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Statement Regarding Repurchase Operations

newyorkfed.org

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Re: Statement Regarding Repurchase Operations

#61

Post by toomuchtodo »

situational87 wrote: post #37
toomuchtodo wrote: post #15

Earlier quoted context omitted.

It’s to prevent a cascading failure due to a rapid loss in confidence requiring even greater action from the Fed (such would occur if interbank lending dries up because of counterparty risk [perceived or actual]). Disclaimer: I work in financial services, but am not involved in these operations.

How about all the series of cascading failures due to a rapid loss of housing and healthcare and jobs that are affecting people who aren't bank executives? Who is on top of that one again? All the homeless people who live near me have started using the nearby car wash as their toilet, which is making the whole neighborhood smell pretty awful as everyone refuses to deal with this problem. I'm so glad Wells Fargo does…

These are important issues to be solved, but outside of the Fed’s control.

Re: Statement Regarding Repurchase Operations

#62

Post by ww520 »

SilasX wrote: post #12

To retry my earlier comment[1]: The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%. Over three weeks. That means banks are, at most, saved from having to pay an (extra) interest charge of $3.6 million per 1 billion (revolving) dollars borrowed. [2] That ... still seems like a rounding error against their typical quarterly profits, considering it's a one-tim…

The 2.25% overnight funding rate is the basis for a lot of other rates out there, like the loans the banks lending to the public. The Fed doesn't care about saving the banks a few millions. The Fed cares about setting the short term interest rate for the whole economy.

Re: Statement Regarding Repurchase Operations

#63

Post by azernik »

o-__-o wrote: post #57
motohagiography wrote: post #22

What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. But more seriously, legit que…

>Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because…

This is a reference to Elon Musk's financial strategy, specifically https://www.reuters.com/article/us-tesla-offering-banks/elon...

Essentially, he has almost nothing in cash, and instead of selling stock to raise cash he borrows money with his stock as collateral. This is why he's so monomaniacally focused on his stock value and public image.

For a more professional, but login-walled, overview, see https://www.economist.com/business/2016/10/22/countdown

Re: Statement Regarding Repurchase Operations

#64

Post by azernik »

motohagiography wrote: post #22

What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. But more seriously, legit que…

Continuing seriously, those $500M for Musk are peanuts to the financial institutions involved.

Re: Statement Regarding Repurchase Operations

#65

Post by haidut »

motohagiography wrote: post #22

What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. But more seriously, legit que…

>Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other.

And what might that massive geopolitical conflict be?

Re: Statement Regarding Repurchase Operations

#67

Post by one2zero »

azernik wrote: post #63
o-__-o wrote: post #57

Earlier quoted context omitted.

>Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because…

This is a reference to Elon Musk's financial strategy, specifically https://www.reuters.com/article/us-tesla-offering-banks/elon... Essentially, he has almost nothing in cash, and instead of selling stock to raise cash he borrows money with his stock as collateral. This is why he's so monomaniacally focused on his stock value and public image. For a more professional, but login-walled, overview, see https://www.econo…

Ahh the paywall.

Let me keep reloading and smash esc until i get it to load without the paywall.

Re: Statement Regarding Repurchase Operations

#68

Post by whatok »

SilasX wrote: post #35
MichaelApproved wrote: post #28

Earlier quoted context omitted.

> $3.6 million per 1 billion How many of those billions are being borrowed? The Fed is putting up $165 billion to help the market. So we can assume the market is at least that large. If we use your 3.6 million per billion figure, that's $600 million. Of course, the fed isn't the entire market, so we're probably talking a rescue worth several billion dollars. Hardly a rounding error.

The relevant figure to look at is borrowing costs per dollar borrowed against typical return on capital. 0.36% shouldn't make a big difference there.

Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets. There is a lot of leverage in repo financed trades and 36bps absolutely does make a difference.

Re: Statement Regarding Repurchase Operations

#69

Post by beezle »

opportune wrote: post #25
spiantino wrote: post #19

Earlier quoted context omitted.

I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describ…

Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only expl…

Recommend a google news search and pick one of the Bloomberg stories (they limit how many you can read for free).

The problem is that (apparently) there are few lenders in a position to give up reserves to fund other participants bond holdings. Balance sheets, required reserves, excess reserves etc are all pretty complex post 2008.

I don't know how to link to an earlier comment I posted in another thread this morning but summarize:

-Treasury took in an additional 80+ -goal of having 350B cash on hand by quarter -probably single biggest cause for liquidity issue

-most of the collateral posted to the Fed has been Treasuries and less so mortgages.

-financial system/world runs on repo and it is troubling this is happening at all.

-Did Mnuchkin orchestrate this to force the Fed into backdoor easing through another round of QE? My guess, yes.

(QE is where Fed buys treasuries and other debt consequently injecting cash into the system)

Re: Statement Regarding Repurchase Operations

#70

Post by stingraycharles »

ww520 wrote: post #58

One thing to note is that $100B is created everyday but the $100B is destroyed the next day. It's not like $100B created everyday for the next month.

This is indeed very important to understand. While overall of course it’s not a bad sign, the Fed is behaving like a _lender of last resort_ for very short term loans. And the situation can also be explained.

Of course it’s not a good sign overall, but there’s no reason to panic.

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