New York Fed Again Upsizes Liquidity Plans for Turn of the Year
wsj.com
wsj.com
If you see comments complaining about how misleading the article and headline are, they were probably about that one, not this one.
We're talking about an overnight loan of $120 billion (that is, a loan that is paid back the next morning, lent again the next night, paid back in the morning, etc. This article is treating it as a cumulative loan - that is, the second day, it's now $240 billion (never mind that the first $120 billion has been paid back by then), and the third day it's $360 billion (never mind that the first $240 billion has been paid back by then).
That's either incredibly stupid, or propaganda. My money is on propaganda.
>"The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days."
Most people misunderstand this point when discussing repo operations, so it's worth emphasizing.
And how would that happen exactly?
But if it did, the Fed would extend the loan, or loan more. Not very complicated.
Would you be worried about default if you loaned me a million dollars, and I gave you a million dollars of treasuries as collateral?
It blows my mind that people are getting all worried about fully collateralized short term interbank lending.
Not when they keep rolling them over, they aren't.
That, I believe, is SilasX's point about quick expiry. The total amount doesn't accumulate. That's true, whether the loans are rolled over or not.
And yes, that is my point about how to account for it (and that both $120B and $120B x n are bad ways to express the loan significance, for opposite reasons).
Here I was addressing the narrower, quoted point, that they're loans "with short expiry built in". No, when the intent from the beginning is to keep rolling them over, that should no longer count as a loan with "quick expiry built in".
Why do you think that $120B is a bad way to express the loan's significance?
And if that's cheald's point, then it's invalidated. A loan of effectively three months is not lubrication, it's the [can't continue metaphor under HN rules, but you get the point].
It's also worth pointing out that these aren't just free loans propping up banks short on capital - they're collateralized (in many cases, over-collateralized) with treasuries. The Fed isn't "loaning the bank lunch money", it's buying the bank's valuables, which the bank agrees to buy back at a premium the next morning.
The banks should only sporadically need money from the Fed, but it is not uncommon for them to need money to cover reserve requirements. Traditionally, they purchased those shortfalls from other banks on the repo market. Post-2008, the Fed started offering interest on overnight reserves on deposit with the Fed, which gives banks with extra reserves incentive to not loan to other banks, but to simply maintain their reserves. Additionally, banks have a preference for cash reserves over treasuries, since they're easier to move around without signalling the strength (or lack thereof) of the bank's position. All that has led to a constriction of the liquidity available in the repo market, which is why the Fed is stepping in to provide that liquidity. Banks sourcing their reserve coverage from the Fed is a new development, but banks needing to cover their shortages via repos is not. The most significant change in behavior is, broadly speaking, on the supply side, not the demand side. There have been changes to the demand side - notably the increased reserve requirements post-Lehman - but it's the supply crunch (and associated rate spikes, like what happened in September) that's predominantly causing issues.
And BTW, where's my $120B overnight loan?
Who values what the asset is worth? That was the key issue with the 2008 crash. Banks were making up what the assets were worth and rating agencies were rubber stamping them. When the music stopped, people realized those assets were garbage.
There are no toxic assets involved in the repo market.
They weren't "garbage"; they were worth less than expected at the time they needed to be liquidated. This caused major problems (obviously), and it's precisely why the Fed stepped in to provide liquidity. Many of those so-called garbage assets turned out to be great investments.
Because they were sold at garbage prices.
People buy recycled trash and make money doing it but that trash is still garbage.
Where's your $120B overnight loan? Well, I'm pretty sure these loans aren't free. Where's your $7 million to pay the interest?
[Edit: And even if you have $7 million, do you really want to use it to borrow $120B overnight? You probably don't, unless you really have good reason why you need $120B overnight.]
If I invest poorly, and get a temporary bail-out until my investments pan out, I'd still like that $120B please.
"Wall Street Banks Will Funnel $2.93T to the New York Fed over the Next Month"
It seems every single article on that entire site (wallstreetonparade.com) is one part relevant fact, then one part unrelated fact with plenty of innuendo to invite you to draw spurious linkages between those.
There's a fantastic amount of noise that various large banks are major shareholders of the NY Fed, for example.
This despite the fact that being a shareholder of one of the Federal Reserve Banks gives no control over it; or that being a shareholder is effectively required by law. The overwhelmingly vast majority of Fed 'profits' are required by law to be returned to the Treasury rather than distributed as dividends.
Similarly there's a lot of hullaballoo that James Gorman (CEO Morgan Stanley) is on the board of directors, despite the fact his bank is overseen by the NY Fed. OK, sure, but Class A directors (elected by the banks, and required to be bank representatives!) are only a third of the board and cannot participate in regulatory decisions.
tl;dr Banks have money in the Fed that they normally loan each other over night. This is mostly money they are keeping in reserve. At quarterly period ends, taxes and other payments are due so the big banks can't provide the same amount of repo loans so the Fed steps in to do the lending instead. Non story, click bait.
So there is some cumulative impact to argue the point, but like you said it's not the sum of the loans. That said, I don't think this bodes well if you're in the camp that thinks the bigger the bubble the bigger the pop.
AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs. This is needed because left to their own devices banks would just leverage to the max regardless of their cash position.
The crucial point is that the reserve is only measured at the end of day, so a bank can dip below the safety thresholds as long as they make it up by the evening. Overnight loans allow them to ignore the safeties since they just loan the cash for a brief moment to be in the clear with regulation come the daily measuring, but just return the money straight after the measurement has taken place.
It is an organized method by which the Fed facilitates regulation dodging for the financial sector.
Since the regulation was introduced to reign in irresponsible freewheeling and extreme risk taking by banks, the logical conclusion must be that the banks despite the regulation that was intended to keep them into a position that was in line with their public responsibility are at it again.
Can something bad for market come out of it? Like one of big bangs bankrupting or something?
The cash reserve is just a collateral against the risk, needed to stabilize public trust they will not default at the slightest ill wind.
Or would you rather have banks unloading massive stacks of treasuries at market close daily to meet their cash needs, creating volatility in bond markets?
Repo lending means banks don’t have to unwind their positions daily due to a cash shortage, because they have other assets they can post as collateral for cash. It’s not a bad thing.
Why was the cash reserve regulation introduced? What problem did it address?
Why, if banks are not able to comply with this regulation without "unloading massive stacks of treasuries at market close daily", are they allowed to load up on "massive stacks of treasuries" flaunting the cash reserve regulation in the first place?
The goal of a bank is to make as much money as it can with it's assets. It's in the banks interest to loan out as much as it safely can while staying above the reserve requirements. If a bank were to dump it's assets to ensure it met reserve requirements it would likely sell at firesale prices which could drive down the price of those assets for the rest of the market. By taking a loan from the Fed and using those assets as collateral that scenario is avoided. It's also worth noting that these loans are not free, the Fed does charge interest.
So the bank avoids dipping below reserve requirements (and flooding the asset market) and the Fed earns a small amount of interest.
This is not true in reality. The only reserve requirements on financial institutions are on household deposits, and it's peace-of-mind that if 10% of Joe Public depositors show up one day demanding their money the bank won't have to deny.
Functionally there are zero reserve requirements on the vast major of financial institution assets. It's been a long time since the banks have been anywhere near reserve constrained. Many central banks don't even have reserve ratios (like mine in Canada).
Sure this stuff is complicated, but you can literally look it up on Wikipedia. The econ 102 money-multiplier model of deposits is not how modern banking works.
>It is an organized method by which the Fed facilitates regulation dodging for the financial sector.
This is borderline conspiracy theorizing, and it's kind of sad that people blindly accept it.
Generally speaking, banks try to maintain a steady reserve ratio over the whole period, but there's some wiggle room to play it a little loose and just borrow a lot on the last 1 or 2 days of the measurement period.
Source: I used to work at the Fed and studied these patterns.
Lets say that you are Lerrill Mynch. You have 2 clients, today client 1 has $10,000 in AAPL and client 2 has $10,000 in cash. Client 1 decides to sell $10,000 in AAPL and Client 2 decides to buy $10,000 in Ford. You go to the market and find that Soldman Gachs has a client that wants to buy $10,000 in AAPL and MP Jorgan has a client looking to sell $10,000 in Ford. Everyone agrees and everything is happy.
Overnight Lerrill Mynch needs to makes sure that Soldman Gachs gets the 10k, Client 1 gets the shares in the security, MP Jorgan gets the 10k and Client 2 gets the Ford shares. In order to make sure that this whole transaction clears, Lerrill Mynch has to make sure that they have enough cash to cover the transaction.
https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
I'm trying to avoid pedantic arguments and focus our discussion on the safeties and how effective they can be when the unthinkable happens.
In a sense, kind of. If your friend is expected to be able to pay for his own lunch (because it's costly to keep covering for him) and only very sporadically need to borrow from you (because e.g. he forgot his wallet), and suddenly you find yourself doing it every day for several days at a time...
Then yes, it's worse than your friend having to "borrow $10 [once]" from you, even if it's not as bad as him having a $50 shortfall (esp since he does pay you back).
It also means your friend is making a systematic error he's not correcting, and you should probably start charging him more to, in effect, carry his money for him. If you don't, you're enabling his dependence.
Similarly, banks are expected to only very sporadically need liquidity directly from the Fed. If they need it over such long intervals, that's bad, and the daily amount borrowed, by itself, understates the significance. It also feels like the Fed isn't doing its job if the banks aren't paying (and savers aren't receiving) a premium for such an unusually scarce service.
If someone tells me that the NY Fed is looking to significantly (>25%) increase its overnight and short-term liquidity operations and the necessary increases are in the range of tens of billions of dollars then that already sounds pretty important. I don't see how anything you said is an argument that cumulative liquidity is an appropriate measure here. Instead we both seem to agree that if someone had said - the loans are only $150 billion (because that seems to be the one day aggregate limit) then that person would also be misleading.
My point is not that this isn't an important issue but rather that it is an important issue and as such it deserves serious coverage and the linked article is not it.
I agreed that accumulating the entire amount is also the wrong way to account for it (but was pointing out that the daily amount is also an error in the other direction):
>>even if it's not as bad as him having a $50 shortfall (esp since he does pay you back).
If I plan on bailing out his broke ass for the next 5 days, then I have to set aside $50 to do so regardless of whether or not he actually repays me on time. This is closer to the actual situation at hand.
Your friend is a reckless speculator. He lends $10 with you as an underwriter and your wife says it's fine, but I'm going to check every evening he has at least $1 so we at least know he hasn't lost it all.
So every night just before your wife goes to check, you run ahead and lend him quickly the difference between what he still has and the $1 he needs. Your wife checks, he shows her the $1 in his wallet, she leaves and he pays you back the loan you made him a minute before.
This is wholly unsubstantiated, but a link someone posted on this issue in a previous submission on HN (I can't find it) suggested that hedge funds in particular are the main institutions causing this, that the too-big-to-fail banks (JP, BofA, etc.) are unwilling to lend to them in the repo market because the hedge funds are taking too much risk with those funds, and the hedge funds are in turn forcing the fed's hand by telling them that they either step in with funds or they'll either be forced to sell assets en masse or, worse, fail. I'm probably using the wrong language to describe the mechanics of how this would actually take place (e.g., I'm not suggesting a hedge fund actually calls up and forces the fed's hand).
I have seen multiple people assert there's a reasonable explanation for this and others suggest this is just more QE and that the market, after years of QE, can't function properly without it, and so I'm floating what is likely a conspiracy theory as an attempt at getting an explanation from someone informed. Nearly impossible to believe this is a benign event. The parties (the fed, the big banks, hedge funds) haven't earned that trust so if it is benign then maybe there's a first time for everything.
Yes. That's the purpose. You want banks repo'ing Treasuries so they don't dump them (or their mortgages) to pay taxes (or employees or creditors). Repos finance the asset side of the borrower's balance sheet. Tying fungible dollars to specific liabilities is a losing game.
And if someone wants to repo Treasuries to take a new risk position, that's fine. The cash is still injected into the money market through the acquisition of the position. That's the point of the Fed's repo operations.
Note that hedge funds aren't at the Fed's repo desks. They're at the banks'.
> this is just more QE
Repo pre-dates QE. And the Fed supporting money markets goes back to its founding purpose. QE was novel in its scale and the assets it supported, not its act per se.
Believe me I want to believe it's benign, but as I understand it if the fed hadn't stepped in the repo rate would've been high single digits and things would've ground to a halt.
Also, I've heard the too-big-to-fail banks suggest that the funds would be available in the repo market if not for all the regulations around reserves, but I gotta be honest my trust level for what Jaime Dimon et al say is pretty low and in fact if they're saying it it makes it even more suspicious. That's my problem of course, but just looking for a more detailed explanation.
There are hypotheses. The involve post-crisis capital-requirement rules making banks more conservative with their cash interacting with unexpected demand for cash from tax payers. (There is another around carry trades [1].)
At the end of the day, this is all speculation. Predicting demand for cash is difficult. It's also the Fed's job. That we can complain about an overnight rate spiking for a few hours is, itself, a luxury.
> as I understand it if the fed hadn't stepped in the repo rate would've been high single digits and things would've ground to a halt
Probably. Liquidity crises in leveraged markets force selling, which lowers collateral values, which forces selling, et cetera.
The Panic of 1907 is one of the clearer cases of an unregulated money market turning a liquidity crisis into a solvency crisis [2]. This is a known market failure for which a lender of last resort is a solution.
With rates negative there, it makes sense for savvy traders to borrow in Euros (and get paid for it), convert those Euros to Dollars at a U.S. bank (which requires that the bank have dollars available), and then lend in Dollars (and get paid for it). With everybody doing this, the banks quickly run out of dollars and accumulate large euro reserves. The accelerated lending at the discount window is needed so that banks can service all the traders looking to exchange euros for dollars.
The natural economic response to the carry trade would be for the euro to weaken and the dollar to strengthen until interest rates equilibrate, but this'd have political implications that are unacceptable: notably, it'd make American goods even more expensive overseas and deepen the trade imbalance, which would cause job losses in manufacturing and other competitive domestic industries, which would sell out Trump's base for Wall Street's interests again. So the respective central banks get locked in a competitive race to the bottom, where the ultra-loose monetary policy in Europe has to carry over to the U.S. because otherwise either exchange rates or interest rates has to move opposite stated government policy.
I follow this topic on real vision with info from some insiders and big name finance people. The whole thing is a mess. Like spaghetti code with thousands of if statements and no comments, and none of the "developers" (in the Fed or in the trading desks) is answering any questions.
The big take from all this is that the most profitable way forward for the banks now is to creatively mess up as much as they can and declare "out of my control" reserve emergency. What finance people find fascinating is there are no leaks to the public. No whistleblowers and no regulator questioning it in general.
The official explanation doesn't make much sense. Both the taxes and the basel 3 provisions were known well in advance and the projections of the profits are within normal ranges. It doesn't make sense that they were caught by surprise.
1. https://wallstreetonparade.com/2019/12/bis-drops-a-bombshell...
It’s odd to me the overnight market has contracted to the point this extra liquidity is needed.
I’m not particularly concerned about Fed’s overnight loans since I believe they probably technically make a small amount of money off interest.
What’s curious is why the overnight market has become so expensive at the intrabank level?
On one hand it could be a positive result of greater capital requirements due to post 2008 regulations. Alternatively banks could be holding greater amounts of assets in less liquid forms such as properties or perhaps stocks?
Perhaps the high stock market has increased banks asset sheets causing greater liquidity requirements reducing their ability to lend?
I’m very much not particularly well informed here, but if that’s the case, this doesn’t really feel so much like news as the Fed just performing it’s mandates as expected?
First, the massive issuance of treasuries used to fund the persistent and growing US budget shortfalls. As the big Wall Street banks have been tasked with buying up treasuries, massive amounts of liquidity have been siphoned out of the market. The Fed Will ultimately have to restart QE (in perpetuity) in order to fund the debt.
Second, hedge funds have been taking advantage of the repo markets, funding massive leveraged trades. Of course as the Fed pumps more liquidity into the system, these hedge funds will only ramp up their leverage. This is why Fed lending will be perpetually insufficient, because any increase in lending will just be used to support more and more leverage. It's like throwing paper towels at a water main break.
Short-term as in short-term financing, i.e. overnight lending.
Nobody expects repo to go away in the same way nobody expects interest paid on excess reserves to go away. It's a tool the Fed uses to manage the money markets. Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from.
Wrong. It used to be this way but they switched it up in 2003.[1]
The Fed is considered the "lender of last resort" and they manipulate the interest rates to keep it that way.
They used to target the Fed Funds rate to be higher than the discount rate. But that didn't make sense if you think about the system the government wanted (for a while it was thought that embarrassment/the risk of increased oversight was enough of a barrier that the lower rate was OK).
There was no "switching up". The relationship between the discount [1] and Fed Funds [2] rates is a lever for tightening and loosening monetary policy. Over the Fed's lifespan, the discount rate has typically been higher than the Fed Funds rate, to dissuade the former's use.
And neither is the topic of discussion, which are the repo reference rates [3].
All that said, yes, when the Fed is tightening one may find market rates cheaper than the Fed's.
[1] https://www.federalreserve.gov/monetarypolicy/discountrate.h...
[2] https://www.bankrate.com/rates/interest-rates/federal-funds-...
[3] https://www.newyorkfed.org/markets/treasury-repo-reference-r...
> Fed repo operations take in Treasury, agency and mortgage bonds from eligible banks in exchange for short-term loans of cash. They are effectively collateralized loans from the central bank, and they are designed to ensure the financial system has enough liquidity to keep short-term rates relatively steady.
> The Fed has used repo operations, as well as purchases of government securities, for decades to control short-term interest rates, which is key to its ability to influence the direction of the economy.
> The Fed’s response to the financial crisis and its aftermath, however, put repo operations on the shelf for just over a decade. The Fed started using them again in mid-September after interest rates in the repo markets, where firms borrow and lend securities and cash short-term, unexpectedly spiked.
https://www.wsj.com/articles/new-york-fed-again-upsizes-liqu...
I think it matters quite a bit whether these operations are an unusual emergency measure, or the Fed is merely resuming common operations that it paused in the wake of the financial crisis.
Here is some context on the September 2019 bailout (dated September 23), and they actually foreshadow that more intervention would be likely:
https://fortune.com/2019/09/23/repo-market-big-deal-400-bill...
If I lend you $50 overnight, and then you repay. And then I lend you another $50 overnight and you repay, most market folks would consider this $50 in credit/loans, not $100 in credit/loans.
I do think there will be a crash similar to 2008, but this is not evidence that it is coming.
i agree but i lack a specific metric or analysis that supports my thinking. do you have one?
Systemic risk is very costly to hedge against, and to do so requires keeping capital idle that could otherwise be productive.
Also, esoteric financial instruments are always going to be less liquid than simple securities, yet the incentive of financial firms is to create them and find markets for them. This is analogous to any industrial input (raw materials) and output (finished product).
Complex financial products are desirable for use as underwriting capital because they can have specific characteristics that make them preferable to cash. But in fact the actual desirable characteristic is that their usefulness as a hedge against systemic risk has been sold off, leaving something that is legal as risk capital but ineffective against systemic risk.
Hence, the financial system has an incentive to create complex, entangled, webs of risk capital, none of which is cash, and all of which looks fantastic if you just look at its core (non systemic) risk characteristics.
When there has not been a systemic risk event in a while, such systems appear to be ingenious and clever. Regulators "understand" them well enough to deem them suitable as risk capital in good times (due to their non-systemic risk characteristics) and in bad (due to their lower cost).
The issue in 2008 was that the derivatives had baked in resilience to some systemic risk. If you design it with resilience to any systemic risk, it ceases to be useful.
So the game is simply baking in enough resilience to comply with regulations, collect quarterly bonuses, and repeat.
When you think about it there is really no regulatory framework for minimizing systemic risk exposure except for a handful of limits on firm size and some nuances of underwriting capital, created after the great depression.
I'm not American, so I feel like I'm missing the significance that might be obvious to everyone else.
"One one side, we have geophysicist Dr. Alicia Gomez to talk about the history of learning about the shape of the earth and its place in the cosmos. On the other side, we have Bob from the internet, who claims it's flat".
Edit BTW, good follow if you're interested in this sort of asymmetry and how it's playing out in many ways: https://twitter.com/jayrosen_nyu
Tangentially, if you want to see how several media outlets deal with a single piece of news i suggest https://spidr.today (not affiliated, just a satisfied user)
If you ignore the comment box it's pretty cozy and useful.
I wanted to understand more about the situation itself, but the writer's obsession with the NYT (to the exclusion of every other news outlet that is not covering this situation) was weird. I was curious why the NYT, above all others, is so important in this.
In short; can we see exactly what this money is used for?
Otherwise it's just a big robbery.
Yes, it's earmarked. Yes, it's traced.
No, the Fed's books are not "open to everybody". They are, however, open on a delay to a ridiculous level as you can find from their website. (As in, if you want to know how much each institution has borrowed on what terms, you can do that.)