The issues we're seeing today in the Repo Market isn't something new. This problem has been punted from 1999.
22 years ago, HF funds got carried away shorting and bending the stock market to their will.
They shorted technology stocks to the point where banks had to step in to stop the damage before everything exploded.
With Y2K fears being blasted all over the media, it became ingrained in the mind of the "regular every day citizen" that technology is a bad thing. There were sell offs in the market leading up to January 1, 2000.
With that, Long Hedge Funds and banks that were heavily invested in tech companies had no collateral and the liquidations started.
The solution was for the FED to get involved in the Repo Markets to minimize the damage.
They were a little too late to put a stop to the damage but managed to punt the can down the road.
That can showed back up again in 2007 in the form of a Collateralized Debt Obligations (CDO).
A very good explanation of a CDO can be found here:
https://www.tavakolistructuredfinance.com/cash-flows-synthetic-cdo/
When everything started to implode in 2008, the banks once again had no exit but at the same time had the FED by the balls.
"Either bail us out, or we sell everything in our portfolio for the collateral we need to survive!"
The FED came up with a solution:
Rather than blow up the Repo Market once again, or a bail out, the solution was to give the banks money. The intention was to have the banks loan out the money to citizens at low interest rates.
It was a good plan. This would've allowed normal, every day citizens to start businesses, not have to sell their houses, stimulate the economy and "survive another day" themselves.
The money would've been returned in the form of income taxes.
Everybody wins.
Wrong!
Here's a scene from Too Big To Fail. I highly recommend watching that movie. It's often overlooked but is very in depth concerning 2008.
Here's the most important scene:
https://reddit.com/link/pwppqj/video/aqov90y6m3q71/player
The FED made the decision to give the banks $125B through The Troubled Asset Relief Program (TARP).
It was a Hail Mary but it was intended to avoid a total collapse of the world economy.
Rather than do the right thing, the banks kept the money, gave themselves bonuses and continued the same bullshit investing strategies that had led to this now 10 year problem.
Collateralized Debt Obligations (CDO) then became Mortgage Backed Securities(MBS) and Commercial Mortgage Backed Securities (CMBS).
Maximum risk was still maximum reward. If shit goes south, the FED will be there to change their diaper.
The kicking continued....
Along came 2013...
The problems from 1999 were still there and it needed to be solved. Governments of the world were getting nervous once again and demanded this be resolved.
The best solution was to eat the interest, use the Repo Market to settle the issue and in a few months, life is good.
Nope!
The Repo Market was engaged again, the banks hoarded the money, solved nothing and started hiding the money in the crypt0 market to the tune of trillions of dollars.
The FED responded with "Fuck it. Let's see how this plays out.".
The can was once again kicked to 2019.
The banks were screwed once again. Collateral was gone and they cried to the FED.
The result was the Repo Market exploding in September 2019.
This is the part that "retail" didn't see.
I simplified two videos from The Duomo Initiative and One Minute Economics to show the difference between the Repo Market and the Reverse Repurchase Markets.
That video is here:
https://www.reddit.com/r/Superstonk/comments/pw1ypm/repo_vs_reverse_repo_explained_in_ape_speak_2/
Seriously. It's only 4 minutes and at the end of the video, you'll understand the difference between Repo and Reverse RePurchse Agreement (RRP). I made it as "ape" as possible.
Moving on:
With the can kicked ONCE AGAIN we arrive at today.
The RRP Market is now at $1.3T.
You can see from the Repo chart in correlation with the Reverse Repo chart that they work inverse to each other. When the FED isn't stepping to help, there's a desperate time in the Repo market where they can't buy back the bonds.
Since the "buy back" part of the repo can't happen like it's supposed to, the counter parties that accepted the bonds for cash can now sell them at market.
This hammers the price of the bonds. Anyone who is willing to buy them knows that the seller is desperate.
The bonds are tank at an alarming rate.
This hurts the seller because they're getting less cash in return for a trade they made two years ago.
With no collateral and no liquidity, the FED has stepped in to avoid absolute disaster. The 22 year problem is in their face and as they all stare at the exits, someone is outside the doors welding them shut.
- Mortgage Backed Securities are tanking.
- Commercial Mortgage Backed Securities are tanking.
- Treasury Bonds are tanking.
- Hedge Funds (long and short) are losing their minds as both sides of their portfolios (long vs. short) can't save them. They're over leveraged and therefore, facing bankruptcy.
- Banks are also over leveraged and facing bankruptcy.
They're not to be leveraged beyond 7:1 but when you're facing bankruptcy, prison time and taking everyone else with you, why not break the rules to avoid making enemies? You can justify it pretty easily.
"Everyone else is doing it as well. Either fit in or get eaten."
To further this explanation, have a look at this video from Duomo:
What Caused the Repo Blowup in 2019? | Explained in 3 Minutes
Here's an article from Forbes that goes over what happened in 2019 and why it was such a big deal:
To sum up the article, here are a couple quotes from it:
"Last week the financial system ran out of cash. It was a modern version of a bank run, and it’s not over yet. Stepping back, it reveals two big things about financial markets: first, US Treasuries are not truly “risk-free” assets, as most consider them to be, and second, big banks are significantly undercapitalized. The event doesn’t mean another financial meltdown is necessarily imminent—just that the risk of one is heightened—since the brush fire can be doused either by the Fed, or by the banks raising more equity capital. However, it provides a “teachable moment” regarding systemic fragility and anti-fragility."
And...
"Why was someone willing to borrow cash at a 10% interest rate last Tuesday, in exchange for pledging US Treasury collateral that yields only 2% or less? That trade lost someone a whopping 8% (annualized) overnight, but presumably the trade allowed the bank to stay in business for another day. As risk premiums go, 8% is shockingly high—for a supposedly risk-free asset!"
"For every US Treasury security outstanding, roughly three parties believe they own it. That’s right. Multiple parties report that they own the very same asset, when only one of them truly does. To wit, the IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner plus 2.2 subsequent re-users believe they own the same collateral (often a US Treasury security).
This is why US Treasuries aren’t risk-free—they’re the most rehypothecated asset in financial markets, and the big banks know this. Auditors can’t catch this because GAAP accounting standards obfuscate it."
After rehypothecating Treasuries to their limit before getting caught, the banks were essentially loaning to themselves, 8% higher than the normal rate, in a desperate attempt to show liquidity on their balance sheets.
Nobody was willing to take the other side of the trade though, because it would tank the price of the asset.
What did the FED have to say about what happened in 2019?
A few lovely quotes:
"In mid-September 2019, overnight money market rates spiked and exhibited significant volatility, amid a large drop in reserves due to the corporate tax date and increases in net Treasury issuance. Although some upward pressure on money market rates due to these seasonal factors was expected, the extent of the increase in both the level and volatility of rates in secured and unsecured markets was surprising."
- We didn't see this coming.
"On Monday, September 16, SOFR printed at 2.43 percent, 13 basis points higher than the previous business day. With pressures in the repo market spilling over into the fed funds market, the EFFR printed at 2.25 percent, 11 basis points above the Friday print and at the top of the FOMC's target range. On September 17, the EFFR moved above the top of the target range to 2.3 percent and the SOFR increased to above 5 percent."
- The entire system almost fell at the same time.
"Why did this happen?
Two widely cited factors exerted upward pressure on overnight funding rates in mid-September. First, quarterly corporate tax payments that were due on September 16 were withdrawn from bank and money market mutual fund (MMF) accounts and went to the Treasury's account at the Federal Reserve (Fed). Second, $54 billion of long-term Treasury debt settled on September 16, which increased the Treasury holdings of primary dealers that purchase these securities at auctions and finance them through the repo market. As tax payments and the settlement of Treasury auctions drained a large amount of cash, reserves in the banking system declined by about $120 billion over two business days."
- After paying one of their bills, they were unable to pay other bills.
"Following the Fed's policy response to the Global Financial Crisis and the subsequent Great Recession, reserves increased from less than $10 billion at the end of 2007 to a peak of about $2.8 trillion in October 2014."
- We fukt up! Debts got big after punting "The Big Can".
"Strains in money markets in September seem to have originated from routine market events, including a corporate tax payment date and Treasury coupon settlement. The outsized and unexpected moves in money market rates were likely amplified by a number of factors. First, these events occurred against a backdrop of increased Treasury outstanding and reduced reserve balances. Reserves were at a multi-year low, which reduced liquidity, while Treasuries outstanding were at an all-time high, which led to increased borrowing demand. Second, borrowing demand in the repo market proved to be highly inelastic, which along with the persistence of trading relationships in the triparty segment, led cash borrowers to pay up significantly to secure the funding they needed. Lastly, on the lending side, uncertainty about cash flows and market conditions was a factor contributing to the reluctance of lenders to increase their lending in response to higher rates. For banks, this reluctance may have been exacerbated by frictions due to supervisory and regulatory factors, including their internal risk management practices, which may have prevented them from lending their excess funds to take advantage of higher rates. These factors appeared to have contributed to acute pressures on money market rates in September. Ongoing analysis may help us better understand how pressures emerged and spread across different money markets."
FED - They didn't give a fuck and we weren't watching. Oopsy!
One last long and in depth article from CADTM:
https://www.cadtm.org/Another-look-at-the-Federal-Reserve-s-panic-in-September-2019-and-solutions-to
This article is long but very thorough. I'll throw a few snippets/quotes in here:
"From 16 September, there has been a crisis situation: banks financing themselves on the repo market found themselves facing abnormally high interest rates, the interbank market had almost dried up, a situation called credit crunch, in other words banks were not ready to lend one another cash even overnight. Other lenders such as Money Market Funds took advantage of the situation to demand very high returns. While the normal rate was 2%, lenders were demanding up to 10%.
So the big banks knocked at the Fed’s door, asking it to substitute as a lender at rates they would consider normal, that is, about 2%. The Fed hesitated for a moment before massively intervening, in a highly uncertain climate bordering on panic, by injecting over 50 billion dollars of liquidity on 17 September 2019. Thus the Fed acted as a substitute for the markets."
"After having injected, on 17 September, 53 billion dollars into the banks, substituting for the interbank market and other private lenders, the Fed has made fresh injections of liquidity every day, bringing the amount from the second day on to a daily maximum of 75 billion dollars, then up again to a maximum of 100 billion dollars. On the date of writing, the Fed continues its daily interventions and has announced that it will continue to do so until 4 November at the earliest."
- Everything should've went fucking insane in January as they returned the bonds but they couldn't buy them back.
"At present, the markets’ demands are quite clearly those of about fifteen big private US banks (four of which collectively hold $377 billion of cash reserves— they are JP Morgan Chase, Bank of America, Citigroup and Wells Fargo) and by big investment funds such as BlackRock."
"They managed to get the [sic] administration to have the Volcker Rule abrogated from January 2020 onward.
The Volcker Rule is a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds."
- And finally...
"There are two main categories of bonds: low-risk securities issued by Triple-A corporations like Apple on the one hand, which have a relatively low yield, and on the other, junk bonds. These are bonds issued by companies with a bad reputation, that is, a low credit rating (BBB, CCC, and worse). Junk bonds give high yields but are high risk. Banks also buy structured products which may be highly toxic."
We'll be right back to that last quote after this video:
Ryan Grim And Wall St Whistleblower Claim Banks Engaged In SYSTEMIC FRAUD In Commercial Real Estate
That's right (conclusion):
- Shorting tech companies in 1999 fucked up the market.
- After a few years of wondering what to do, Collateralized Debt Obligations (CDO) blew things up in 2008.
- Mortgage Backed Securities (MBS) stuck another thorn in their sides in 2013.
- Commercial Mortgage Backed Securities (CMBS) fraud opened the wound again in 2019.
- After all that, with the FED having their back against the wall and looking the other way...
-(refer to last quote)-
... there are now stock bonds.
The only solution to this now parabolic issue is the collapse of the Global Economic System.
Downside:
Starting from scratch means their slate is clean and they can start a new 22 year cycle of complete bullshit that will blow up again but not until they kick the can a few times.
Rinse and repeat...
Here's the situation as it sits today:
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