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Fed Said to Start Talks With Dealers on Using Reverse Repos - Bloomberg.com
“One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. “They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb.”
OMG...this stuff gets more hilarious each day.
And the number one agreement?
The problem didn't remain contained to the G-8.
Notice how Crandall talks about "the dealer community" while the proposal is specifically targeted at MMFNDs, which could bypass the dealers entirely.
Push back already to protect their franchise?
NW
< /snarkon >
Did they decide to let the children (BRICs) eat at the grownup table (G-7) next time?
< /snarkof f>
The reverse repos aren't likely to be optional when push comes to shove. It sounds a lot like the Argentinian plan to force their retirement plans to buy government bonds. The real difference is that this version has enough obscurification/misdirection so that only those of use that are really paying attention will see it for what it is.
Generally speaking, that's the goal of most financial innovation, make the old scam so complicated that it looks shiny and new.
So, as a by-product, broker/dealers have one leg of their TBTF stool just kicked out?
All the better.
Back to your regularly scheduled doom colored glasses commentary.
EEngineer wrote:
Good insight! It does seem suspiciously like that.
The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit.
Or what? The rest of the world will throw itself into a depression to teach us a lesson? Look at the so called G-20. Freakin' 12 of them are smaller than California. Where's California's vote on how the US should address the repressive trade imbalance between them?
EEngineer:
You mean that it's really, really not different this time?
Hoocoodanode!?
NW
EE +100
CAM, I don't think so. The broker/dealers are the 19 TBTF that "own" the FED. It looks more like a way to get the FED to loot the competition.
Look at the bank failures so far. Mostly feeding the small fry to the big fry at the FDIC's expense. This would be using (poaching) the resources of one half of your competition to devour the other half.
in the words of General De Gaulle - 'international agreements are like roses and young girls,
they last while they last.'
Small adjustment, from the Fed's standpoint they would be repos (Fed providing the cash and lending; MMFNDs providing the collateral and borrowing) .
I fear your Argentina scenario is plausible.
unless they set up a framework for instance as envisioned in say the Law of the Sea Treaty
all their lofty notions are the Maltese Falcon equivalent of what dreams are made of...
NorkaWest wrote:
Are you sure this is right? A regular repo to the Fed is someone giving a bond to the Fed and getting cash. So a reverse repo would be the Fed getting cash in return for giving a bond to someone.
If that's right, seems to me this is really a way to tighten up on the CP market by getting the MMFND to sell CP and buy whatever the Fed is reverse repo'ing with the cash.
Norka,
I looked at the last thread a bit and will continue to watch this stuff. These proposals are obviously going to be modified by SIFMA-like lobbies that have a taste of Paulson's TARP Flavored Witches Brew (PTFWB)
Press Release: SEC Proposes Rule Amendments to Strengthen Regulatory Framework for Money Market Funds; 2009-142; June 24, 2009
"These proposals are designed to increase the ability of money market funds to weather future economic storms," said SEC Chairman Mary Schapiro
On June 24, 2009, As proposed, the rule amendments would:
•
prohibit money market funds from investing in “second tier securities,”
prohibit money market funds from acquiring illiquid securities,
limit money market funds to investing in repurchase agreements
collateralized by cash or U.S. Government securities in order to obtain
special treatment under the diversification provisions of Rule 2a-7
require money market funds to file a monthly portfolio holdings report with
the SEC on new Form N-MFP no later than the second business day after
month end to provide more detailed portfolio holdings
create new Rule 22c-3, which would permit money market funds to
suspend redemptions upon breaking the buck if a fund’s board, including
a majority of independent directors, approves the liquidation of the fund in
order to facilitate an orderly liquidation of the fund.
whether Rule 2a-7 should be amended to address risks presented by
structured investment vehicles or similar asset-backed securities...
This does get boring:
Rule 2a-7 -- Money Market Funds
Section 2 -- Definitions
"Government security" means any security issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing.
Like all G-20 meetings this one was no more than a photo opportunity, pretending that they didn't agree before hand, in private meetings and phone calls long before. But let's see, what have they agreed to.
Was this really agreed to? There was no agreement here, these things were and are happening anyways, whether the G-20 wants ti to happen or not. All they supposedly agreed upon is to acknowledge reality.
If the US were actually serious about increasing its savings rate than interest rates wouldn't effectively be zero. If the US were serious about addressing the trade deficit then steps would be taken to promote manufacturing and creating a skilled work force. And if the US were actually serious about addressing its deficit then the government and Mr. Bernanke would stop their insane and hopeless propping up of dead markets.
China and Japan are going to attempt to up their domestic consumption and reduce their exports not only because they have to, but also to try to save themselves.
If the recovery is going to be export lead, then the recovery is many, many years away. Not only will it take time for the US to rebuild its manufacturing and skilled workers, but neither China nor Japan have the domestic markets to support the US economy; and just as important: the US has to restructure to not be so dependent on oil--it take roughly 10 calories of oil to deliver 1 calorie of food. If the US economy were to suffer just a 10% reduction in oil consumption, the US economy and agriculture collapses.
But don't worry, everyone, Mr. Bernanke says that we're recovering--and seeing that the currency sway money is being eaten through and the quantitative easing funds are drying up, all Mr. Bernanke has left in his weaponry is to make constant optimistic statements so people become drunk off of empty hope.
And if/when we find where that $2.4 trillion went, I suspect then we'll be shocked to discover that the Federal Reserve printed up almost all the money to cover the US budget deficit. Who in their right mind would be buying US Treasuries right now? The worse global recession, and yet the world has enough money left just burning a hole in their pocket to loan to the US for very little return?
Let's encourage saving...
Oh wait we've also got to inflate our way out of a slump...
Haha savers, you're fucked!
From CR:
The United States will be expected to increase its savings rate, reduce its trade deficit...
Imagine an export led recovery in the U.S.
There's two components that make up the trade deficit. And the import portion could clearly be reduced by lower consumption and/or a lower oil price.
Ahhh yes, look at this bread crumb:
CDARS, Moral Hazard & the FDIC - Housing Doom
Since the CDARS program provides an excellent source of liquidity and funding for community banks, we urge the SEC to consider treating fully-insured CDs as “liquid securities” for purposes of Rule 2a-7 so that MMFs can hold them without restriction. CDs acquired using CDARS are fully protected by the FDIC. Unlike other illiquid securities, MMFs do not need to rely on market quotations to determine the value of a CD. Fully-insured CDs should also be considered “government securities” since they are backed by the FDIC’s Deposit Insurance Fund, a line of credit from the U.S. Treasury Department, and the full faith and credit of the U.S. government.
'Tis a slippery slope.
edit: I'm too tired to explain why I'm so stupid
So, who is:
http://www.sec.gov/comments/s7-11-09/s71109-44.pdf
FDIC insurance is widely considered to be the equivalent of a
U.S. government guarantee since it is backed by the full faith and credit of the U.S.
government. The FDIC’s Deposit Insurance Fund has a $500 billion line of credit from
the U.S. Treasury Department.
*
No insured depositor has ever lost any funds that were
insured by the FDIC*. We urge that FDIC-insured CDs be considered “government
securities” for purposes of Rule 2a-7 and, as such, considered as liquid securities.
I thought CDARS were sorta behind the hot money thing?
Evil,
Re: "the Federal Reserve would be forcing MMs out of Treasuries by buying the Treasuries, and saying go find something else to invest in."
That's already happening!
Vanguard has closed Vanguard Admiral Treasury Money Market Fund and Vanguard Treasury Money Market Fund to new accounts effective 4 p.m., Eastern time, on Monday, January 26, 2009. The decision was made to protect the interests of current fund shareholders in an environment in which yields on short-term Treasury securities have reached historic lows.
https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article?File=NewsMMClose
Money Markets are the only living, breathing left alive in the liquidity trap game -- and these beasts are being hunted down like wounded animals...
The suggestion that this is for the safety of shareholders is bullshit, Treasury wants to manipulate MZM and force money out of safety. Having FDIC back away from MMs and then having mutuals cutting off access to (prior) Treasury safety is somewhat of an interesting conflict. It is very possible that MM cash will be herded out of mutuals back into a handful of banks, and it is thus possible that the liquidity trap problem from last year (Lehman to TARP) was patched over, but the wound is re-opening and hence credit markets will freeze again.
EPH, couldn't this also be a way to force MBS's and other trash down the MMF's throat at face value? This seems a lot like a game of "hot potato". If it goes bang, they say talk to the treasury...
2 things I am awake enough to say without later redacting:
- On June 30th a primary dealer paid a 7% overnight yield. anyone ever hear a good rumor?
- they are using their Agency MBS purchasing money to buy stripped off coupons. not in any apparent significant way relative to the whole program. but why shouldn't they spend it all hammering down the coupon yields? it's a naïve question, but I'm curious to know
I am viewing it from the point of view of the lender.
When we do repos in our fund, we are lending cash and getting securities.
From the borrower's perspective, they are doing a reverse repo: borrowing cash and giving up securites as collateral.
In terms of the Fed trial balloon about draining liquidity, it was described as reverse repos where they would borrow cash and provide securities as collateral.
Per Wiki:
Repurchase agreement - Wikipedia, the free encyclopedia
Doc Holiday, EEngineer
It's atypical for me, but I haven't read the actual story on FRB meets MMFs yet
my trick of remembering the two sides is that reverse repo has the more complicated name and that is because the initiator gets to force the other party to buy a security
Watching a clip of Erin talking to Julian Robertson. He just stated that should the Chinese & Japanese not attend the T auctions then rates will go to 15-20%. That could leave a mark.
From Wikipedia:
A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints.
TJ and the Bear,
and the Chinese and Japanese and everyone else could have invested it all in pure cocaine, but they didn't and it probably wasn't by chance.
Julian Robertson: US May Face 'Armageddon' If China, Japan Don't Buy Debt | Benzinga.com
“We're in for some real rough sledding,” he said. “ I really do think the recession is at least temporarily over. But we haven't addressed so many of our problems and we are borrowing so much money that we can't possibly pay it back, unless the Chinese and Japanese buy our bonds.” (problems are for our grandchildren to deal with, we only get the pleasures - can I interest you in a new home? car? appliance? paid for by your fellow taxpayer? please?)
EPH, it's late on a Friday night so I'm not surprised you haven't read everything interesting that's come out recently. Personally, I design circuit boards, so the minutia of this stuff is hard for me. I'm content with myself if I can seed those in the know by asking intelligent/pointed questions.
The Fed uses repurchase agreements, also called "RPs" or "repos", to make collateralized loans to primary dealers.
In a reverse repo or “RRP”, the Fed borrows money from primary dealers.
The typical term of these operations is overnight, but the Fed can conduct these operations with terms out to 65 business days.
here
since that spike up to 7% (nb: the other time it spiked to 7% was Oct 8), OMOs have been so stable it makes me want to puke. Before, there was some reasonable freedom of movement. Since that day, it is low 0.05% average of 0.14-0.17%, and high of 0.38% with a std dev of 0.03 to 0.05. Somebody freaked and wanted to take fewer chances
....
as for the reverse repos, why do they want to explicitly do it with MBS? isn't this supposed to be a testing phase? why would it matter
I almost choked reading that. I also will believe it when I see it.
I think this defines a major shift of living standards.
EPH, I wouldn't expect them to start with MBS. I'm just taking the idea to it's logical conclusion in an effort to try and figure out what they could do if they get backed into a corner.
EEngineer,
I'm sure I heard the MBS bit elsewhere too. In any event, I will recall what I said the other night about the reverse repo -- why?
They already have how much in excess reserves? So all the Fed is doing is converting excess reserves, into a reverse repo. No money moves anywhere, but the Fed will pay a higher interest rate. Until they start doing massive RRP, it does nothing. Better to try the Swedish negative interest rates -- because we all know those excess reserves are there to cover a fraction of known but not yet recognized losses at the banks. At least with negative interest rates they'll recognize losses faster and stop confusing the Fed as to why banks "don't want" to lend money
Group of 20 Agrees on Far-Reaching Economic Plan
Sounds like they're trying to start WWIII.
"You're going to have to suffer and pay down your debts and reduce your dependence on oil."
"How about we just take other nations' shit and let them pay down our debts and suffer instead."
In this brave new G20 world, will the gov'ts be as honest and transparent with their policies and commitments as they've been with the rest of the financial mess?
I'm sure that they'll all want to do what's best for the common global good, and not worry about what's in the interest of their own country, people, or the elites that are the power in their little corner of the world.
/sarcasm off, but on auto-wake
On Topic:
I wonder if one of the clever G20 delegations will slip in a coded SOS. Like having the call to action or memo number 4, 9, 14, 24, or 43 pages (unlucky/sound like bad things, kind of like #13 western culture is familiar with)
ac - Bernanke is an expert in the great depression, so I'm sure he does know that a world war is just what he needs to pop the U.S. out of this mess like a bullet - oh - unless the wars were on THIS side of the oceans, then not so much.
EHP - sometime in the future, (G) 7, 8, and 20 could all be considered unlucky numbers.
I do find it interesting when it's suggested that a WW would be good for ending the recession that nobody comments on the possibility of that war occurring in the Americas.
There must be some thinkers out there in other countries who could see some real advantages to having that happen.
Of course, they could also just keep things going like they are until they own the continent. That might work too.
Why am I suddenly smiling to myself with the mental picture of NY, DC, and LA all being turned into reserves for the 'native' Americans (plus maybe Toronto, Vancouver, and Mexico City), where everyone gets to play with their shiny beads while the new rulers take over the rest of the country?
Conquest is, after all, a very effective gov't make work program.
Imagine, if you will, a world without...
I suspect their imaginings will produce as much as John Lennon's.
Whatever happened to the thing about banker bonuses? Didn't Merkel need something in writing by tomorrow?
I worked for a major company before Solly where I did repo deals on a daily basis.... we had about 200 mil,
so say Goldman or Morgan would call and pitch me overnight rates or x number of days forward, my only constraint was the duration mix and the quality of CP (A1 P1) I was allowed to hold acc board of directors...
I can't ever remember doing 30 days out maybe 20 at most...
right, I thought a reverse repo was the other side of the deal but I'm talking 25 years ago...
.......
**happy 40th Anni for Beatles Abbey Road album **
Factory work in Guang Dong is 72c per hour. The official exchange rate is ~7 RMB to 1 USD.
Clearly a fair FX rate would be at least parity, pushing the factory labor to all of $5 per hour.
Who can compete with 72c per hour labor???
plus ça change:
http://en.wikipedia.org/wiki/File:1896GOP.JPG
Vanguard - Vanguard's Treasury money market funds are closed
The Money Market business is really hurting. With short rates at less than 0.10%, most of them are having to eat the fees just to stay above 0.0% returns.
And this is before the new 2a-7 rules come into effect, which will make life a LOT more difficult. Another year of rates like today, and the Money Market business might be toast.
Conquest is, after all, a very effective gov't make work program.
Yes. It's worked well for GS and pals.
The objective the FED is pursuing seems rather simple: when monetizing, they buy assets (MBS, etc) from every market player, which means that those have to substitute what is sold for almost every asset (though, primarily, treasuries). It inflates every asset. This is done on a permanent basis.
But now, when unwinding, they plan to use reverse repos (so, temporary) and buy only from MMFs. Which means that in return, MMFs will be selling just MMF assets to compensate, which is not the reverse of when monetizing.
This means that the monetization inflated every asset, but its unwinding is designed to deflate only some assets which don't manage to deflate at all: short term high quality debt, and whose rates can be controlled using regular monetary policy tools!
Happy 40th Anniversary for the release of the Beatles Abbey Road album... some band here in 'da Penh'
is going cover the songs tonight... getting lubed at the moment...
Comrade Troyski (profile) wrote on Sat, 9/26/2009 - 6:51 am
Factory work in Guang Dong is 72c per hour. The official exchange rate is ~7 RMB to 1 USD.
Clearly a fair FX rate would be at least parity, pushing the factory labor to all of $5 per hour.
Who can compete with 72c per hour labor???
.....
here in Cambodia it's dropped to about 67 cents per hour in the garment biz, but the key for these
workers is the overtime they can make... not much of it why now...
I'm like your Indian with his ear to the ground here...
......
hard to get girls working in the factories for 79 a month when they can average 50 a week on the street,
since the spring 73 plants have shut and you can see it on the streets and bars...
i just grepped thru all the comments from yesterday, and only 1 mention of rosenberg.
has this place become an echo chamber that refuses to address info or events that dont reinforce the doom bunker mentality?
first faber threw in the towel, now rosenberg.....i cant think of anybody credible that is still bearish.
maybe todd harrison @ minyanville...other than that, i cant think of anyone.
i am not trying to be an ass here, i was just really surprised that rosenberg flipping didnt generate some really intelligent debate here.
It is, I am certain, my own poor abilities or training which prevent me from following your comment on the FED's use of reverse repos. I can easily believe they choose to apply the unwind to select assets or asset classes, but I really would love to understand completely what you are saying.
Unfair to ask, I know but, if you're inclined, could you clarify for those of us who haven't studied finance? Probably it looks clear already to all but me.
nullpointer,
The link I followed to Rosenberg was subscription only. If that is the one you mean, some of us simply missed the content as we haven't chosen to subscribe.
Please enlighten us. I've never heard of Rosenburg and even Google seems to not have heard of him.
The US has switched its export economy: goods are gone. debt is in. Just think how much we save in transportation costs by sending out digital debt bits instead of tractors and machine tools. Its climate friendly!
Let's see here--Germany to reduce its reliance on exports?
Germany has a decreasing, aging population with strong social programs (e.g. health care) and trade unions and not much in the way of natural resources. So, by the traditional arguments, they should have a huge economic disadvantage when it comes to competing in world economics. And yet those freighters sail out of Hamburg, full of Teutonic goodness.
Merkel must have an iron will not to bust out laughing at the US, who, by all rights, should have an unbeatable dominance in the export market, with natural resources, weak unions and little in the area of social welfare (at least compared to Germany).
Instead of tending to business in the last twenty years, we've been occupying our time with fancy financial footwork, outsourcing manufacturing, waging constant war, gutting our educational system and repeating the mantra of the Reagan-esque "service economy", going from bubble-to-bubble all the while.
And we're upset because Germany is generating too much real wealth?