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New York Fed Again Upsizes Liquidity Plans for Turn of the Year

wsj.com

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Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#101

Post by SilasX »

AnimalMuppet wrote: post #100
SilasX wrote: post #98

Earlier quoted context omitted.

I am SilasX :-) 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".

Facepalm . Yes. Yes, you are. I believe that was cheald's point. Why do you think that $120B is a bad way to express the loan's significance?

See my comment for my answer in the other thread: https://news.ycombinator.com/item?id=21827398

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].

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#102

Post by cheald »

SilasX wrote: post #101
AnimalMuppet wrote: post #100

Earlier quoted context omitted.

Facepalm . Yes. Yes, you are. I believe that was cheald's point. Why do you think that $120B is a bad way to express the loan's significance?

See my comment for my answer in the other thread: https://news.ycombinator.com/item?id=21827398 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].

Is there any evidence that these repo loans are being rolled over? The Fed absolutely rolls over its open market operations assets, and open repos between banks roll over, but I haven't seen anyone suggesting that term repo loans the Fed is currently engaged in are being rolled over. Lending $120b to Bank A today, and then closing the repurchase and lending $120b to Bank B tomorrow isn't evidence of systemic failure within either bank. It is evidence of systemic friction in the repo market, which is already pretty well established, and is the reason given for the liquidity provision in the first place.

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.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#103

Post by jgalt212 »

ipnon wrote: post #10
jgalt212 wrote: post #5

This repo operation is YUGE, but the writer of the article is adding his/her numbers up wrong (and perhaps on purpose). 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.

The distinction between credit and debt is crucial here.

only if you count your numbers in an unconventional manner.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#104

Post by MichaelApproved »

aguyfromnb wrote: post #70
MichaelApproved wrote: post #54

Earlier quoted context omitted.

"asset" 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.

> When the music stopped, people realized those assets were garbage. 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.

> 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.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#105

Post by joering2 »

PeterStuer wrote: post #53
joering2 wrote: post #43

Earlier quoted context omitted.

Thank you. This is actually first comment that explains whats going on. Now since my understanding is that this is something relatively new (in terms of volume pumped in) can someone explains WHY this is happening? Why banks need to dip below the line so often these days. And is this behaviour can come eventually with some negatvie consequences to banks or individuals holding loans, stocks etc?

I would speculate that as this regulation dodge vehicle is being increasingly needed to be invoked, that means that the regulation is being skirted to a higher degree than in the past. 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 i…

So less regulation allows banks to use their clients money more aggressively. Then why would banks need to borrow so much money? And if its returned overnight, then why is FED keep pumping more and more?

Can something bad for market come out of it? Like one of big bangs bankrupting or something?

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#106

Post by me_me_me »

thisisnotmyname wrote: post #61
cheald wrote: post #38

Earlier quoted context omitted.

The point, more broadly, is that these are loans with a quick expiry baked in. The money comes into and poofs out of existence on a relatively short timescale (ranging from overnight to a couple of weeks); we aren't going to see an extra ~$3T in circulation. They're providing lubrication in the repo markets, they aren't just shoveling cash into the banks' vaults. Most people misunderstand this point when discussing r…

What happens if banks systematically are unable to pay these loans back?

Middle class can handle that, they already have a lot of experience with this. Better to leave it up to them to clean that mess up.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#107

Post by me_me_me »

wmf wrote: post #28
corporate_shi11 wrote: post #23

Earlier quoted context omitted.

Except it's not all overnight now. >"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. "

So that's still only $560B, right? It's not $2.93T.

yes, only.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#108

Post by noneeeed »

noneeeed wrote: post #6

What's the obsession with the NYT specifically, in contrast to other news outlets? It made the post rather irritating to read. I'm not American, so I feel like I'm missing the significance that might be obvious to everyone else.

Wow, downvoted for asking a question.

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.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#109

Post by Red_Leaves_Flyy »

quickthrowman wrote: post #71
Red_Leaves_Flyy wrote: post #62

Earlier quoted context omitted.

Who pays if those assets are fraudulently overvalued rubbish?

They aren’t, they’re US Treasuries and US Agency Debt. There are no toxic assets used for collateral in the repo market.

Looking at yesterday, there were mortgages used as collateral.

https://apps.newyorkfed.org/markets/autorates/tomo-results-d...

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#110

Post by MichaelConlon »

apacheCamel wrote: post #93
MichaelConlon wrote: post #90

Earlier quoted context omitted.

The cash reserve system was introduced to protect against a 1920's style bank run. The idea being that a bank should have enough liquid assets to cover 10 or 15% of their customers pulling all of their deposited funds out of the bank. 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…

I guess my question would be then why did the bank originally allow themselves to loan too much out? From what you said, it seems like they loaned too much out and without the Fed they would then have to dip into their assets to meet the regulation. So it still seems like the bank messed up and the Fed is bailing them out (despite with interest). I agree it would be a problem for them to dump the assets but it also s…

You're correct in that it means that the bank messed up. The idea is that this is for (relatively) small amounts to cover reserve funds for a short period of time. This may happen because large deposit accounts decided to withdraw unexpectedly or loan repayments stopped coming in. Ideally this is to be used for a day or maybe a week. However, you're correct that there is certainly potential for abuse in the system if a bank is doing this repeatedly every day for months or more. I'm not sure what, if any, measures are in place to prevent that abuse.
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