A Coffin Full Of Dollars?
Our unprecedented in depth coverage of the repo ruckus continues, following up on the Man With No Name in The Good, The Bad And The Ugly?.. a dig into the how and why, Part 3 of our "blood money" series revealed not everything is as it seems, and debt can trump cash?
With A Coffin Full Of Dollars in mind, seasonal monetary factors (TGA, required reserves) exacerbated the problem, which cannot be entirely attributable to diminishing dollar or reserve levels, or the bloated inventory of UST's (add $800B by YE, yippy-skippy)....
But the Basel III rules and LCR regs in how CASH is treated? Let me get this straight, to review the circumstance and resulting repo ruckus replete with a coffin full of a half TRILLION dollars in Fed intervention to date...
1) For balance sheet purposes, because UST's are treated more favorably than CASH, the dealers had their cash deposited at the Fed getting IOER, or fracking their reserves in RRP? Either of which drains systemic liquidity... Unlimited, easy to redeem, what else do you need to know? Whats in your wallet?
2) 24 primary dealers were "stuck" holding an already bloated UST inventory on their balance sheets, which over the weekend of the 16th, saw a yield spike and reduction in price (value). Little known fact Normie (at least to the STIR ignorant public)...
Both UST's and reserves are ZERO Risk Weighted Assets for Regulatory Capital Ratio purposes. The RCR is calculated by RC divided by RWA. If you take the bother to lend out reserves for UST's, you now "test positive" for RCR for taking the arb and risk of lending to a brother in need.
As the UST asset drops in value, your RWA increases and RCR ratio declines, double whammy. Now, one can understand an "inability" to absorb more of what is suddenly "less" valuable, desirable or "safe" collateral from an RCR perspective?
3) This mandated SNAFU of capital (liabilities) and collateral (assets) resulted in an impairment to dealer balance sheet capacity in which they were unwilling to "spare a square" for their market stall neighbors in need to fund market making repo activities?
In effect creating a disintermediation of market making services or general collateral strike? I went to the window with A Fistful Of Dollars (UST's) for cash? Sorry Sir, we're fully "booked?"
4) Thus, when the demand for liquidity or cash rose, said asset was already spoken for, and any desire to absorb (hold) more UST's fell, constricting the repo market as the cost or premium of GC repo collateral spiked to 10%. However, we could "squeeze" you in for a "haircut" and 10% o/n or For A Few Dollars More?
Your kidding right? I'm getting treated like The Good, The Bad And The Ugly? Karl Malden said these (AMEX - UST's) were always "safer" to carry than cash? And from behind the window, this is what the man said...
Thus, the central bank "sheriff" was forced to intervene with cash and collateral at more favorable terms. Lubricant to prevent the market "engine" from freezing and contagion spreading to global markets?
The rundown from above in order: regulatory SNAFU, double ending, collateral extortion, collateral cluster f*ck, shooting fish in a barrel (for those willing to make that GC repo market, FHLB?), and sooner than one thinks permanent Fed market insertion, all come to mind.
Since September 17th $660bln repo; $140bln term repo; $62bln RR = $862bln... And we thought this repo ruckus would only merit a trilogy with an epilogue, but you just can't make stuff like this up. In the meantime, stay calm and carry on?
As always there's more than meets the eye, so the more we dig (and that's what we're good at) the more dirt and buried skeletons we find. Like a dog with a bone... More to come when the Man With No Name returns in Part 5: A Dollar To Die For? Stay tuned, no flippin.
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
Discount Window Margins and Collateral Guidelines
Realizing the Liquidity Benefit of Required Deposits at the Fed
What Just Happened in Money Markets, and Why it Matters.
Bottom line, to hold deposits or CASH BALANCES under LCR for "operational" purposes, the banks are assessed an enhanced liquidity premium (matching against HQLA, leverage ratio and GSIB assessment) over and above auction rate government securities.
What's next when (for banking regs) Cash is Not King? A system with unprecedented levels of dollars, reserves and collateral, "preordained" conditions lead to almost a trillion dollar cash crisis? And a limited few (including moi) outside of the credentialed "experts" and central bank, saw and warned of the impending squeeze? In Part 4, when one keeps diggin for the facts, sometimes they uncover even stranger things like A Coffin Full Of Dollars...
But the Basel III rules and LCR regs in how CASH is treated? Let me get this straight, to review the circumstance and resulting repo ruckus replete with a coffin full of a half TRILLION dollars in Fed intervention to date...
1) For balance sheet purposes, because UST's are treated more favorably than CASH, the dealers had their cash deposited at the Fed getting IOER, or fracking their reserves in RRP? Either of which drains systemic liquidity... Unlimited, easy to redeem, what else do you need to know? Whats in your wallet?
2) 24 primary dealers were "stuck" holding an already bloated UST inventory on their balance sheets, which over the weekend of the 16th, saw a yield spike and reduction in price (value). Little known fact Normie (at least to the STIR ignorant public)...
Both UST's and reserves are ZERO Risk Weighted Assets for Regulatory Capital Ratio purposes. The RCR is calculated by RC divided by RWA. If you take the bother to lend out reserves for UST's, you now "test positive" for RCR for taking the arb and risk of lending to a brother in need.
As the UST asset drops in value, your RWA increases and RCR ratio declines, double whammy. Now, one can understand an "inability" to absorb more of what is suddenly "less" valuable, desirable or "safe" collateral from an RCR perspective?
3) This mandated SNAFU of capital (liabilities) and collateral (assets) resulted in an impairment to dealer balance sheet capacity in which they were unwilling to "spare a square" for their market stall neighbors in need to fund market making repo activities?
In effect creating a disintermediation of market making services or general collateral strike? I went to the window with A Fistful Of Dollars (UST's) for cash? Sorry Sir, we're fully "booked?"
4) Thus, when the demand for liquidity or cash rose, said asset was already spoken for, and any desire to absorb (hold) more UST's fell, constricting the repo market as the cost or premium of GC repo collateral spiked to 10%. However, we could "squeeze" you in for a "haircut" and 10% o/n or For A Few Dollars More?
Your kidding right? I'm getting treated like The Good, The Bad And The Ugly? Karl Malden said these (AMEX - UST's) were always "safer" to carry than cash? And from behind the window, this is what the man said...
Thus, the central bank "sheriff" was forced to intervene with cash and collateral at more favorable terms. Lubricant to prevent the market "engine" from freezing and contagion spreading to global markets?
The rundown from above in order: regulatory SNAFU, double ending, collateral extortion, collateral cluster f*ck, shooting fish in a barrel (for those willing to make that GC repo market, FHLB?), and sooner than one thinks permanent Fed market insertion, all come to mind.
Since September 17th $660bln repo; $140bln term repo; $62bln RR = $862bln... And we thought this repo ruckus would only merit a trilogy with an epilogue, but you just can't make stuff like this up. In the meantime, stay calm and carry on?
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
Discount Window Margins and Collateral Guidelines
Realizing the Liquidity Benefit of Required Deposits at the Fed
What Just Happened in Money Markets, and Why it Matters.
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