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Impending Systemic Financial Insolvency – Dave Kranzler w/ Jay Taylor

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Suffice to say, whatever happened went far beyond what might be considered normal in terms of end of quarter window dressing. It’s impossible to tell, but it may have been related to Glencore and its counterparties (banks and other commodity traders?), or to increased mar-gin calls on derivative trades. The timing is also thought provoking given the recent announce-ments regarding write-offs and capital raisings from Deutsche Bank and Credit Suisse.  – Paul Mylchreest, “Do Central Banks Need A Plumber? Part 2”

TND Guest Contributor:  Dave Kranzler

I suggested in a blog post last week that the extraordinary “outlier” amount of reverse repo transactions conducted by the Fed with its system member banks beginning in mid-September went several standard deviations beyond the amounts used in quarterly bank “window dressing” maneuvers.

I received several emails, of course, suggesting I was wrong and that the all-time record amount of reverse repos was de rigueur.   Rather than write a blog post explaining why the “de rigueur” view is wrong, I was able to discuss the entire reverse repo process on Jay Taylor’s “Turning Hard Times Into Good Times” radio show:

The big spikes in reverse repos is designed to put collateral in the financial system which can be posted against losing derivatives trades.  As everyone knows, there has been highly problematic collateral shortage in the market for several years now as a result of Central Banks vacuuming up all the sovereign-issued paper for the purpose of being able to refer to Central Bank money printing as “QE.”

This shortage of collateral is a big problem when events occur that cause volatility in the OTC derivatives market.   While banks have access to the collateral of Central Bank balance sheets, non-Central Bank system financial entities do not (hedge funds, mutual funds, insurance companies, pension funds, etc).   But these are the entities that are often on the losing side of derivatives trades.  Thus they need collateral to post for margin.

Through the “magic” of hypothecation, banks can borrow collateral from the Central Banks (primarily the Fed) via the reverse repo operations and then hypothecate that collateral into the general financial system as needed.

To be very clear about this, the timing of the Glencore stock plunge and the beginning of the spike up in reverse repos in mid-September is unequivocally not a product or natural random probabilities.   Especially when we find out a few weeks later that Deutsche Bank – a big lender to Glencore – seems to be “walking the financial plank.”

And, furthermore, Black Rock issues a public statement calling for markets to be “turned off” during times of high volatility.  Make no mistake, Black Rock is probably one of the most systemically dangerous financial institutions out there now.

And, perhaps the strongest signal in the market place that the Fed is terrified of an event that could crash the markets is the continuous and blatant intervention in the stock market.   The divergence between the valuation of U.S. stocks and underlying fundamental economic reality has never been greater in the history of the United States.

# # # #

About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.

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