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A Repo Implosion

Scorpio

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#1
A Repo Implosion
Mike Whitney

implosion.jpg

President Barack Obama is determined to prevail in his battle with GOP congressional leaders on the debt ceiling issue, but not for the reasons stated in the media. Obama is less concerned with the prospect of higher interest rates and frustrated bondholders than he is with the big Wall Street banks who would be thrust back into crisis if there is no resolution before October 17. Absent a debt ceiling deal, the repurchase market–known as repo–would undergo another deep-freeze as it did in 2008 when Lehman Brothers defaulted triggering a run on the Reserve Primary Fund which had been exposed to Lehman’s short-term debt. The frenzied selloff sparked a widespread panic across global financial markets pushing the system to the brink of collapse and forcing the Federal Reserve to backstop regulated and unregulated financial institutions with more than $11 trillion in loans and other obligations. The same tragedy will play out again, if congress fails lift the ceiling and reinforce the present value of US debt.

Repo is at the heart of the shadow banking system, that opaque off-balance sheet underworld where maturity transformation and other risky banking activities take place beyond the watchful eye of government regulators. It is where banks exchange collateralized securities for short-term loans from investors, mainly large financial institutions. The banks use these loans to fund their other investments boosting their leverage many times over to maximize their profits. The so called congressional reforms, like Dodd Frank, which were ratified after the crisis, have done nothing to change the basic structure of the market or to reign in excessive risk-taking by undercapitalized speculators. The system is as wobbly and crisis-prone ever, as the debt ceiling fiasco suggests. The situation speaks to the impressive power of the bank cartel and their army of lawyers and lobbyists. They own Capital Hill, the White House, and most of the judges in the country. The system remains the same, because that’s the way the like it.

US Treasuries provide the bulk of collateral the banks use in acquiring their short-term funding. If the US defaults on its debt, the value that collateral would fall precipitously leaving much of the banking system either underwater or dangerously undercapitalized. The wholesale funding market would grind to a halt, and interbank lending would slow to a crawl. The financial system would suffer its second major heart attack in less than a decade. This is from American Banker:

As banking policy analyst Karen Shaw Petrou describes it, Treasury obligations are the "water" in the financial system's plumbing.

"They're the global reserve currency and they are perceived to be the most secure thing you can own," said Petrou, managing partner of Federal Financial Analytics. "That is why it is pledged as collateral. … The very biggest banks fear that a debt ceiling breach breaks the pipes."….

Rob Toomey, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said institutions are concerned about whether Treasury bonds that default are no longer transferable between market participants.

"Essentially, whatever the size is of the obligation that Treasury is unable to pay, that kind of liquidity would just disappear from the market for whatever time the payment is not made," Toomey said.”

By some estimates, the amount of liquidity that would be drained from the system immediately following a default would be roughly $600 billion, enough to require emergency action by either the Fed or the US Treasury. Despite post-crisis legislation that forbids future bailouts, the government would surely ride to rescue committing taxpayer revenues once again to save Wall Street.

Keep in mind, the US government does not have to default on its debt to trigger a panic in the credit markets. Changing expectations can easily produce the same result. If the holders of US Treasuries (USTs) begin to doubt that the debt ceiling issue will be resolved, then they’ll sell their bonds prematurely to avoid greater losses. That, in turn, will push up interest rates which will strangle the recovery, slow growth, and throw a wrench in the repo market credit engine. We saw an example of how this works in late May when the Fed announced its decision to scale-back its asset purchase. The fact that the Fed continued to buy the same amount of USTs and mortgage-backed securities (MBS) didn’t stem the selloff. Long-term rates went up anyway. Why? Because expectations changed and the market reset prices. That same phenom could happen now, in fact, it is happening now. The Financial Times reported on Wednesday that “Fidelity Investments, the largest manager of money market funds… had sold all of its holdings of US Treasury bills due to mature towards the end of October as a "precautionary measure."

This is what happens when people start to doubt that US Treasuries will be liquid cash equivalents in the future. They ditch them. And when they ditch them, rates go up and the economy slips into low gear. (Note: “China and Japan together hold more than $2.4 trillion in U.S. Treasuries” Bloomberg)

Now the media has been trying to soft-peddle the implications of the debt ceiling standoff by saying, “No one thinks that holders of USTs won’t get repaid.”

While this is true, it’s also irrelevant. The reason that USTs are the gold standard of financial assets, is because they are considered risk-free and liquid. That’s it. If you have to wait to get your money, then the asset you purchased is not completely liquid, right?

And if there is some doubt, however small, that you will not be repaid in full, then the asset is not really risk free, right?

This is what the Fidelity flap is all about. It’s about the erosion of confidence in US debt. It’s about that sliver of doubt that has entered the minds of investors and changed their behavior. This is a significant development because it means that people in positions of power are now questioning the stewardship of the present system. And that trend is going to intensify when the Fed begins to reduce its asset purchases later in the year, because winding down QE will precipitate more capital flight, more currency volatility and more emerging market runaway inflation. That’s going to lead to more chin scratching, more grousing and more resistance to US stewardship of the system. None of this bodes well for Washington’s imperial aspirations or for the world’s reserve currency, both of which appear to be living on borrowed time.

The media has done a poor job of explaining what’s really at stake. While, it’s true that higher interest rates would make consumer loans more expensive and put the kibosh on the housing recovery, that’s not what the media cares about. Not really. What they care about is the looming massacre in shadow banking where USTs are used as collateral to secure short-term loans by the banks so they can increase their leverage by many orders of magnitude. In other words, the banks are using USTs to borrow gobs of money from money markets and financial institutions so they can finance their other dodgy investments, derivatives contracts and ancillary casino-type operations. If there’s a default, the banks will have to come up with more capital for their scams that are leveraged at 40 or 50 to 1. This systemwide margin call would trigger a deflationary spiral that would domino through the entire system unless the Fed stepped in and, once again, provided a giant backstop in the form of blank check support. Here’s how Tim Fernholz sums it up over at Daily Finance:

“…Many informed people are worried” (about) “A freeze in the tri-party repo market, akin to the cascade of troubles that followed the Lehman Brothers bankruptcy in 2008.”….

In 2008, more than a third of that collateral was mortgage-backed securities. When Lehman went bankrupt, its lenders began a “fire sale” of the securities it used as collateral, which drove down the value of other mortgage-backed securities, which led to more fire sales. This dynamic would eventually lead to a freeze in the repo markets, which, at the time, provided $2.6 trillion in funding to the banks each day…..

Today, most of the collateral in use is U.S. Treasuries and “agency securities” — mortgage-backed securities guaranteed by the U.S. government:

… if the ugly day of a default comes, lenders may simply stop accepting U.S. debt as collateral. That will have the effect of sucking some $600 billion in liquidity out of the banking system. Unable to get funding for Treasurys, securities dealers would be pressured to sell them-or other assets-to find new funding, creating a fire sale dynamic…..

And, of course, this scenario is only about how the Treasurys work in the repo markets. U.S. debt is used as collateral for derivatives swaps and numerous other transactions; if they are suddenly worth less than expected, lenders can be expected to demand more collateral up front, putting even more pressure on the financial system. That’s why pressure is building to raise the ceiling before the world’s largest economy enters a scenario with so much uncertainty.”

Repeat: “That’s why pressure is building to raise the ceiling before the world’s largest economy enters a scenario with so much uncertainty”.

So the Obama team isn’t worried that Joe Homeowner won’t be able to refi his mortgage or that the economy might slip back into recession. They just don’t want to see Wall Street take it in the shorts again. That’s what this is all about, the banks. Because the banks are still up-to-their-eyeballs in red ink. Because they still don’t have enough capital to stay solvent if the wind shifts. Because all the Dodd Frank reforms are pure, unalloyed bullsh** that haven’t fixed a bloody thing. Because the risks of another panic are as great as ever because the system is the same teetering, unregulated cesspit it was before. Because the banks are still financing their sketchy Ponzi operations with OPM (other people’s money), only now, the Fed’s over-bloated balance sheet is being used to prop up this broken, crooked system instead of the trillions of dollars that was extracted from credulous investors on subprime mortgages, liars loans and other, equally-fraudulent debt instruments.

Can you see that?

This is why the media is pushing so hard to end the debt ceiling standoff; to preserve this mountainous stinkpile of larceny, greed and corruption run by a criminal bank Mafia and their political lackeys on Capital Hill. That’s what this is all about.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney's story on declining wages for working class Americans appears in the June issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.



www.counterpunch.org

http://www.silverbearcafe.com/private/10.13/repo.html
 

Irons

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Such a warm fuzzy feeling of security I get from all this. :bear_wub:

Makes me want to start a 401k and really participate in the glorious opportunities available in the bountiful stock market! :w00t:
 

Sport

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I'm so happy that my 401k is sitting, waiting to be taken to help my fellow man!
 

oldgaranddad

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I'm so happy that my 401k is sitting, waiting to be taken to help my fellow man!
You are not alone. :cry_smile:
 

Mr Paradise

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Wait till Hillary launches the Fair and Affordable Housing Act in 2021, many of ya'll will be donating your homes to help your fellow man.

...Don't worry, you'll get one in return ...450 sq ft per citizen in household.
 

BarnacleBob

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#6
The crux of the matter at hand:

"The reason that USTs are the gold standard of financial assets, is because they are considered risk-free and liquid. That’s it. If you have to wait to get your money, then the asset you purchased is not completely liquid, right?"

UST's and their "supposed" liquidity were once considered a substitute for the greatest ALWAYS liquid collateral of gold, seconded by silver.... hence since BWA UST's hhave served UNQUESTIONABLY as a gold substitute in the financial system....

Now since the banking & financial system "provisions" the .gov via UST's one must ? the REAL reasons behing the debt-ceiling debacle.... in one sense debt default would crash the REPO markets which would crash derivatives markets and the entire banking system, the same system the provisions funding for .gov. As Spock would say, "thats illogical!"

Yet, history indicates that .gov EXISTS because of capital accumulations. Once capital begins the accumulation process, the wealth must be FIRST protected, so .govs are organized to protect the accumulators wealth, secondly, banks are then organized to MANAGE the distribution and growth of the accumulations.... the .govs are paid protection fees called taxes which are provisioned & accounted for by & thru the banking system to provide protection for the capital accumulations....

Banks need .gov, .Gov needs banks to financially and economically survive.

Next we must consider the outcome when economic participants become self-financing, meaning they no longer rely on the traditional system of credit creation. There has been an ongoing shift away from banks which is evidenced by the so called "shadow markets." These markets are self financing... in fact the banking system is forced into shadow markets to receive financing that the combo of banking & .gov once fully controlled.

Historically EVERY .GOV ever created ALWAYS assumes roles beyond the initial responsibility of their creation & organization, which is to protect capital & wealth from foreign enemies & domestic criminals.... this extra-legal role always results in excess ddebt being created.... In this writing I will not direct the subject matter concerning the expanding role into the merchants of debt, a.k.a. the banking system. In short, the bankers assiredly do in the beginning profit greatly by the .gov expanding its power.

With that said, we may easily assume that the unregulated shadow banking system that operates outside of the jurisdiction of both .gov & banking regulations constitutes the ENEMY, & most likely, underneath the propaghanda is the WOT! "Either your with U.S. or your against U.S.!"

The debt machine and its cartel is broken.... due to the ability of self financing. Both banks & .gov receive their social powers, hence political & financial powers from the emissions of debt..... the outcome of these operations is called "the (their) economy."

ALAS, but with the great expansion of technology, information & innovation, a new economy is organizing in the shadow markets where the .gov/banking cartel possesses no jurisdiction. Competition, like Bit Coins, Liberty Dollahs, off-shore depositories, etc. have arisen in competition with the traditional .gov economy... whose management has been found corrupt, weighed & wanting.

How will these entities regain the loss of power & authority that has been lost to the GLOBAL shadow markets? Keeping in mind that UST's are at the heart of shadow banking, as they serve as the collateral & credit creation transmission mechanism for these markets.... seems reasonable to presume that the THREAT of crashing UST's could be viewed as a warning shot participants engaged in shadow market activities.

For instance IF UST's for whatever reason were to fully crash via a default, the debt accumulated & incurred under this system would disappear for most intents & purposes. New reserve assets would replace the present in use, the political & banking cartel would RESET, allowing the next interest rate/debt cycle to take place.... A major crash would restore the traditional powers invoked by the cartel.... it would also crash & destroy the major competition, being the self financing shadow markets along with much of the off shore wealth accumulations hidden around the world.

Could this be an organized attack by the CB & BIS system attempting to survive the onslaught of technology that is challenging their supremacy??? I dont know, I'm merely attempting to throw some thought provoking ideas into current events! What say you?

There is some evidence emerging to support some of the ideas presented above. From Forbes Mag today...

Are Banks Obsolete
?

http://www.forbes.com/sites/tomgroenfeldt/2013/10/16/are-banks-obsolete/

The .gov/banking cartel WILL NOT allow themselves to become obsolete by technology, opinion, law, treaty, etc. w/o a major battle and upheavel! History proves this statement....
 

Scorpio

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#7
BB,

not buying his argument that banks are redundant and over,

because of prior mentioned reasons by you,

a + b = c

meaning, .gov + .bus = fooked sheeple

even if .bus tries to circumvent the process and go rogue, then .gov has the biggest hammer of all, which is why the banks use them,

this has been proven time and again,

it really is quite fun to watch though, where the money pushers are trying to move into a position of strength against .gov and the battle rages on,

.gov is rapidly raising enemies from rumblings in the room to roars of multiple gorillas,

Fall Street, China, Russia.........etc

It is almost surreal being alive at this moment in time while all of this goes down,

Incredible to watch as each chapter unfolds