We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

   Non-TechDerivatives: Darth Vader's Revenge

Previous 10 Next 10 
To: Worswick who wrote (2771)12/21/2021 8:21:37 PM
From: ggersh
   of 2789
Merry Christmas everyone!!

Enough of this “Bond-Markets-Don’t-Buy-Hawkish-Fed’s-View” Nonsense: It’s the Fed’s Reckless Interest-Rate Repression by Wolf Richter • Dec 20, 2021 • 210 Comments Bond Markets will buy Hawkish Fed’s views just fine if the Fed stops buying bonds, period, and sells outright its TIPS, MBS, and long-dated Treasuries. By Wolf Richter for WOLF STREET. The articles are everywhere, including today: “Bond Markets don’t buy hawkish Fed’s view on high U.S. rates can go.” They’re looking at the Treasury yields, particularly the 10-year yield which currently is at 1.4%, which is just a little higher than where short-term rates might be, according to the latest dot plot from the Fed by the end of 2022 and below where short-term rates might be in 2023. The theory is that bond markets are smart somehow and figure that the Fed won’t raise rates, or might cut rates into the negative or some such thing.

The reality is that the Fed already holds $5.64 trillion in Treasury securities, after its reckless bout of QE that started in March 2020. These holdings represent 25% of all marketable Treasury securities.

But this includes only $326 billion in short-term Treasury bills. The remaining $5.31 trillion are coupon-bearing Treasury notes and bonds. Of them, $1.02 trillion mature in 5-10 years, and $1.34 trillion mature in over 10 years.

With these enormous purchases and still growing holdings, the Fed has massively repressed long-term Treasury yields, which was the primary purpose of these purchases – to reduce borrowing costs across the board, from mortgages to junk bonds.

The interest rate repression scheme is even bigger: MBS. The Fed also holds $2.63 trillion in government-guaranteed Mortgage-Backed Securities, which, due to their government guarantees, trade with yields just a little higher than Treasury securities. And 97% of those MBS that the Fed holds mature in over 10 years.

MBS are different from regular bonds in that they pass the flow of principal payments through to their holders. These principal payments occur when a mortgage is paid off when the home is sold, and they occur when a home is refinanced and the existing mortgage is paid off, and they occur as monthly mortgage payments are made.

During the full-blast QE, which is now being tapered out of existence, the Fed purchased roughly $110 billion a month in MBS: $40 billion a month to add to the overall pile of MBS; and $70 billion to replace the pass-through principal payments.

By buying $110 billion a month in MBS, the Fed was the hugest gigantic-est and most relentless ravenous buyer ever in the MBS market. Nothing came even close. The Fed doesn’t trade; it only buys – unlike many other market participants that trade in and out of their positions.

By buying $110 billion in MBS a month, and by increasing its holdings by $40 billion a month, the Fed massively repressed not only the interest rates on mortgages, but also yields in the broader bond market. And that was the stated purpose of those MBS purchases.

The Fed purposefully falsifies the bond markets inflation signals. Part of the Fed’s Treasury security holdings are Treasury Inflation Protected Securities. The Fed holds TIPS with a face value of $381 billion and accumulated inflation compensation of $70 billion, for a combined $451 billion. Its holdings at face value represent about 20% of total TIPS outstanding.

With these TIPS purchases and holdings, the Fed has not only repressed the TIPS yield, but also has ingeniously manipulated the bond market’s “inflation expectations” data, that are based on the difference in yields from Treasury notes and TIPS with similar maturity dates.

So the often cited inflation expectation data coming out of the bond market, such as the “10-Year Breakeven Inflation Rate” (now at 2.38%), is not an indication of actual inflation expectations by the bond market, but what the Fed wants it to be.

Despite the Fed’s year-long and now abruptly abandoned efforts to brush off the worst inflation in 40 years, it must have expected back in 2020 and 2021 that there would be a lot of inflation as a result of its reckless money-printing.

And to be able to brush off this coming inflation for as long as possible without looking too ridiculous – an effort that failed as the Fed ended up looking totally ridiculous by summer – it preemptively manipulated the inflation signals coming out of the bond market with its proportionately large purchases of TIPS. It thereby purposefully falsified the very inflation signals that the Fed cited endlessly in its efforts to brush off the surging inflation.

The bond market will buy the Fed’s hawkishness just fine if the Fed allows it to. So we’re confronted with headlines like this: “Bond Markets don’t buy hawkish Fed’s view on high U.S. rates can go,” and similar.

But what bond yields reflect is what the Fed allows them to reflect. So in order to free the bond market from under the yoke of the Fed, and in order to allow it to signal what it really thinks, and to allow the bond market to buy the hawkish Fed’s views on how high rates can go, the Fed should:

  1. End QE cold turkey now, rather than in March.
  2. Allow all maturing Treasury securities to roll off the balance sheet without replacement, starting now.
  3. Sell outright, starting in January, those Treasury securities with a maturity of five years or more, starting with the longest-dated maturities, in large and unspecified amounts that are sufficient to allow the 10-year yield to rise well above the rate of inflation.
  4. Reduce MBS holdings by not replacing pass-through principal payments, and by selling MBS outright to where the combined reductions amount to about $120 billion a month. This will allow the Fed to wash its hands off these MBS in less than two years.
  5. Announce a policy shift, where QE is removed from the Fed’s toolbox forever.
If there is too much demand for yields to rise beyond a certain point, particularly demand from foreign buyers whose own sovereign bonds might still yield near 0%, the Fed should increase amounts of outright sales until the 10-year yield rises well above the rate of inflation. Blistering foreign demand would provide a perfect opportunity to unload the balance sheet for a perfectly timed exit.

And after the Fed starts actually shedding two or three trillions of its holdings in this manner, the bond market will start joyfully buying the Fed’s hawkishness, and yields will jump to where they belong with CPI inflation at 6.8%.

And as long-term yields shoot higher, the yield curve steepens, and the Fed can then raise its short-term rates rapidly to keep spreads at a reasonable level, while keeping the yield curve steep enough. And it will then gradually begin to accomplish the other task at hand: tamping down on this runaway inflation.

That’s what it would take to free the bond market to signal a reality outside the reckless interest-rate repression scheme designed and created of the Fed.

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Share RecommendKeepReplyMark as Last Read

From: Worswick12/23/2021 2:12:25 PM
   of 2789
OCC Report Shows JPMorgan Chase Owns 62 Percent of all Stock Derivatives Held at 4,914 Banks in the U.S.

By Pam Martens and Russ Martens: December 23, 2021 ~

The Office of the Comptroller of the Currency (OCC), the regulator of national banks that operate across state lines, released a report on Monday that details the quantity and variety of derivatives held by commercial banks, savings associations and trust companies as of September 30. (According to the Federal Deposit Insurance Corporation, there were 4,914 commercial banks, savings associations and trust companies operating in the U.S. with FDIC insurance as of September 30.)

The striking detail in the OCC report is that one taxpayer-backstopped, federally-insured bank, JPMorgan Chase Bank N.A., is for some unfathomable reason sitting on 62 percent of all stock (equity) derivatives held at all 4,914 federally-insured banks in the United States. The second striking detail is that this federally-insured bank’s holdings of stock derivatives come to a notional amount (face amount) of $3.3 trillion. (Yes, trillion with a “t.” See above chart.) And the third striking detail is that 74 percent of JPMorgan Chase’s stock derivatives are not centrally-cleared but instead are opaque, over-the-counter (OTC) contracts – highly likely beyond the scrutiny of bank regulators.

Why is any taxpayer-backstopped bank in the United States allowed to own anything near a trillion dollars in stock derivatives, let alone a bank like JPMorgan Chase that has admitted to an unprecedented five criminal felony counts brought by the Justice Department in the past seven years, with three of those felony counts for rigging markets.

The Dodd-Frank financial reform legislation of 2010 promised Americans two things pertaining to derivatives. First, it promised that federally-insured banks would no longer house the derivatives that blew up much of Wall Street and the U.S. economy in 2008. This was known as the “push-out rule” where derivatives were to be pushed out to other parts of the bank holding company which could be wound down in case of insolvency, without impacting the federally-insured bank – or so the theory went. That promise was derailed in December 2014 when Citigroup (the recipient of the largest bailout in U.S. history during the 2008 financial crisis and its aftermath) was able to get its pawns in Congress to repeal the push-out rule by attaching an amendment to a must-pass spending bill to keep the government running. (See our report: Meet the Two Congressmen Who Facilitated Today’s Derivatives Nightmare at Wall Street’s Mega Banks.)

The second promise pertaining to derivatives in the Dodd-Frank legislation was that opaque over-the-counter derivatives would be phased out and transparency and financial stability would be brought to derivatives by making them centrally-cleared. That has obviously not happened when JPMorgan Chase is allowed to own $3.3 trillion of stock derivatives with 74 percent of that amount not centrally-cleared.

Another alarming aspect of the $3.3 trillion in stock derivatives at the federally-insured bank at JPMorgan Chase is how exponentially the stock derivatives have grown in a short span of time. The OCC’s report for September 30, 2014 shows JPMorgan Chase holding just $481 billion in stock derivatives. That’s an increase of 586 percent since the third quarter of 2014.

JPMorgan Chase is the same bank that paid its various regulators a total of $920 million in fines in January of 2013 for its infamous London Whale derivatives scandal. The bank had used deposits in its federally-insured bank to gamble in derivatives in London and lose $6.2 billion of depositors’ money along the way. Its consent decree with the OCC said this:

“The OCC’s examination findings establish that the Bank has deficiencies in its internal controls and has engaged in unsafe or unsound banking practices and violations of 12 C.F.R. Part 3, Appendix B (Market Risk Management Amendment) with respect to the credit derivatives trading strategies, activities and positions employed by the CIO on behalf of the Bank. The deficiencies and unsafe and unsound practices include the following:

“(a) The Bank’s oversight and governance of the credit derivatives trading conducted by the CIO were inadequate to protect the Bank from material risks in those trading strategies, activities and positions;

“(b) The Bank’s risk management processes and procedures for the credit derivatives trading conducted by the CIO did not provide an adequate foundation to identify, understand, measure, monitor and control risk;

“(c) The Bank’s valuation control processes and procedures for the credit derivatives trading conducted by the CIO were insufficient to provide a rigorous and effective assessment of valuation;

“(d) The Bank’s internal audit processes and procedures related to the credit derivatives trading conducted by the CIO were not effective; and

“(e) The Bank’s model risk management practices and procedures were inadequate to provide adequate controls over certain of the Bank’s market risk and price risk models.”

The overarching question is why is this federally-insured bank still allowed to trade any derivatives by its banking regulators, let alone $3.3 trillion in stock derivatives? The same man sitting at the helm of the bank at the time of the London Whale fiasco, Jamie Dimon, remains the Chairman and CEO of JPMorgan Chase.


Share RecommendKeepReplyMark as Last Read

From: Worswick12/23/2021 2:21:07 PM
   of 2789
Meet the Two Congressmen Who Facilitated Today’s Derivatives Nightmare at Wall Street’s Mega Banks

By Pam Martens and Russ Martens: August 19, 2021 ~

Former Congressman Randy Hultgren Is Now President and CEO of Illinois Bankers Association

When high risk derivatives start blowing up again at Wall Street’s mega banks and tanking the U.S. economy, be sure to send your thoughts along to these two men: former Congressman Randy Hultgren (R-IL) and former Congressman Kevin Yoder (R-KS). You can reach Hultgren at the Illinois Bankers Association where he now sits as President and CEO after losing his seat in Congress in the 2018 election. Yoder…wait for it…is a registered lobbyist at Hobart Hallaway & Quayle Ventures after also losing his seat in the general election of 2018.

Former Congressman Kevin Yoder Is Now a Registered Lobbyist

These two men were effectively the handmaidens of Wall Street in getting a critical derivatives provision in the Dodd-Frank financial reform legislation repealed in 2014. We’ll get to the specifics of the role the two men played in a moment, but first some background.

According to the official analysis and report from the Financial Crisis Inquiry Commission, derivatives played an outsized role in the severity of the financial and economic collapse in the U.S. in 2008 – the worst downturn since the Great Depression. According to documents released by the Financial Crisis Inquiry Commission (FCIC), at the time of Lehman Brothers’ bankruptcy on September 15, 2008, it had more than 900,000 derivative contracts outstanding and had used the largest banks on Wall Street as its counterparties to many of these trades. The FCIC data shows that Lehman had more than 53,000 derivative contracts with JPMorgan Chase; more than 40,000 with Morgan Stanley; over 24,000 with Citigroup’s Citibank; over 23,000 with Bank of America; and almost 19,000 with Goldman Sachs.

The U.S. government had to take over the giant insurer, AIG, because it was counterparty to tens of billions of dollars in derivatives to Wall Street banks and had no money to pay them.

Another chart from the Financial Crisis Inquiry Commission shows that Goldman Sachs had turned itself into a giant derivatives casino. By June of 2008, Goldman Sachs held $5.1 trillion notional (face amount) of exposure to the most dangerous form of derivatives, credit derivatives. Its counterparties were subsequently propped up by secret revolving loans from the Federal Reserve. In the case of Merrill Lynch and Morgan Stanley, where Goldman had more than $600 billion exposure to each counterparty, the Fed made $2 trillion in secret, cumulative, below-market rate loans to each firm, according to an audit by the Government Accountability Office (GAO) that was released in 2011.

Citigroup, which also had massive exposure to derivatives, became a 99-cent stock. But because its Citibank unit was one of the largest federally-insured banks in the U.S., it received the largest bailout in global banking history. The U.S. Treasury injected $45 billion in capital into Citigroup; there was a government guarantee of over $300 billion on certain of its assets; the FDIC provided a guarantee of $5.75 billion on its senior unsecured debt and $26 billion on its commercial paper and interbank deposits; secret revolving loan facilities from the Federal Reserve sluiced a cumulative $2.5 trillion in below-market-rate loans to Citigroup from December 2007 through the middle of 2010.

Congress promised the American people that its Dodd-Frank reform legislation of 2010 would rein in these dangerous derivative practices at the Wall Street mega banks. One key derivatives reform measure in Dodd-Frank was known as the “push out rule,” meaning derivatives would be pushed out of the insured bank to a different part of the bank holding company that could be wound down without taxpayer support if the bank became insolvent.

Less than three years after Dodd-Frank was passed and signed into law by President Obama, the U.S. Senate’s Permanent Subcommittee on Investigations released a 300-page report showing that in 2012 the largest federally-insured bank in the United States, JPMorgan Chase, had engaged in high-risk derivative trades in London using depositors money from its federally-insured bank in the United States. JPMorgan Chase gambled in derivatives and lost $6.2 billion of depositors’ money. This became known as the “London Whale” scandal. If ever there was compelling evidence of the need for the push out rule, this was it. The Wall Street mega banks had learned nothing from the 2008 financial collapse and were up to their old tricks again.

But the same year that the Senate released its London Whale report, Wall Street banks and their trade associations began aggressively lobbying Congress to repeal the push out rule. New York Times’ reporters Eric Lipton and Ben Protess reported on May 23, 2013 that Citigroup had effectively written House Bill HR 922 to repeal the push out rule. The reporters revealed the following:

“In a sign of Wall Street’s resurgent influence in Washington, Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill. Two crucial paragraphs, prepared by Citigroup in conjunction with other Wall Street banks, were copied nearly word for word. (Lawmakers changed two words to make them plural.)”

HR 922 carried the Orwellian title of “Swaps Regulatory Improvement Act.” The only thing it was going to improve was the profit margins on Wall Street and C-suite bonuses since keeping risky derivatives at the federally-insured bank, which has a higher credit rating than other parts of the bank holding company, allows these Wall Street banks to write trillions more of the derivatives.

Congressman Randy Hultgren had introduced HR 922 on March 6, 2013 according to the Library of Congress website. On the same day that Hultgren introduced the bill, Congressmen Jim Himes (D-CT), Sean Maloney (D-NY), and Richard Hudson (R-NC) signed on as co-sponsors, according to federal records.

Citigroup then paid the following lobbyists to push for the passage of HR 922 according to federal lobbying records: its own Citigroup Management Corp, Capitol Hill Strategies LLC, Elmendorf Ryan, and Rich Feuer Anderson.

JPMorgan Chase, which was apparently trying to lay low after its London Whale derivatives blowup had been splashed all over the press for more than a year, used only one lobbyist to push for HR 922 passage: Larry Romans of Lawrence J. Romans & Associates. The American Bankers Association Securities Association (ABASA), the New York Bankers Association and other Wall Street banks also lobbied the House and Senate aggressively to pass the bill.

HR 922 passed the House on October 30, 2013 with a vote of 292 to 122. Unfortunately for Wall Street, the bill never advanced in the Senate. Enter Congressman Kevin Yoder. The Obama administration was desperate to pass the so-called Cromnibus spending bill in December 2014 in order to keep the U.S. government running. Yoder, according to reporting at CNN, lifted the language straight from HR 922, which by that time he clearly knew had been written by Citigroup, and inserted it into the Cromnibus.

Senator Bernie Sanders of Vermont was livid, issuing a press release that stated: “Instead of cracking down on Wall Street CEOs whose greed and illegal behavior plunged the country into a terrible recession, this bill allows too-big-to-fail banks to make the same risky bets on derivatives that led to the largest taxpayer bailout in history and nearly destroyed the economy. Instead of cutting back on the ability of billionaires to buy elections, this bill outrageously gives the wealthy even more power over the political process.”

Sanders’ reference to billionaires buying elections came from the fact that incoming Republican Majority Leader Mitch McConnell had inserted another provision into the Cromnibus spending bill that allowed political campaign donors to give almost 10 times as much money to political party committees as previously allowed – ensuring that only the top one percent would continue to control Washington.

Senator Elizabeth Warren was also outraged and gave an impassioned speech on the Senate floor against passing this toxic provision. (See video clip below.) Despite public outrage, the Cromnibus passed with the toxic amendments included.

Both Hultgren and Yoder benefitted greatly from Wall Street largess when running for their House seats.

According to the Center for Responsive Politics, “Securities and Investment” was the number one donor category to Hultgren’s political campaigns in 2011-2012, 2013-2014, and 2017-2018. It ranked second in 2015-2016 behind the “Insurance” industry. “Securities and Investment” includes donations from both employees of securities firms, their spouses and Political Action Committees (PACs). Throughout Hultgren’s political career in the House, he received $902,475 from the “Securities and Investment” category.

Likewise, Yoder’s number one career donor category was “Leadership PACs,” which contributed $872,976. Securities and Investment ranked a close second with $811,301. Citigroup, Goldman Sachs, and Bank of America – which today hold tens of trillions of dollars of derivatives inside their federally insured banks (yes, Goldman Sachs is allowed to own a federally-insured bank) – ranked among the top 20 of Yoder’s campaign donors.

According to the most recent report from the Office of the Comptroller of the Currency, as of March 31, 2021, JPMorgan Chase Bank, Goldman Sachs Bank USA, Citibank N.A. (the federally-insured unit of Citigroup), and Bank of America are sitting on a total notional (face amount) of $168 trillion in derivatives or 89 percent of the $189 trillion at all federally-insured banks.

Even after JPMorgan Chase’s reputational damage from its London Whale scandal, the Office of the Comptroller of the Currency reported that during the first quarter of last year JPMorgan Chase had lost $2.4 billion trading stocks (equities) and $822 million trading credit derivatives, giving it a net loss among all of its trading in cash instruments and derivatives of $940 million. This is not what happened in the whole sprawling trading behemoth of JPMorgan Chase, it’s just what happened in the taxpayer-backstopped, federally-insured bank.

One reason that JPMorgan Chase needs the taxpayer subsidy backstopping its derivatives casino is because it has demonstrated since 2014 that it’s not very good at managing risk. Since 2014 JPMorgan Chase has racked up five felony counts – making it unique in the history of money center banks in the United States. (See After JPMorgan Chase Admits to Its 4th and 5th Felony Charge, Its Board Gives a $50 Million Bonus to Its CEO, Jamie Dimon.)

Share RecommendKeepReplyMark as Last Read

From: ggersh1/8/2022 5:36:02 PM
1 Recommendation   of 2789
Well if this doesn't explain how rotten the banking system is
I'm not sure what will

Wall Street Banks Have an Alibi for their $11.23 Trillion in Emergency Repo Loans from the Fed – It’s a Doozy

Share RecommendKeepReplyMark as Last Read

From: Worswick1/11/2022 6:12:43 AM
1 Recommendation   of 2789
Now we know much more .....thank you Wall Street on Parade!

You might check out the original url as the relevant charts have not been posted on Silicone Investor.

Wall Street Banks Have an Alibi for their $11.23 Trillion in Emergency Repo Loans from the Fed – It’s a Doozy

By Pam Martens and Russ Martens: January 6, 2022 ~

Trader on New York Fed’s Open Market Trading Desk (Source: Fed Educational Video)

From September 17, 2019 through July 2, 2020, the trading units of the Wall Street megabanks (both domestic and foreign) took a cumulative total of $11.23 trillion in emergency repo loans from the Federal Reserve. The loans were conducted by one of the 12 regional Fed banks, the Federal Reserve Bank of New York – which is literally owned by megabanks, including JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley and others.

The New York Fed is also responsible for sending its bank examiners into these same banks to make sure they aren’t plotting some evil scheme that will bring down the U.S. economy, as they did with their derivatives and subprime debt bombs in 2008. Unfortunately, if a New York Fed bank examiner doesn’t listen to the “relationship managers” at the New York Fed, and insists on giving a negative review of a megabank, she can find herself fired, as New York Fed bank examiner and attorney Carmen Segarra found when she went up against Goldman Sachs. Segarra provides a fascinating look inside the New York Fed in her book, Noncompliant: A Lone Whistleblower Exposes the Giants of Wall Street. (For mind-numbing other conflicts at the New York Fed, see our report here.)

As we’ve been reporting this past week, there’s been a complete mainstream media news blackout on the names of the banks that were feeding at the Fed’s repo loan trough. The New York Fed released the names of the banks and the amounts they borrowed for the last quarter of 2019 a week ago Thursday, and yet all those Fed watchers at Bloomberg News, the Wall Street Journal, the New York Times, Financial Times, CNBC, MarketWatch, and Reuters just can’t seem to bring themselves to publish even 100 words on the subject.

Banks were borrowing huge sums over short spans of time from the Fed’s emergency repo facility. As we previously reported, from November 12 through November 25, 2019 – a span of just 14 days – J.P. Morgan Securities, the trading unit of the megabank JPMorgan Chase, pancaked term repo loans ranging from 14-days to 42-days, together with one overnight loan, to amass a total of $30 billion outstanding at one time. (You can download the data from the New York Fed at this link, as well as the data it previously released for the last 14 days of September 2019 in its Q3 2019 release.)

And J.P. Morgan Securities’ loan of $30 billion may be just the tip of the iceberg. The Fed has yet to release the details for any of the quarters in 2020. Under the Dodd-Frank financial reform legislation of 2010, the Fed has two years before it is legally required to release the names of the banks and their borrowing amounts.

Yesterday, we decided to ask four of the banks that own the New York Fed if they reported this emergency borrowing binge from the Fed on their SEC filings. Tens of billions of dollars in loans from an emergency Fed facility set up for the first time since the financial crisis of 2008 would seem to be a material disclosure required under securities laws.

We emailed the media relations folks at JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley. The response from Goldman Sachs sought clarity on what data we were talking about. After we clarified that we heard nothing further from them. JPMorgan Chase and Morgan Stanley did not respond at all. But Citigroup’s response was very enlightening. It went like this: “I am going to decline to comment on this open market operations data.”

This strongly suggests that one or more banks are going to claim they were not required to disclose these tens of billions of dollars in emergency loans from the Fed – for a financial crisis that has yet to be explained and which came months before the first case of COVID-19 was reported by the CDC on January 20, 2020 – because they were not really taking emergency loans at all, but were simply being white knights helping the poor beleaguered Fed with its open market operations.

Unfortunately, that limp excuse has a mountain of facts and easily-produced charts to quickly sap its staying power. First of all, the Fed is not required to release its routine open market operations. It is only required to release the names of the banks involved in emergency loan operations. Secondly, as the chart below shows, this was the first time since the financial crisis of 2008 – the worst since the Great Depression – that the Fed had initiated its emergency repo loans. The stark difference between the bar graph for 2008 and the bar graph for 2019 casts aside any notion that there was not a serious financial problem in the fall of 2019.

The chart we produced below from the Fed’s data illustrates Goldman Sachs’ outsized grab of a repo loan on November 25, 2019. The repo (repurchase agreement) market is an overnight market. Banks, corporations, money market funds and others borrow from each other overnight against safe collateral such as Treasury securities. But the Fed’s version of the repo market in 2019 morphed from overnight loans to making 14-day term loans to making 42-day term loans. The fact that a major Wall Street bank needed the comfort of a loan from the Fed that stretched out for 42 days is a strong indicator that there was a serious liquidity crisis going on in the fall of 2019. Surely the American people deserve better than a news blackout on this critical matter from both Big Media and Congress.

The 42-day term loan from the Fed on November 25 was for $25 billion. Goldman Sachs grabbed a total of $9.6 billion or 38 percent of the total $25 billion offered.

Ponder that when you look at what Goldman Sachs derivatives’ exposure looked like in the financial crisis of 2008.

Share RecommendKeepReplyMark as Last Read

From: Worswick1/11/2022 6:26:00 AM
1 Recommendation   of 2789



Closing Price of the S&P 500 Index on Friday, March 27, 2020, Versus the Wall Street Banks

Despite what was obvious to anyone watching stock charts, Fed Chair Jerome Powell repeatedly testified to the Senate Banking Committee that the U.S. megabanks were “a source of strength” during the financial crisis in 2020.

In the first six months of 2019, long before there was a pandemic anywhere in the world, Reuters reported that JPMorgan Chase had reduced the reserves it was holding at the Fed by $158 billion, or an alarming 57 percent. To this day, no one knows what JPMorgan Chase needed that money for or why the Fed let it draw down those reserves.

The Financial Crisis Inquiry Commission, the official government body that examined the underpinnings of the 2008 implosion on Wall Street, said this about the role of derivatives in the crisis: “the existence of millions of derivatives contracts of all types between systemically important financial institutions—unseen and unknown in this unregulated market—added to uncertainty and escalated panic, helping to precipitate government assistance to those institutions.”

Despite this acknowledgement that derivatives played a central role in the worst financial crisis in 2008 that the U.S. had seen since the Great Depression, neither the Fed, nor Congress, nor the banking regulators have stopped these banks from holding tens of trillions of dollars of derivatives with questionable counterparties on the other side. Even worse, in the U.S., the derivatives are held at the federally-insured banking units of the megabanks, which are holding deposits for moms and pops across America.

Share RecommendKeepReplyMark as Last Read

From: Worswick2/4/2022 1:50:01 PM
2 Recommendations   of 2789

Repo Magic

Crisis 2021 2022 American Meltdown

X Repo Magic

When Repos Blew Up in 2019, Hedge Funds Were $800 Billion Short U.S. Treasury Futures; Then Margins Blew Out

By Pam Martens and Russ Martens: February 3, 2022 ~

New details have emerged to provide a fuller picture of the turmoil that was taking place in the dark corners of markets when the overnight repo market blew up on September 17, 2019 and the Fed had to run to the rescue with trillions of dollars in cumulative loans that went on for months.

Imagine if you were the Federal Reserve and had been thoroughly disgraced by waging more than a two-year court battle to prevent the press in America from doing its job and publishing the granular details of the Fed’s 2007 to 2010 bailout of Wall Street and its foreign bank derivative counterparties. Then the Fed was further disgraced after losing the court battles when in 2011 the details of the $29 trillion bailout were published. Chances are that the Fed would not be anxious to let the public or Congress hear the latest details of bailing out hedge funds for the one percent that were using leverage of 50 to 1 obtained from the very banks the Fed is supposed to be supervising.

That background might help to explain why there was a complete news blackout by mainstream media, including by reporters assigned to cover the Fed, when the Fed began releasing the names of the trading units of the Wall Street megabanks that were pigs at its emergency repo bailout trough from September 17, 2019 through December 31, 2019.

That background might also help to explain why the Treasury Department’s Office of Financial Research (OFR) wrote a research paper attempting to shift hedge fund turmoil in the Treasury futures market to March of 2020 – after the onset of the COVID-19 pandemic in the U.S. – but slipped up and included two graphs that move the onset of the turmoil to smack dab in September of 2019.

As we next describe what happened, it’s important to remember that thanks to the repeal of the Glass-Steagall Act in 1999, Wall Street has been allowed to structure itself into a daisy chain of systemic contagion. The same trading houses giving 50-to-1 margin loans to hedge funds on their Treasury securities as their so-called “prime brokers,” are the same “primary dealers” used by the New York Fed for its open market operations and contractually bound to be buyers of Treasury securities when the government issues new debt. The primary dealers that are the sugar daddies to hedge funds and get a regular pat on the head from the New York Fed, are, for the most part, owned by the megabanks on Wall Street which also own giant, federally-insured, deposit-taking banks that hold trillions of dollars of mom and pop savings accounts and insured money market accounts.

But in addition to holding trillions of dollars of insured mom and pop savings, these same taxpayer-backstopped megabanks also hold hundreds of trillions of dollars in dodgy derivatives which remain, for the most part, a black hole to regulators despite the promise of the Dodd-Frank financial reform legislation of 2010 to clean up this mess.

We mention this because when any part of this highly interconnected daisy chain teeters, the key players begin to back away from providing more lending to the others because the lack of transparency prevents any player from knowing who has the bulk of the risk and might blow up.

This situation has moved the Fed from its original mandate as lender-of-last-resort to commercial banks that are the backbone of the U.S. economy to lender-of-last-resort to the high rollers on Wall Street.

The OFR report explains how hedge funds were getting 50-to-1 leverage from their prime brokers (who are not named in the report but include JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, and Citigroup Global Markets and others) and engaging in a strategy called the basis trade. The OFR report describes the strategy as follows:

“The basis trade relies on a relationship between the cash Treasury market, where investors purchase Treasuries today; the Treasury futures market, where investors agree on a fixed price to pay for Treasuries they will receive in the future; and the repo market, where investors borrow or lend Treasuries against cash today. Theoretically, borrowing a Treasury today in the repo market, for which the investor pays interest at the repo rate, should cost the same amount as purchasing that Treasury today in the cash market with the agreement to sell that Treasury in the futures market at a later date. Very small variations from that ideal can be profitable if the investment is leveraged using borrowed capital.

“Basis trades are three-legged trades that span crucial financial markets: cash Treasury markets, Treasury futures markets, and repo markets. As we show, basis trades use long cash Treasury positions and short futures positions to construct a payoff that, absent financing risks and other frictions, would be a net position similar to a Treasury bill. (In futures markets, long positions are a bet prices will go up; short positions are a bet prices will go down.) One immediate difference between the return on a basis trade and the return on a bill is the possible variation margin on the futures position. (Futures traders make variation margin payments when the value of cash and collateral in their accounts falls below set margin levels.) More importantly, basis traders generally finance the long cash position in the repo market, which exposes the basis trade to rollover and liquidity risks. The return on basis trade is thus equivalent to a synthetic bill plus a risk premium. This risk premium is positive on average but can vary significantly and can turn negative during times of stress in funding markets.”

The OFR report also offers this on the subject of leverage: “Hedge fund leverage is constrained only by the haircuts on the collateral, and for Treasury securities haircuts are typically around 2 percent. This implies a maximum leverage ratio for hedge funds of 50 to 1.”

As we previously indicated, the OFR is attempting to shift all of this to the blow up in the Treasury market in March of 2020 but it slipped up and included the chart above and the chart below. The chart above shows that in 2019, hedge funds’ short positions in U.S. Treasury futures had skyrocketed to more than $800 billion. The chart below shows that the key players became alarmed and started demanding increased maintenance margin on the trades. (Maintenance margin is the minimum equity an investor must maintain in a margin account after the purchase has been made. The amount required at purchase is called the “initial” margin.)

A Bloomberg News article on March 19, 2020 named Field Street Capital Management as one of the hedge funds that had lost significant sums on the basis trade.

Yesterday, we checked out Field Street’s Form ADV on file with the Securities and Exchange Commission. Field Street lists as its prime brokers the following: Bank of America Securities; J.P. Morgan Securities; and Merrill Lynch Professional Clearing Corp. (part of Bank of America). Bank of America Securities and J.P. Morgan Securities are two of the Fed’s primary dealers; they were also heavy borrowers during the Fed’s repo bailout; and they are two of the four largest derivatives holders among all U.S. banks.

Field Street’s Form ADV also indicates that J.P. Morgan Securities is not just one of its prime brokers but is also a “marketer” of the hedge fund. As the chart above shows, J.P. Morgan Securities was the second largest borrower from the Fed’s repo bailout during the last quarter of 2019.

This does not mean that the basis trades blowing up were the sole cause of the repo crisis in the fall of 2019.

As we have previously indicated, Nomura was heavily exposed to derivatives; Deutsche Bank, a major counterparty to the derivatives of Wall Street’s megabanks, was in a death spiral; and $2.7 billion in credit default swaps blew up the very day before the Fed launched its repo bailout.

In other words, the ill-conceived, incompetently regulated, and opaque structure of Wall Street appears to have been coming apart at the seams in September 2019.

It is nothing short of a travesty against the American people that Congress has failed to investigate the matter, that mainstream media refuses to accurately report what happened, and that the Fed thinks Americans are stupid enough to believe its dumb corporate tax payment excuse (something corporations do every quarter).

We’ll be forwarding this article this morning to the Senate Banking Committee and the House Financial Services Committee, both of which oversee the Fed.

Bookmark the permalink.

Share RecommendKeepReplyMark as Last ReadRead Replies (1)

To: Worswick who wrote (2778)2/5/2022 5:27:29 PM
From: ggersh
1 Recommendation   of 2789
Once upon a time banksters jumped

nowadays they get bailed out.....sigh

Share RecommendKeepReplyMark as Last Read

From: ggersh3/17/2022 6:09:32 PM
1 Recommendation   of 2789

"A synthetic instrument has no real assets. It is simply a bet on the performance of the assets it references. That means the number of synthetic instruments is limitless, and so is the risk they present to the economy. Synthetic structures referencing high-risk mortgages garnered hefty fees for Goldman Sachs and other investment banks. They assumed an ever-larger share of the financial markets, and contributed greatly to the severity of the crisis by magnifying the amount of risk in the system.

Increasingly, synthetics became bets made by people who had no interest in the referenced assets. Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed."

Carl Levin, US Senator

Share RecommendKeepReplyMark as Last Read

From: ggersh6/25/2022 2:08:45 PM
1 Recommendation   of 2789
Imagine one bank by itself has $60 trillion in derivatives, that's
right $60 trillion, rising by nearly 1/3rd in one quarter alone....UFB

JPMorgan Chase’s Derivatives Spike by $14 Trillion in First Quarter to Six-Year High of $60 Trillion

Share RecommendKeepReplyMark as Last Read
Previous 10 Next 10