treasury securities, and some other things in smaller amounts.

But the company has only $10 billion in equity capital. So how does the company fund these investments?

On the day of June 30, AGNC owed $86 billion to the repo market, out of $96 billion of its total liabilities. In other words, nearly all of the cash to fund its investments comes from the repo market.

During the six months period through June 30, the company cycled nearly $2 trillion with a T through the repo market, borrowing short-term, paying back the required amounts when the repos mature, and then borrowing again, constantly rolling over the increasing pile of short-term debt.

So over the first six months this year, this company has cycled through nearly $2 trillion in repos. This is up from $700 billion over the same period last year.

Maturities are typically one year or less but can be longer. Of that $86 billion in repos outstanding on the day of June 30, $66 billion were repos with maturities of 3 months or less, including $14 billion in repos that were due the next day.

So how cheap is borrowing in the repo market?

For the period ended June 30, the company paid an weighted average interest rate of 2.6% on $86 billion in borrowings.

Over the same period, the average 3-month Treasury yield was around 2.3%. So this company was borrowing at a cost of only 30 basis points above the borrowing costs of the US government.

In addition to the $86 billion in repos, the company had listed as its second largest asset $9 billion in receivables from reverse repos. This is where the company borrows actual Treasury securities to cover its short sales of Treasury securities. These reverse repos on its books have maturities of 30 days or less.

The company also uses derivative instruments to hedge against interest rate risks and other factors.

So this is just one example of the many players in the repo market. These players include hedge funds, PE firms, Real Estate Investment Trusts, banks, and others.

But banks have the lowest cost of funds, namely deposits. Many banks still only pay minuscule interest on the bulk of their deposits, such as basic savings accounts and checking accounts, including corporate checking accounts. The average cost of funds, all funding sources combined, for a bank like Wells Fargo is below 1%. And most banks don’t need to borrow in the repo market. But they’re expected to lend to the repo market.

The Fed has said nothing about which entities had trouble borrowing in the repo market. It has only discussed a couple of suggestions why banks might have refused to lend to the repo market, and has said that it is still investigating why banks had refused to lend to it. The whole thing is still shrouded in mystery, and speculation is all around it.

The big risk for a firm like AGNC is that suddenly, it’s locked out of the repo market, and can no longer borrow in the repo market, or can only do so at a very high expense when the rates blow out. But it must borrow in the repo market to constantly roll over its debts.

AGNC is just one of many players in the repo market. The daily balances outstanding of repos and reverse repos was nearly $4 trillion with a T. But only about $95 billion with a B were accounted for by AGNC’s repos and reverse repos – that’s only about 2% of the total.

All these players knew that the repo market could blow out at any time, and that it could implode their long-term leveraged bets that were funded short-term in the repo market, and that this in turn could incinerate the firm and create contagion.

But these folks weren’t born yesterday. They figured from get-go that the Fed would step in and fix the repo market if it blows out. That had been their bet. And they were right. The Fed stepped in and fixed it so that the speculative, highly leveraged games can continue, the games of borrowing short-term in the repo market and betting those funds long-term on leveraged financial speculations.

The thing is, the real economy would do just fine if hedge funds and others such as AGNC could not borrow in the repo market, but had to fund their bets in other ways. This is a corner of the financialized world that has nothing to do with the real economy, real investment, production, consumption, or jobs. It’s just some players trying to milk the financial system by taking huge leveraged risks and betting – and that’s the real bet here – that the Fed will step in and save their asses when the whole thing blows up. And that’s what the Fed is currently doing.

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  60 comments for “What’s Behind the Fed’s Bailout of the Repo Market?

  1. Bob Hoye says:

    A classic case of borrowing short and lending long. As old as time.
    Then there is the problem of when boomed, liquidity issues are first discovered in lesser exchanges. As on July 1st, with the Asian Crisis in 1997.
    Starting in Thailand, the establishment said it would not spread. When it hit other countries in the region, the tout was that it would be “contained”.
    It hit New York and that September clocked one of the worst months in the corporate bond market in ages.
    This series of liquidity failures started earlier in the year with Argentina and Turkey. Then when hitting India and China, I used the term “outlying” exchanges. These are big, not “lesser”.
    Two thousand years ago, Cicero noted that if there was a problem in the Eastern Provinces, it would hit the financial center in Rome.
    And the “Repo Crisis” is the symptom of the liquidity problem hitting New York.
    The injection of credit has been heroic, but quite likely the Fed won’t be able to defy a global loss of liquidity.

  2. Bruce Sammut says:

    Moral hazard to the nth degree.

    No end in sight to the Fed’s put.


  3. Ricardo says:

    Good description of the facts, but I don’t agree with your final comments.

    The REITs purchases of MBS increase the prices of the MBS, lowering their yield, and increase the liquidity of the mortgage market.

    Mortgage brokers and banks can sell their retail mortgages to the MBS underwriters at better prices, and at the end, the consumer should get the benefits of slightly lower mortgage rates.

    Let the REITS take the risk and the profit for their benefit and the benefit of the consumer. It is not the REITs fault that the Fed fixes the market rate.

    • Dale says:

      Good point. This is all a consequence of the Fed trying to manipulate short-term interest rates, and also long-term interest rates.

      But the curtain fell for a few moments in September, and we saw the real short-term market rate: 10%.

      Fake it till you make it, Jerome. Fake it till you make it.

    • California Bob says:

      How are the REITS ‘taking the risk’ if they know the Fed will bail them out if the repo market blows up?

  4. jrmcdowell says:

    “What they do is borrow short-term in the repo market, and invest this cash in long-term investments in a highly leveraged manner.”

    In effect, the Fed is subsidizing financial speculators by giving them preferential loans with lower borrowing rates through repo operations. In addition, the Fed has restarted the printing press and is buying $60B of Treasury bills per month which they will purchase at a market premium, albeit a smaller one since they’re purchasing shorter-term bills as opposed to the longer-term (more volatile) notes, bonds and MBS of prior QEs.

    This is the classic one-two punch of asset-inflating monetary policy where interest rates are lowered while newly created money is pumped into the markets. As the short-end of the yield curve is jackhammered down by the T-bill purchases (and cuts to the fed funds rate), the additional liquidity provided by these favorable asset purchases and repo loans will generate more hot air (money) for insiders to pump into the everything bubble.

    The problem (besides blowing risky bubbles and favoring the few) with these monetary schemes is that the inflation created is not evenly distributed as wages do not keep pace with the cost of housing (and countless other items) while extreme wealth pools at the top. And the economic prospects for the next generation of kids (who aren’t inheriting wealth) are being sacrificed at the altar of this epic money-grab.

    Shouldn’t we at least leave the kids a few crumbs before the next 20 years of gains are pulled forward and transferred upward?

    • Unamused says:

      Shouldn’t we at least leave the kids a few crumbs before the next 20 years of gains are pulled forward and transferred upward?

      Not if they can help it. All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.

      Twenty years? Now that’s optimistic. They’re gaming the markets like there’s no tomorrow.

      • bungee says:

        The fed just disagrees with wolf’s analysis, namely that: the real economy would do just fine if hedge funds and others such as AGNC could not borrow in the repo market.
        The Fed thinks (and they should know) it is a big enough threat to risk their public image and increase after years of painstaking reduction to their balance sheet.
        The system is self-defending and it will kick the can as long as there is road. The problem is not the rich or your “masters”. It’s that millions of people’s savings are dependent on these debts being rolled over into perpetuity. When the rich take a haircut, it’ll be the middle class that riots. It would probably be okay, but you know, politics.

  5. Unamused says:

    Whose Bets are Getting Bailed Out by the Fed’s Repos & T-Bill Purchases?

    It’s their way of financing cash-burning, “disruptive” new businesses, so as to break down the Old Way of Doing Things in favor of a New World Order which the FIC can more easily control, leaving the General Population not merely more vulnerable but absolutely prostrate. They’re in sort of a hurry to complete The Project because the ecological and social supports of the existing order are falling apart faster and sooner than they anticipated, and they’re losing their window of opportunity. They don’t want everything to turn into a messy salvage operation.

    In other words, they’re bailing out their own bets, on behalf of the member banks that own the Fed. Other CBs pursue variations on these and related techniques, and the overall goals of the cartel motivate their other programs of economic, political, corporate, and social manipulation as well.

    Was that a rhetorical question?

    • Buckaroo Banzai says:

      Good analysis. We’re moving rapidly towards a dystopian tyranny where all resources and information are controlled by a tiny technocratic elite who will rely on their monopoly to ruthlessly suppress the general population by (1) atomizing and homogenizing it into fungible inputs of human labor, (2) preventing it from accessing or sharing any kind of information that does not promote the interests of the elite, (3) rendering it physically helpless by completely disarming it and (4) promoting increased mental/emotional/physical/spiritual morbidity via psychotropic drugs, moral degeneracy, toxic food, and a ruthlessly exploitative “healthcare” industry designed to weed out and destroy the “weak”.

  6. fred flintstone says:

    Prior to WW2 the navy authorized the new Essex class carrier in July, 1940 and it was operational May of 1943 with a new design class of aircraft on its deck.
    The Ford class carrier was authorized sometime around 2002 and they hope to get it operational in 2021…..
    and they wonder why we run a 40 billion dollar per month balance of payments deficit.
    The butt kickers are in jail and the pansies are growing everywhere. Good luck with this.

    • Kent says:

      Yes, but that Ford class carrier is much more capable of fighting WWII than the Essex class was.

    • X-Pat DE says:

      Getting stuff done on time, working as specified and under budget is so …. 1940s. Endless (military) projects wars on “terror” and “drugs” are, for the few milking the system, an eternal hand to the fruit of the magical money-tree.

  7. WES says:

    It just seems to me that this type of unreal financial game is a tool that the Fed needs to help them control the real market.

    The Fed itself uses hugh leverage to control the real market and repress interest rates.

    These tools know the Fed needs to keep them alive, so they game the system set up by the Fed. For the Fed it is just the cost of doing business.

    It is just another of the many ways the little people are skinned alive.

  8. Memento mori says:

    Everyone seems to think that Fed is printing money ad infinitum, but is it really?
    I struggle to understand how this is happening as all fiat money is issued as debt.
    So if the Fed prints one million to buy my bonds in a pomo or repo, eventually I will have to use same money to buy back my securities so no new money is created in fine.
    The Fed just can’t deposit money on my account without something in exchange.
    Can someone describe the mechanisms that the Fed uses to inject freshly printed money permanently in the system?

    • jrmcdowell says:

      The Fed is creating (printing) money by paying above-market prices for the assets it purchases. For example, the Fed purchased mortgaged-backed securities during its QE operations. It obviously paid much more for the MBS than the market would have paid during the time of the purchases. In my opinion, that difference (we’ll never know the exact amount but it would have been huge) should be considered printed money.

      • Calculator says:

        To calculate the amount, how much money did the Fed hand over for these. Remember, the whole system was crashing to the ground because these MBS’ had a market value of zero. Or at least so close to zero as to make that a close estimate of what the market would have paid for them at the time. Thus, to calculate the amount you refer to, take the amount the Fed paid out, then subtract zero.

      • Memento mori says:

        I think that is small potatoes, because the price for bonds while it fluctuates, at maturity reverts to the face value . Not convinced.

      • Iamafan says:

        The banks made about $650 million in the bid ask spread selling to LSAP or QE.
        Source: https://fortune.com/2014/07/23/big-banks-made-650-million-off-of-feds-qe-program/

        • jrmcdowell says:

          That $650M amount was only the estimate for the fees and not how much the Fed would have paid above free market for the assets which would have been a much larger amount.

      • otishertz says:

        The fed is also printing money by purchasing government debt which then all gets spent into the economy.

    • Fed Chopper One says:

      “The Fed just can’t deposit money on my account without something in exchange.”

      The term you are looking for is “helicopter money”. And it is frequently talked about in central banker circles as a ‘innovative’ way to deal with the dip in the business cycle. I’m not sure as to the extent that its been used so far around the world, but there is little doubt that they would have done it before if they felt they needed to.

      Remember, the Fed is owned by the big banks, and the owner gets to decide the rules. Plus, they keep what they do a secret from any elected people, so this is really the case of the fox guarding the henhouse.

    • Iamafan says:

      The Fed is injecting money to the BANKS not MAIN STREET.

      The (primary dealer) banks buy Treasuries and the Fed buys these treasuries from the banks with (or by) paying them Excess Reserves at the Fed. The banks are then paid interest on reserves (an incentive to keep the reserves as reserves at the Fed).

      Of course you need to figure out how the banks originally got the money to pay for the treasuries they bought in the first place. That is what repo and all the 4 letter programs were for.

      With permanent POMO the banks do not have to buy back anything. It is a permanent purchase by the Fed and not overnight or term repo (re-purchase agreements). The Fed simply rollovers the security at maturity with the Treasury as SOMA add-ons at NON-COMPETITIVE yields.

      The banks do not need QE to lend to C&I, real estate, or personal loans.
      They can simply create these loans through fractional reserve banking (aka thin air) and double entry accounting. Their problem is getting paid back, that’s why they have to be choosy or securitize risky loans so they can sell them to others who want the yield and the risk.

    • medial axis says:

      Here, in the UK, QE works by creating a firm called the Asset Purchase Facility (APF). It issued £375 billion worth of bonds and used them as collateral for a loan from the Bank of England (the bonds are backed by the Treasury[1]). Waving this wad of £375 billion the APF entered the bond market offering to by govt bonds and paid a good price for them, no doubt (all in he market knew the score). In other words, the govt was effectively buying its own debt. This means firms that normally buy govt bonds (pensions for instance) have to invest elsewhere (property for instance). Does that create new money in the real economy?

      [1] Yes, it’s all smoke and mirrors.

    • Fed doesn’t print money, or issue bonds, Treasury does that, and they only print money when banks request the money. They create credit out of thin air, that credit is extended to business and new goods and services created and by extension demand for MORE money. (not just the money already in circulation). No small irony that it hasn’t worked that way for the last decade. Money velocity runs inversely to money supply, which means new money is leaving the system, (hence no real inflation) and companies buy their own stock and retire the paper.
      Fed does set reserve limits for banks, which is cash banks must put outside the fractional reserve system. When Fed opens Repo it allows them is borrow the money to place in reserves, which frees up other money for their trading desks, derivatives, etc. Each variation of Repo has a specific purpose, so using all of them at once should rate our attention, like a football coach calling every play in the playbook.
      The functioning basis for their operations depends on fungibility of Treasury paper, when they ran into problems with longer maturities they switched to short term T Bills, forget what happens to the curve, they don’t care. They don’t care about putting more reserves against a run on the banks either. They have FDIC for that. What do they care about?
      When liquidity is not an issue Fed may worry about labor, inflation, blah blah but they worry most about this process of monetizing bonds into cash more than anything. The financial economy will lock up when end users reset or reject bond value as collateral. At times like THIS, they put more liquidity into the market to compensate for the shortage in collateral value of these bonds. The net effect is to restore confidence in their paper, while adding more fungible assets to the mix, driving speculative asset prices higher. They give a shot of adrenaline to the heart attack victim, and he jumps up and does a dance. Or not. It’s a sad and scary thing to watch.

    • Aaron A says:

      I believe you answered your own question: “So if the Fed prints one million to buy my bonds in a pomo or repo, eventually I will have to use same money to buy back my securities so no new money is created in fine.”

      The fed creates money by adding a liability to their balance sheet; the offsetting entry is adding Treasuries to its assets. They buy the treasury from you, you then take the cash and put in your bank account, which increases the bank’s reserves, and thereby reducing the cost of banks borrowing (the Fed Fund rate). Lets say two banks need $10 of reserves, one bank has $8 and the other has $12. When you deposit $1 into bank 1 or 2, either bank 1’s need for additional reserves goes down, or the bank 2 is willing to give up its excess reserves for cheaper, thereby reducing the cost of interbank borrowing…. When the Treasury comes due, the US goverment pays back the principal, and AT THAT POINT IN TIME the Fed either reduces the money supply or buys another Treasury with the proceeds they just got,

  9. Lisa says:

    And just what are some of the names of the human beings making the strategic decisions behind the corporate veils like the one that you used as a prime example that the fed has so kindly accommodated to continue the game?

  10. Cally says:

    This is of course insane.

    The capitalist markets are supposed to exist to provide efficient allocation of resources. Which is not happening in this example.

    What is odd is that the same instruments can be a vehicle for investment and trading and also considered solid gold collateral for super cheap interest rates.

    So, basically the rules and regulations have created a wormhole, where the same piece of paper is both a profit-making investment (which should involve risk to be worth the profit), while it is also solid-gold collateral of such a risk-free nature that the nation just hands over money no questions asked. This is almost certainly especially designed to let people who have access to such super cheap interest rates have a scheme to automatically make money.

    In the big picture, this does absolutely nothing to help the country. And we wonder why our system, with so many little confidence games embedded in it, has trouble competing with other countries.

  11. HB Guy says:

    ZeroHedge has suggested that the JP Morgue’s asset shuffling was the source of the repo rate’s sudden jump. Certainly plausible…

    I’d like to ask another question: how much of this repo madness, and Fed largesse, will find its way to Deutsche Bank? US subsidiaries of foreign banks were among those most in need of the Fed’s aid, according to ZeroHedge.

    This is just another case of banksters helping fellow banksters.

    • Wolf Richter says:

      What has been suggested by ZH, the Fed and myself — and was confirmed by Dimon himself — was that JPM’s role that it failed to fulfill was on the lending side to the repo market. It didn’t lend to the repo market when everyone thought it would lend to it as repo rates shot up. This has been well established now. Other big banks might have had the same problems on the lending side. What we don’t know is what was going on the borrowing side of the repo market.

      • CapOB says:

        We know, the problem was “Lousy Paper” assets, the problem is that JPM is not interested in buy low-quality debt as a security.

        The problem is JPM is taking their CHEAP FED MONEY, and buying ‘AAA’ paper, and refusing to buy the dog’s of wall street, the problem is that most of the paper brought to the REPO market for cash, the underlying securitys are JUNK.


        So the system is NOT working, you have JPM which is the 500LB gorilla of banking, and they’re refusing to FUND the puppys, locust, and larvae of Wall Street. If you had 100’s of banks, then there would be some hungry bank that would take the biz, just to get biz (commissions), but now we have HUGE banking monopolys that pick&use what assets they want to HOLD.

        Here’s is another IDEA, we know that we have TWO systems now, the GOV mafia gets low rates, and the PROLES pay 20%, just maybe what JPM is doing is forcing certain BIZ that are not “In the Club”, to also pay say 10% rates for REPO money. It would be the logical next step, for the GREEDY who run our system, to start extracting more FLESH, because they can.

      • Bob Hoye says:

        Wolf–good note, but…
        JPM out of the Repo market was based upon focusing on long Treasuries. That decision may have been made weeks earlier on the then popular theme that US long rates would decline to at least zero. As in Europe.
        The bond rally into late August was outstanding. Outstanding enough to ring all of out technical “Bells and Whistles”.
        So JPM had bought the hot story and taking them out of the Repo market.
        Just when the liquidity vacuum that started in Turkey and Argentina hit New York.
        Just guessing on JPM’s likely decision path.

    • Iamafan says:

      I am a bit confused here. I don’t think JPM had an obligation to lend at Repo even if they had the extra liquidity to do so. What’s wrong with extracting a ransom (10% overnight) if that was what the market rate was? Are borrowers now cry babies? Most people pay a lot more for credit cards. Student debts are at least 7%.
      With rehypothecation, you never really know just how good that “secured” collateral is.

      I wonder, in the case the borrower can’t pay or buy back at repo, what would be the real cost for DTCC to actually sell the collateral to make the lender whole. Holding back lending is sometimes the smart thing to do.

    • Tom Pfotzer says:

      That ZH article also said that JPM has been rotating out of cash and loans and into “long-dated bonds”. The article also said that JPM was planning to distribute $32B in dividends to stockholders (the entire year’s profits), and so needed cash to do that job as well.

      A few people interviewed by the article’s author speculated that JPM was taking money off the table, locking in longer-term (higher) interest rates via the long-term bonds in anticipation of a recession and the expected lowering of interest rates by the Fed.

      Meanwhile, Bank of America was doing nearly the opposite; they were adding new loans as fast as JPM was shedding them. BoA’s reserves posture (bank regulator rules) is different than that of JPM.

      This whole story doesn’t really add up for me, though. Banks run their operations to make money. They are opportunistic. If someone’s willing to pay JPM 10% for overnite, or worst-case, 2-week tie-up of cash that is well-secured (REPOs are apparently very well-secured via pledging Treasuries and like-risk-free collateral)…why would they not jump on that? It’s what they do. And that’s much, much more profitable then their other uses of this cash.

      I don’t think we’ve dug down to the real motivations of the big banks, on the lending side. The lenders are the ones acting differently, not the borrowers. The lender’s behavior-change is where the story is. And we don’t yet have the whole story.

      Is it true that none of the other major banks stepped in to make up the shortfall “caused” by JPM’s refusal to lend into the REPO market? Why not?

      Remember that the Fed is composed of the Member Banks, and JPM is, by far, first among equals. Fed bank-side policy emanates from JPM first.

      That cash – the short term would-be-repo money – may have had a higher calling elsewhere, or was used as a policy instrument (lever) to achieve a desired behavior.

      • Because they are afraid they won’t get their bonds back. It’s still a collateral issue, at first glance it seems cash takers did not trust the securities, but in reality maybe the security lenders didn’t trust the cash? Cash is trash….

  12. Glenn Hautly says:

    The current “bail out” of the “ENTERPRISES” (GSE, MBS and F&F) is costing taxpayers billions of dollars per day. Quote: 9/30/2019: FEDERAL HOUSING FINANCE AGENCY, director “The Enterprises are leveraged nearly 1,000-to-one, ensuring they would fail during an economic downturn – exposing taxpayers once again”. In response to this issue President Trump stated: “Fannie & Freddie should not be the responsibility of the Treasury Department”. Trump will be forced to end the bail-out and “sell” F&F to private financial institutions. Private institutions will not be making or buying long term mortgages given current economic realities: FALL This a repetition of 1933; (see page 3). The current economic slowdown and capital markets crisis is the “handwriting on the wall”. “Thursday (October 24, 2019), the Federal Reserve announced that they will nearly double the repo liquidity (Quantitative Easing; printing money) to $120 billion daily.” (This amounts to $2.4 trillion per month); from:

    • Tom Pfotzer says:

      Glenn: Great article @ seekingAlpha. Thx for the pointer.

      In remarks that Federal Housing Finance Agency (FHFA) director Calabria made recently, he pointed out that Fannie and Freddie Mac’s leverage had been decreased to 300x. FHFA is the “conservator” that now effectively controls Fannie and Freddie.

      See: https://www.fhfa.gov/

      Navigate to the “prepared remarks by Dr. Calabria to Structured Finance Assoc (SFA). It’s a short read, transcript of a short speech, and it is telling the main operators of the mortgage origination / packaging business what to expect from Fannie/Freddie over the next few years.

      The actual agreements between Treasury and Fannie/Freddie are also provided at the fhfa site (5 pages each) and make a good read, if you’re into original source stuff.

      The core idea is that the public is still on the hook if the mortgage market tanks like it did in 2008, and that currently, nobody (private investors) seems to want to assume that risk, so that situation is unlikely to change.

      The Federal Gov’t, thru Freddie and Fannie is the market for most of the mortgages being originated today. This has been the case for the last 11 years, ever since the 2008 blowup. Gov got to hold the bag, nobody else wanted exposure to the next 2008.

      That means we, the public, is still holding the bag. Calabria’s trying to work us out from under that rock. How much help is he gonna get from some other bag-holder?

      Is anything really different today .vs. 2008?

  13. CrazyCooter says:

    Is there any way to know what the average weighted yield they are earning on their investments? Curious what the spread is … and how much return they are getting on their 10 billion in equity capital.



    • Iamafan says:

      I am assuming you mean the securities bought by the Fed.
      You can aggregate all the coupon yields that the Fed SOMA publishes. When I checked a while back, I saw 30 year bond purchases upward of 7% interest coupons. Not sure how easy you can get the purchase prices though.
      But in the end this might not be that informative since the Fed returns the interest earnings minus the cost of running the Fed to the Treasury anyway. So it just goes back to the same pockets.

  14. Dale says:

    Borrowing short and lending long. That’s the definition of a bank. This is a shadow bank. And wholly endorsed and fully supported by the Federal Reserve, despite its claims to be dubious of shadow banking. (Indeed, there is reason to believe the Fed invented the term ‘shadow banking’.)

    And all in order to keep mortgages rates low and prolong a bubble that cannot continue.

    Not since Bernanke have I seen such vivid evidence of the Fed’s incompetence.

    • Unamused says:

      Not since Bernanke have I seen such vivid evidence of the Fed’s incompetence.

      Incompetence? No, that’s not possible.

      While Hanlon’s Razor advises you to Never attribute to malice that which is adequately explained by stupidity, the converse must also be true: if there is no way it can explained by stupidity you must attribute it to malice, and they are anything but stupid. Heavily corroborated accounts of that malice predate the Torah and have never abated since. Where they err it is only in allowing their avarice to outrun their machinations.

      • CapOB says:

        Just greed, there is no limit, FIAT to infinity, so ergo GREED & THEFT to infinity.

        Look what’s happening the banks pay 1.5%, they loan to credit-card people for 20%, and the paycheck-adv places are doing 2,000%.

        Get yours while you can, its clear that everybody is doing it, just like the medical racket, education racket, housing, in every direction you look they’re trying to extract the MAX, the problem is there aren’t that many people left that are not on the dole, or not in a soup line. So now scavenging for the last of the last that still have flesh to steal.

        Total poverty & misery for all is how this will end. Schools will close, hospitals will go black, and drugs will be impossible to find.

  15. Iamafan says:

    I wonder how we survived for many decades with the Fed owning less than 800 bil of securities and zero excess reserves.

    Now they have more than 4 trillion in securities and about 1.5 trillion of bank reserves when only 200 bil is required. Fascinating.

  16. tommy runner says:

    maybe the ‘sitch in the repo mkt’s stem from the Transparency & Accountability – EGRRCPA (S. 2155) 11/16/2017) a bipartisan agreement of the Senate – Banking, Housing, and Urban Affairs beginning w/(115th congress) in effect loosing dodd/frank and including a number of changes to the 2114 lcr rules. the rule (liquidity coverage ratio rule, is calculated by dividing the banks ‘high quality liquid assets’ by its total net cash flows over a 30-day stress period) established a quantitative liquidity requirement that is designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations. the interim final rule also rescinded ​the Board’s 2016 Amendments so that municipal obligations under the board’s rule are treated consistently with section 403 of the EGRRCPA’, among the changes section 403, high quality liquid assets (hqla) – Requires the ‘federal banking agencies’ to amend their liquidity coverage ratio regulations to treat municipal obligations that are “investment grade” and “liquid and readily marketable” as level 2B liquid assets not later than 90 days after enactment. (municipal obligations were no longer required to be general obligation securities and, as a result, many issuances of revenue bonds could qualify as municipal obligations. IFR effective August 31, 2018. Final rule effective July 5, 2019). these hqla municipal obligations represent the collateral for the repo’s and are the same as cash for lcr stress/testing. the link below is the rest of the sections of the egrrcpa w/short descriptions, in the right ‘status’ Column ‘fed reg notice’ is a further description of the rule making, and if final, the effective date. so congress has made these changes and left it to the fed to figure it out, as Jd didn’t want the shitty collateral he begged for, an assed out of the repo, then shrugs an toes the ground. the banks want the fed to back stop the whole process and hold the bag of.. collateral, permanently. perhaps the fed is increasing its bal sheet by rolling over short term t bills to add liquidity to cover the repo mkt and effect the yield curve positively. fun times for a problem solving contractor, different sow than throwing $ at a fan, but same results.. ‘have printer, will travel’.


  17. Adam Robertson says:

    Could it be that the banks have the liquidity to make repo loans, but but just don’t want to be on the hook if the stock market suddenly tanks? Per Occam’s razor, could this simply be about a forcing a new norm?

    • Iamafan says:

      If the yield curve steepens and the prices of long term notes and bonds fall when the yields rise, they might think twice.

  18. Wes says:

    Well done Mr. Richter. Let’s focus one moment on the the what if side of this equation. What if the Fed did not intervene and this so called low risk paper hit the market and the real rate of interest was imposed. Why we would have had real price discovery and the real risk of this paper would be known. This could have very well influenced other assets prices in the same class. This translates to real price discovery, something akin to Adam Smith’s “hidden hand”. This was and still is a true liquidity problem and the Fed cannot suppress it for forever. You can exchange paper back and forth but at some point in time it has to be turned to cash to pay the real bills. If or when this paper is turned to cash the real market value is or will be exposed.

    • Iamafan says:

      That’s called a “Fire Sale” of government securities. To prevent that, the Fed became the BUYER or also known as the lender of last resort. I think the foreigners have wised up to the game.

  19. Iamafan says:

    What could be draining bank reserves while the Fed increases its assets (by buying gov’t securities) ???


  20. Unamused says:

    It’s hard to tell how the machineries of financial extraction are operating here. The data simply don’t fall into the usual insidious patterns. As the tree said to the lumberjack, I’m stumped.

    This can only mean one of two things. Either the Usual Suspects have very deviously gone through a great deal of trouble to cover their tracks, or this is a previously-undiscovered opportunity for ruthless exploitation for the operator who can come up with an unusually clever, cash-burning, disruptive business plan.

    I’ll be expecting the usual intrepid reporting on this in the coming weeks and months, unless we’re all blown to bits or mercilessly suppressed in the meantime, which is actually much more likely if you think about it.

    • Unamused says:

      This was actually intended to be a comment on the more recent article, “Where You Pay the Mostest and Get Approved the Leastest, so to Speak: Mortgage Rates, Fees & Denial Rates Differ Bigly by State”.

      It probably fits here okay, though.

  21. carl says:

    Thanks to Dodd-Frank they now can do whatever they want without any body looking.

  22. Buckaroo Banzai says:

    Wolf, when I think of the REIT market, I think of holding companies that own lots of rental properties and generate a rental income stream. Obviously my knowledge of this part of the investment universe is superficial at best. How much of the REIT sector is composed of pure financial plays like ANGC, who rely on REPO market funding to make leveraged borrow-short/lend-long bets in MBS?

    • Wolf Richter says:

      Buckaroo Banzai,

      The majority of REITs are just like you describe. But there are also mortgage REITs, which is what AGNC and others are. These are purely financial creatures. In terms of size by assets, I don’t know how these two groups stack up against each other.

  23. WSKJ says:

    Thx, all

    I can’t find time now, to read this blog and comments studiously, several times, so am going to content myself with understanding that we recently had a disruption of the smooth running of big banks and money managers wrt the Fed (of course the Fed = select group of big banks/bankers, charged with extra rights and responsibilities), AND, it was a big enough disruption that explanations are still being offered up, and debated.

    Close enough ?

  24. Wes says:

    Mr. Richter, here’s a link from a recent LinkedIn post written by the infamous Ray Dalio. It looks like he may be ready to throw in the towel!


  25. freewary says:

    You commenters are making this way to complicated. Here’s how repo and everything the Fed does works:

    “Lower your rates”
    “Very bad idea, no”
    “Here’s free money, now do it”
    “Ok we lowered our rates”
    “Lower your rates more”
    “Even worse idea than last time, no”
    “Here’s even more free money, do it again hurry!”
    [rate lowering/free money cycle continues several more times]
    “Hey Mr Fed we lowered our rates just like you said, and now we are drowning in bad loans, we need our free money again”
    “too bad”
    “hey we lowered our rates like you said because you had our back, now we are ruined”
    “yup you are out of business now and my cousins are taking over your bank”
    “hey that’s not fair! we thought the Fed was a friendly govt institution”
    “nope, bye!”
    Fed seizes all collateral they want and hand the good assets over to their friends.

    FYI right now we are in the free money stage. Repo is free money. Fed very bad folks end the fed and fractional reserve banking fast or be eaten by it.

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