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Statement Regarding Repurchase Operations

newyorkfed.org

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Re: Statement Regarding Repurchase Operations

#101

Post by rising-sky »

LocalTrust wrote: post #91
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.

I guess that's a fair point. Sorry for oversimplified explanation. So, to attempt to improve on your further clarification: technically it is $75b per night created and destroyed each morning. And 3 separate cycles of $30b will be created for 2 weeks and then destroyed. Therefore $90b injected for 2-weeks then destroyed. Point is this is being injected to help banks cover their overnight exposures with the hope that…

Is there some resource I can look up to better understand what you mean by "destroyed"? Will they be absorbing the value back through financial instruments or how does this "destruction" happen?

Re: Statement Regarding Repurchase Operations

#102

Post by adrr »

LocalTrust wrote: post #9

Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a…

They are screwing over some of the fintechs that provide banking services and use overnight lending to make money on the deposits.

Re: Statement Regarding Repurchase Operations

#103

Post by lmkg »

rising-sky wrote: post #101
LocalTrust wrote: post #91

Earlier quoted context omitted.

I guess that's a fair point. Sorry for oversimplified explanation. So, to attempt to improve on your further clarification: technically it is $75b per night created and destroyed each morning. And 3 separate cycles of $30b will be created for 2 weeks and then destroyed. Therefore $90b injected for 2-weeks then destroyed. Point is this is being injected to help banks cover their overnight exposures with the hope that…

Is there some resource I can look up to better understand what you mean by "destroyed"? Will they be absorbing the value back through financial instruments or how does this "destruction" happen?

They are loans. Money is given to the banks, and then repaid (with interest, but a low rate and short time makes this marginal).

The fact that the money is "created" and "destroyed" is the nature of the Fed. They don't need to have money in order to lend it. That's what the Fed is.

These loans are literally the same as printing money, loaning it, collecting the loans, and destroying the printed money. Except everything is just numbers on a balance sheet, so no physical money needs to be physically printed or shredded. The effect is still the same: The Fed decides that money should enter the money system, and also describes how that money will leave the money system.

Re: Statement Regarding Repurchase Operations

#104

Post by [deleted] »

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.

[deleted]

Re: Statement Regarding Repurchase Operations

#105

Post by whatok »

SilasX wrote: post #99
whatok wrote: post #88

Earlier quoted context omitted.

There's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic. ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and w…

I explained the basis for my reasoning about the upper bound, on banks, of the impact of the higher effective federal funds rate. I concluded that the size of the impact "shouldn't matter." I don't see how that translates to "very strong opinions" on the topic. Instead, it's an invitation for others to directly address and correct the error in logic. You, for your part, are conveying very strong opinions on the topic…

Note how I only focused on your assertion that 36bps "does not make a big difference". That is a strong opinion that is not based on market reality and also has several incorrect assumptions baked into it. Based on continued references to "banks eating the cost", you seem to think that banks are the only ones involved in these transactions. They aren't and not understanding that means that it's very hard to understand the life of a repo transaction. The simple mechanics of a repo transaction are easy to explain but there are a lot of individual parts underlying each transaction. The individual parts sum up to a pretty complex beast that is hard to understand. Reducing this to "can't banks just eat the costs?" is borderline misinformation which does no one any good.

I previously gave a trade example that is a likely cause (or something similar) of the market events that transpired this week. It's a good example of how 36bps matters (my original point of contention). The NY Fed has a very good guide to the repo markets [1]. Hope these help.

[1] https://www.newyorkfed.org/medialibrary/media/research/staff...

Re: Statement Regarding Repurchase Operations

#106

Post by MichaelApproved »

SilasX wrote: post #99
whatok wrote: post #88

Earlier quoted context omitted.

There's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic. ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and w…

I explained the basis for my reasoning about the upper bound, on banks, of the impact of the higher effective federal funds rate. I concluded that the size of the impact "shouldn't matter." I don't see how that translates to "very strong opinions" on the topic. Instead, it's an invitation for others to directly address and correct the error in logic. You, for your part, are conveying very strong opinions on the topic…

Lookup the size of the overnight markets then apply the 36bps to that figure. That dollar amount is a massive difference for any company.

Re: Statement Regarding Repurchase Operations

#107

Post by ww520 »

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.

Hijacking my own comment. There're rumors that the current shortage of cash is because people in Europe are borrowing massive amount of ultra low rate loans (negative yield) in Europe and turn around to buy U.S. treasuries (higher yield) to do currency carry trade to profit on the yield difference. To buy the treasury bonds, they have to use U.S. dollars so they are soaking up all the excessive dollars out there with their borrowed euros.

Re: Statement Regarding Repurchase Operations

#108

Post by TheAlchemist »

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.

That's true. But another way to look at it (not necessarily good), it's like the water in desert. You are in the middle of the desert and you need water - you ask a guy - lend me some water please, I will buy you back the same amount once we are home. Technical speaking, the amount you get and the amount you give back is the same.

What happened during the last crisis is also a great illustration - many banks took taxpayers money during the 'dark hours' then paid it back easily some time later, when the air cleared. Some went as far as to suggest it wasn't necessary at all. Well, the truth is, the banking system as we know it survived only thanks to governments stepping in - otherwise none of the banks we know would exist today. There was 0 trust during the crisis - and all the banking system is build on trust.

That's why the FED is "taking a sledgehammer to squash a bug". That's also why it's a very disturbing signal. My gut tells me shit is about to hit the fan.

PS. But don't try to time the market and short it - as the saying goes, the market can stay irrational longer than you can remain solvent.

Re: Statement Regarding Repurchase Operations

#109

Post by DebtDeflation »

beezle wrote: post #85
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…

This isn't about counterparty issues. That was Lehman in 2008. This is a systemic liquidity shortage.

>This is a systemic liquidity shortage.

That seems to be the consensus, but I'm not convinced. $75B is tiny compared to the amount of excess reserves in the banking system and compared to the size of the overall repo market. Yet the Fed is treating this as an urgent matter. My guess is that there is a single (or a small number) of banks that are having a liquidity problem and the Fed is trying to stop it from becoming a broader issue.

Re: Statement Regarding Repurchase Operations

#110

Post by beamatronic »

dpc_pw wrote: post #95
jVinc wrote: post #55

Earlier quoted context omitted.

So in that situation, the banks are basically in a position where raising their rates (which earns them more) will lead to the feds covering more and more of that? What's to stop them from collectively playing chicken against the feds, while shoveling money into the bag until it becomes ridicules? I mean normally I'd expect a business being close to bankruptcy being told by an investor "This simply cannot happen, I w…

What you've described is already happening, just on a global scale. For 10 or more years, whole financial system is just pushing slowly and collectively the lever, knowing that central banks will not allow it to collapse. So as long, as you're not outstandingly fragile, and instead your collapse would mean a collapse of most of similar financial agents, you can always push your risk a little bit higher, forcing your…

So, where should we put our money?
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