by Pam Martens and Russ Martens, Wall St On Parade:
The storyline in the business press is that the lending rate on overnight repos had spiked to an unprecedented 10 percent, necessitating an emergency infusion of $53 billion by the New York Fed on Tuesday to ramp up liquidity for overnight loans and bring down the loan rate. (That was followed with $75 billion more on Wednesday, Thursday and today – raising the question that if the money is going to the same banks, isn’t that a term loan, not an overnight loan? We don’t know, however, if the money is going to the same banks because the Fed, as it did during the 2008 financial crisis, is staying mum about where the money is going.)
As it turns out, the Federal Reserve’s Federal Open Market Committee (FOMC) directive that authorized the Tuesday operation was dated July 31, 2019 – 45 days prior to the action. What was it that the Fed saw in the tea leaves back in July that prompted it to write that directive on July 31? This is the statement from the New York Fed indicating its first $75 billion operation on Tuesday, of which $53 billion was taken by the banks, was under a directive dated July 31:
“In accordance with the FOMC Directive issued July 31, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 9:30 AM ET to 9:45 AM ET today, September 17, 2019, in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent.
“This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion…”
The largest banks on Wall Street are the Fed’s “primary dealers,” along with the U.S. units of numerous global banks. See the full list here.
This is the language in the actual July 31 directive from the Fed’s FOMC:
“Effective August 1, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2 to 2-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.”
Then there is the suspicious fact that the New York Fed actually held a test of the need to conduct such an intervention in the overnight repo market during the month of May of this year. See its statement on that test here.
During the question and answer period of Federal Reserve Chairman Jerome Powell’s press conference on May 1 of this year, Michael McKee of Bloomberg News asked the Chairman the following question:
“I’m curious about the financial conditions that you see out there. The minutes of the March meeting tell us a few officials worried about financial stability risks. Was there a broader discussion at this meeting? Any consensus on whether such risks are growing as the markets hit new highs and we do see some instability in short-end trading. Is it possible that rates are too low at this point?”
Powell answered the financial stability part of the question as follows:
“…I’d say that the headline really is that while there are some concerns around nonfinancial corporate debt, really the finding is that overall financial stability vulnerabilities are moderate on balance and, in addition, I would say that the financial system is quite resilient to shocks of various kinds with high capital liquidity…”
High capital liquidity doesn’t seem to correlate with the Fed having to pump $75 billion a day to infuse liquidity into Wall Street.
A critical consideration in taking the Federal Reserve and/or the New York Fed at their word about what is really going on is that these are the folks who secretly funneled revolving loans cumulatively totaling an astronomical $29 trillion into Wall Street banks and their foreign bank derivative counterparties from December 2007 to at least the middle of 2010. These operations were secret from both Congress and the American people. The Fed justified its actions after they were exposed as a result of legislation and a court action by saying that its emergency lending authority under the Federal Reserve Act gave it this power.
The Dodd-Frank financial reform legislation of 2010 clipped the wings of the Fed in its ability to make secret loans to Wall Street banks without the consent of Congress. And, rather curiously, it was this time last year that the masterminds of the money funnel that the Fed secretly hooked up to Wall Street during the crisis were out on the stump lobbying to have those powers restored.
Former Fed Chairman Ben Bernanke, and former Treasury Secretaries Tim Geithner and Hank Paulson whined in a New York Times OpEd that “Congress has taken away some of the tools that were crucial to us during the 2008 panic. It’s time to bring them back.” The trio also stated in the OpEd:
“Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. Acting in its traditional role as lender of last resort, the Federal Reserve provided massive quantities of short-term loans to financial institutions facing runs, while cutting interest rates nearly to zero.”
The Federal Reserve is not just the lender of last resort to the mega Wall Street banks, it is also the Federal supervisor of their bank holding companies where it has allowed $272 trillion notional of high risk derivatives to have built up. Because the New York Fed depends on these same banks to carry out its open market operations, it has “relationship managers” that function like goodwill ambassadors to these serially rogue banks. It’s a supervisory structure destined to fail again just as it did in 2008.