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Déjà vu All Over Again?

Friday, December 20, 2019 20:09

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“Déjà vu All Over Again?”

By Nomi Prins

“Back in 1907, the world’s leading financier gathered his colleagues around a table in his library. His name was J.P. Morgan. In that plush room filled with the smoke of expensive cigars, New York City’s most important bankers were worried. There had been a run on the money of a few lesser banks. As a result, the financial system, along with the city, was in a state of panic.

Morgan got word to President Theodore Roosevelt, who sent his Treasury secretary to calm their nerves. This he did, with a government bailout fund of $25 million that Morgan could divide as he saw fit to ensure that Wall Street’s most critical financial firms remained afloat. The panic subsided and Morgan was heralded the King of the World by The New York Times, as I wrote in my book All the Presidents’ Bankers. But Morgan was concerned that maybe the U.S. Treasury itself wouldn’t have enough cash on hand the next time there was a crisis.

So he and some other high-level banker and politician friends worked out the plan that would ultimately create the Federal Reserve by December 1913. From that point on, it would be the Fed’s responsibility to make sure the banks had enough money to get them through any crisis (whether they caused it or not) and to keep the markets moving or “liquid.” The Fed’s official day job is to maintain full employment and acceptable inflation levels, but that’s not what it was born to do. It was conceived by the Wall Street elite for the Wall Street elite. And we should view most of the Fed’s actions through that lens.

Morgan didn’t live to see the Fed’s benefits for his own bank. But JPMorgan Chase, the largest bank in the U.S. and sixth-largest on the planet, now run by Jamie Dimon, is a main recipient of that legacy (more on that below). The Fed’s cavalry approach to money and the banking system hasn’t changed much over the past century. Last week on Dec. 12, the New York Fed announced that it would shower primary dealers on Wall Street with about $2.93 trillion in short-term loans. If that sounds so 2008 to you, it’s because it is. Is it déjà vu all over again? Read on.

Eleven years ago, staring at the precipice of a major financial crisis, the same big banks and trading houses (minus the ones that went bankrupt or were otherwise taken over), along with their global mega-compatriots, brought the financial system to its knees. They took the U.S. and global economy down with them.

It’s been a long road back, littered with lots of central bank support and dark money injection. Along the way, the Fed and other central banks pumped trillions of fabricated dollars into the markets and financial system, causing asset bubbles galore. The average cost of money for the world’s major countries is still hovering around 0%.

Yet all that money apparently wasn’t enough. That’s why the New York Fed began a seismic repo (repurchase agreement) loan program on Sept. 17 to contain the level of repo loan rates that had nearly quintupled from 2% to 10%. The reason for this rate jump was there wasn’t enough short-term liquidity in the system, which was normally being provided by the big banks. That caused the cost of money to escalate dramatically. The Fed feared another major financial crisis was brewing, even though it didn’t admit this.

Yet just like in 2008, Wall Street banks either didn’t have enough money to loan overnight, didn’t want to lend it or didn’t trust that their corporate (or other financial institution) borrowers would repay it – even though these counterparties had to post high-quality collateral for these types of repurchase loans. And this date, Sept. 17 – ironically the 11-year (plus two days) anniversary of the collapse of Lehman Bros. (one of my old firms) – became the start of another bank bailout and subsidy operation.

Since then, the New York Fed has made hundreds of billions of dollars of these loans available weekly. It shows no signs of stopping. The major recipients of these money injections are the banks that can hold onto their own money while they put up their Treasury bill collateral for the Fed’s money and profit from the entire exercise.

Red Flags Are Rising: Even the Bank for International Settlements (BIS), the central bank of central banks, has become alarmed by the situation. In its new report, the BIS notes that the “freezing of the repo markets was one of the most damaging aspects” of the financial crisis. A repo transaction is a short-term (usually overnight) collateralized loan in which the borrower (of cash) sells a security (typically government bonds as collateral) to the lender with a commitment to buy it back later at the same price plus interest.

The BIS basically called bogus on the Fed-offered reason for its latest market intervention – that the repo crisis started because of “corporations draining liquidity from the system to pay their quarterly tax payments.” Realty check: Corporations had their taxes lowered under the Trump administration’s marquee tax bill. It makes no sense, therefore, that corporations could afford quarterly taxes when tax rates were higher before the tax cut but could not when tax rates were lower in September 2019. So corporations aren’t as healthy as they want to appear, the banks aren’t as healthy as they want to appear or the banks just want to have the Fed step in and help them again. But the plot thickens from there.

As the BIS report explained, “U.S. repo markets currently rely heavily on four banks as marginal lenders.” Those Big Four banks (Citigroup, JPMorgan Chase, Bank of America and Wells Fargo) had handled the repo markets just fine. Until Sept. 17.

Now the Fed has become the repo market’s lender of last resort. And that’s not even the most daunting secret hidden in plain sight about the Fed’s recent repo maneuvers. What’s worse is that the banks want more money than the Fed has had on offer each week (a condition known as being “oversubscribed” to the repo loans on hand).

It’s like waiting at an airport gate for the flight attendants to beg people to step forward and offer to fly later because the airline sold more tickets than they had seats. Only in this case, the banks have the seats; they just don’t want to give them up. Instead, they’re forcing the airline to provide another airplane for that same route.

As JPMorgan analysts wrote back on Oct. 21, “With year-end coming up, this is all likely to get much worse, in our view, before it gets better.” JPMorgan Chase withdrew $158 billion from its liquid reserves at the New York Fed in the first half of 2019. Now the bank says it doesn’t have enough liquidity to make the sort of repo loans it had been making routinely.

Fed to the Rescue: Dark Money on Tap for New Year’s: The BIS’ report warned that issues from September could reemerge. Judging from the Fed’s preemptive moves, they already are. Indeed, Chairman Jerome Powell said following last week’s Federal Open Market Committee meeting that the Fed was prepared to take additional measures as needed to quell the repo issues.

Sure enough, the New York Fed just announced additional moves to ensure safe operations of the repo market, designed to inject at least another $425 billion into the system. The new programs would encompass longer-maturity term repo operations through year-end of at least $50 billion. Plus, it would increase overnight repo operations on Dec. 31 and Jan. 2 to at least $150 billion from $120 billion. We call these money injections “dark money spikes,” and they have knock-on effects that we analyze in our trading strategies.

If It Looks Like QE and Acts Like QE: Last December, the Federal Reserve raised rates for the fourth time in 2018. The markets dove. By January 2019, the Fed did a complete 180, as did central banks around the world. The Fed cut rates three times amidst an ongoing trade war between the U.S. and China, slowing economic growth around the world and reduced business investment.

Easing accelerated throughout 2019 as central banks, faced with declining domestic and global growth, turned to monetary policy to stimulate economic activity and boost inflation. The Fed won’t call its dark money-pumping repo operation actions “QE.” But for the first time since 2017, the Fed’s balance sheet has grown on a year-on-year basis – by $334 billion since September, causing its asset book to rise above $4 trillion. And it’s going to keep growing.

There Are Even More Problems: To make matters worse, the Fed and the Federal Deposit Insurance Corp. just discovered what they called “shortcomings” in the bankruptcy resolution plans of six of the eight major banks. The only two banks that showed no shortcomings were Goldman Sachs and JPMorgan Chase. (Note: JPMorgan Chase has been charged, or settled charges, for a litany of crimes since the financial crisis, as has Goldman and all the other big banks – but they’ve had plenty of Fed help to thrive.)

Yet even though the Fed’s escalating repo operations are eerily reminiscent of the last financial crisis, the biggest banks are actually better positioned to ride the Fed’s largesse in the short term. They are still sitting on massive buyback programs approved by the Fed into which they can throw the money they don’t put on offer in the repo markets. They have the Fed running their riskiest short-term lending programs. They are sitting on more assets and FDIC-insured deposits than before the last financial crisis, which gives them more muscle to push around should a real crisis emerge. I believe the bank that made it through the crisis the least damaged financially last time will do the same in the near future. Size matters.”

- dailyreckoning.com

○

“One has to wonder how much money it would take for the New York Fed to throw at Wall Street before the New York Times reports to its readers on the biggest Wall Street bailout by the Fed since the financial crisis. Last Thursday, December 12, the New York Fed announced that over the next month it would shower the trading houses (primary dealers) on Wall Street with a total of $2.93 trillion in short-term loans. The money is for a Wall Street liquidity crisis that has yet to be explained in credible terms to the American people and yet the New York Times does not appear to have an investigative reporter assigned to investigate what’s really going on just 11 years after those same trading houses blew themselves up in the biggest financial crash since the Great Depression and took the U.S. economy along for the ride.”

• “New York Fed Plans to Throw $2.93 Trillion at Wall Street’s Trading Houses

Over Next Month as New York Times Remains Silent“

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/12/deja-vu-all-over-again.html

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