Archive for the ‘Tyler Durden’ tag
by Tyler Durden on 11/21/2014
If Deutsche Bank's Jim Reid is right, what just took place overnight from the PBOC is just a pleasant start and an enjoyable dress rehearsal of what is about to take place. Where it ends is precisely where we have said it would ever since QE1 was announced in March 2009.
I had a few meetings yesterday and one of the biggest surprises I had was that for the first time in a long time people were talking about helicopter money and debt cancellation being the end game. This was a major theme of our 2013 long-term study but one that we've struggled to get much traction with over the last year. Perhaps there's an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult (let alone reversing it) without a positive growth shock. Maybe Japan's move this week in delaying the further sales tax increase and the economy's adverse reaction to the first increase reminds the market how difficult it might be to actually pay the bills with real money. As we said earlier this week it could be that the last few days marks the first steps towards monetization. Anyway, this is not something for today or tomorrow but the fact that different clients brought it up independently of each other makes me think that's its starting to get into people's thoughts.
– Jim Reid, Deutsche Bank
Indeed it is, as we warned last September in "Bernanke's Helicopter Is Warming Up" and yet everyone will be shocked, shocked, when the playbook that was clearly revealed by Ben Bernanke himself in 2002 is finally implemented:
… A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money
– Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, November 21, 2002
A Zero Hedge reader, and long-time futures trader, shares his views on the evolution of the "market",
where it was, where it is, and where it may be going.
by Tyler Durden on 11/22/2014
I understand better than most I would think, the "mechanics" of the markets and how they have evolved over time from the auction market to 'upstairs". I am a self-taught, top down global macro economist, and historian of "money" and the Fed and all economic and governmental structures in the world. One thing so many managers don't understand is that the markets take away the most amounts of money from the most amounts of people, and do so non-linearly. Most sophisticated investors know to be successful, one must be a contrarian, and this philosophy is in parallel. Markets will, on all time scales, through exponential decay (fat tails, or black swans, on longer term scales), or exponential growth of price itself. Why was I so bearish on gold at its peak a few years back for instance? Because of the ascent of non-linearity of price, and the massive consensus buildup of bulls. Didier Sornette, author of "Why Stock Markets Crash", I believe correctly summarizes how Power Law Behavior, or exponential consensus, and how it lead to crashes. The buildup of buyers' zeal, and the squeezing of shorts, leads to that "complex system" popping. I have traded as a contrarian with these philosophies for some time.
The point here is, our general indices have been at that critical point now for a year, without "normal" reactions post critical points in time, from longer term time scales to intraday. This suggests that many times, there is only an audience of one buyer, and as price goes up to certain levels, that buyer extracts all sellers. After this year and especially this last 1900 point Dow run up in October, and post non-reaction, that I am 100 percent confident that that one buyer is our own Federal Reserve or other central banks with a goal to "stimulate" our economy by directly buying stock index futures. Talking about a perpetual fat finger! I guess "don't fight the Fed" truly exists, without fluctuation, in this situation. Its important to note the mechanics; the Fed buys futures and the actual underlying constituents that make up the general indices will align by opportunistic spread arbitragers who sell the futures and buy the actual equities, thus, the Fed could use the con, if asked, that they aren't actually buying equities.
They also consistently use events through their controlled media, whether bad or good price altering news, to create investment behavior. The "ending" QE 3, and the immediate Bank of Japan QE news that night, and thus the ability to not quit QE using them as their front, and then propping our markets on Globex, like this is suppose to be good news, free markets totally dependent on QE, is one example. Last night, Obama passing the amnesty bill, and the more great news about how Europe and now China are also printing money out of thin air and "stimulating" their economies with QE too, which in turn prompts the Fed to prop up overnight futures markets on Globex to make that look like great news as well. I guess this is suppose to create a behavioral pattern for investors, that dependency on government gives us positive feedback and is good, much like Pavlov's dog and the ringing of the bell.
Why would the Fed prop up our stock market to begin with? Weren't they just supposed to "stimulate" the treasuries market only, to keep interest rates low, indirectly, by an eventual direct purchase in secondary markets, keeping them propped up (for five years now!)? Well, first of all as it relates to equities and utilizing the "Plunge Protection" mandate, why not just bypass the "plunge" altogether. Can't the definition of Plunge Protection be just that? Protection against a plunge instead of during a plunge? Doesn't propping the market equate to "Plunge Protection" since propping alleviates plunge and "protects" us? Does it depend on what the definition of "is" is? And really, doesn't the Fed buying futures directly alleviate those bankers who take their money in TARP or however means and then this money doesn't make its way into the very heart of what the public deems as its consumption motivator, higher stocks and real estate? Plus, buying futures is a means of then delivering fiat cash upon every expiration, therefore, "stimulus" to someone who receives it.
The Fed boasts about having a printing press, and I guess this allows them to "fix" everything. They "print money out of thin air" we keep hearing (which is true by the way) and with US taxpayer backing (fiat currency (always fails throughout history)), (perhaps post QE 3 there is an Executive Order for QE infinity), they sit on the actual bid and hold our treasury markets steady, and by buying out big sellers as they arise like Russia and China via their Belgium central bank franchise as an example, propping our dollar and then staying on that bid by other franchises, having constant bid flow into equity futures in real time hours and Globex overnite, all in order to retain US consumer confidence (since that is what we are suppose to continue to do) and the image of global strength to keep the dollar from losing its reserve status. Their obsession of stopping a deflationary depression, has headfaked people like Bill Gross, formerly of PIMCO, and known to have started hedging long bond positions five years ago with the assumptions that Fed printing would be inflationary, and rates would move higher, but without the assumption of the perpetual direct bid in the market place by the Fed creating, "price discovery". For now, that is.
In the end, which they know exactly when that is, the ultimate con is exposed through mass theft. Americans finally find out what those guys on CNBC are talking about when they mention "inflation" and how it destroys buying power over time. The end reflects the Fed stepping away from the bid in all markets. Prior to this, of course, they prep their offshore fund accounts to take the other side and short dollar, short global equities, and short fixed income, with mass leverage for maximum gain. I mean, why wouldn't they? They are a private entity and are composed of non-US citizens with no accountability or oversight and they seem to be globalist humanists with a depopulation bent (Rockefeller Foundation). Why wouldn't they use our money to prop, their money to take other side in a massive global short play, then let it all crash by simply stepping off the bid of these markets. They can then use the controlled talking heads who can relay the complexities of fiat money, index arbitrage, money velocity, currency and CDO swaps, with some geopolitical China worries, whatever, but really emphasize that the whole capitalistic system and constitution was flawed to begin with anyways, and that perhaps totalitarian fascism would be best for the country at this point since everyone's wealth is destroyed overnight and are literally hungry. Perhaps Obama is just that person! Maybe Dinesh D'souza was right about Obama. This is the way to destroy us, or "equal" the playing field globally by taking us down to third world status, is it not? Leverage the American people's money by trillions of dollars at the tops of capital markets, then bury them in a death spiral? Maybe Thomas Jefferson knew what he was saying' "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."
Why wouldn't anyone believe these words written here? Perhaps you can't imagine someone being so evil? Wasn't the Federal Reserve Bank concept initially funded by a Rothschild in the 1800s, who used the media to deceive the public and sway the London Stock Market down negatively, who then speculated against that panicking public's sell orders by taking long positions in stocks, then making a fortune when everyone found out that the news was wrong and positive? Then later another Rothschild founded our Federal Reserve in 1913, and others like JP Morgan who supposedly bought the US stock market in a banking panic and "saved" America in 1909? Aren't all of these Fed owners Fabian Socialists?
Details of this last market move:
This last 1900 point Dow Jones push upwards – and the Ebola events leading into it – it was so orchestrated and heightened at critical points but the ascent and push straight up in price, and sideways nonreaction after was completely unlike anything I've seen before. After going up for a record breaking amount of time the last five or so years, in a nonlinear exponential mania type of ascent, there should normally be tremendous volatility that follows. But, this isn't a tech-like mania! There aren't any buyers here other then the Fed. The shorts were all squeezed in 2009, 2010, 11, 12, and everyone who has ever wanted to buy stocks is in!
Modern Portfolio Theory has reached it's pinnacle, leading 55% of the American public who partake in that "diversified" portfolio theory off an eventual cliff. The market acts more like a penny stock that has been pumped up and is "boxed" (boxed, meaning, the whole float is buying and holding and held with the promoter, one broker dealer, and thus this one broker dealer can control price "discovery"(regardless of actual fundamentals and using "press releases" to sway and create order flow they want and need from naive clients)) , and less like a free market. The Dow runs up that much that quickly, then on Globex its down .02 percent at the most over night, multiple days in a row? No pullback? Are you kidding me!? Then the actual trading days have very little volume, and the peaks in price intraday also exhibit nonreactions sideways, just a couple of tics from the highs. This price manipulation reflects that they want to expunge all shorts on all time scales, to the point that there will be no point to try, and at the very end, there will be very few. This also reflects that a group of very smart prop trader types, experienced behavioralists, perhaps off of a prior prop desk like a Goldman, are controlling this game, and not some government treasury/cftc/sec "plunge protect" type who doesn't understand this game.
With the indoctrination of Modern Portfolio Theory, and the masses' epistemology from experience and from "experts" to never ever get out because "it always comes back", and from corporate buybacks, the actual intraday trading float has disappeared, thus, easier and cheaper to manipulate and find the perfect "price discovery" for every situation to control investor behavior, especially during off hours on Globex. This past situation, during the break and runup, there would be thousands of opportunities for the Fed insiders using different variations of ways to front run (without using the focus dump then pump futures contract itself), making the HFT guys front running for pennies look like complete chumps. Can you imagine all the different ways to bet the global markets at the height of the ebola scare, which just happened to be the height of the mass media hammering the public with fear about it(haven't heard a word since!), which happened to be the exact moment of a very large Dow Jones 600 points intraday range after falling 1000 points in 9 days, which also happened to be at the height of put option premiums expanding and call option premiums eroding quickly, by knowing that the Fed is now going to prop it back up, way back up, and quickly! Shorting put premium globally for expiration in 7 or 37 days? Buying way out of the money cheap calls, buying the underlying equities, shorting interest rates, buying inflation, buying emerging markets and all of their liquid securities, options plays etc… on and on. That prior knowledge ts worth trillions, is it not? We all know that investment bank broker dealer desks take the other side of trades, and inventory the other side opportunistically. Why wouldn't this "bank" too, especially now that they are intertwined with investment banks thus have gained their intellectual property in trading? And why wouldn't they influence our idiot sheepish politicians to mandate the Fed Reserve, to encourage the Fed Reserve, to stimulate, whereas our Fed could use that for "the people", while at the same time, for themselves take the other side based on their offshore opportunistic mandate? Today's current markets are completely manipulated, every market, all the time, with our money and political Keynesian (control) mandate doing the manipulation in order for their money to front run and profit from there opportunistic mandate.
So if I am right, and my 23 years of experience trading equities, during manias enables me to know with certainty that I am, that they are allowed to directly be involved and have a perpetual standing bid in the secondary derivatives markets, they can then take the other side when they want (no need to publicly announce this, but to justify in their own heads). So when they take the other side in the public markets upon themselves pulling the prior US citizen backed bids in all markets for the ultimate 80 year cyclical "end game" (btw, about 23 years past the Kondratief Cycle deadline which is one way to describe the inevitable delay in this ongoing natural economic system reset) of the US fiat backed paper print con capped off by mass leverage, wouldn't they make trillions on the bubble pop on the way down? Wouldn't they also end up eventually owning the whole US since commerce would halt immediately, everyone would lose their jobs causing mass deflation (and hyperinflation due to our currency being booted as reserve currency, and imports becoming expensive overnight) causing mass defaults on their home loan obligations? Where do our mortgages end up now post 2008, 2009 financial collapse? Our governments coffers via FHA, FNMA, GNMA? And who will place a lien on our government when they default on it's loans? Wouldn't they be able to foreclose on America?
The US mandate on allowing Plunge Protection enabling the Fed to stick their noses directly in the equities markets was written in 1988 and is public knowledge and found in the public forum. And the attached "memo" shows incentives from the Chicago Mercantile Exchange for Central Bankers to use their equity futures markets.
I have been an independent trader for 23 years, starting at the CBOT in grains and CME in the S&P 500 futures markets long ago while they were auction outcry markets, and have stayed in the alternative investment space ever since, and now run a small fund. Write me if you have any questions or comments, or if you need me to join in your efforts help to expose this Ponzi scam.
Over four years ago, in “Chasing the Shadow of Money“, Zero Hedge first presented a curious if perverse aspect of the Fed’s QE experiment in the context of the modern monetary system: the extraction of “quality” collateral by the Fed’s daily purchases of Treasury (and MBS) securities, and it replacement with reserves – a transformation which while boosting asset prices, results in an ongoing deleveraging of shadow liabilities, as well as a persistent slowdown in the velocity of collateral (due to both its increasing degradation and increasing counterparty risk). Our concurrent investigation into the properties of shadow banking led us to the correction conclusion back in March 2012, and explanation why, the Fed would have to do at least another $3.6 trillion in QE. We are now $1 trillion in, and rapidly rising even as the 10 Year equivalents held by the Fed now represents almost one third of the entire Treasury market: an unprecedented collapse in available private-sector collateral.
And while there has been a small if vocal subset of voices warning about the problems of collateral scarcity, and the implications for the global financial balance sheet if and when renormalization is attempted, for the most part, this remains a very much misunderstood process. Perhaps the main reason for this is that, as Peter Stella summarizes, “When it comes to reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’. Understanding this point requires mastery of the brave new world of shadow banks and re-hypothecation – a world that either did not exist or was truly in the shadows when most of us were taught about money and credit creation.”
Over the past 5 years we have attempted to provide a glimpse into how modern shadow banking (with a world in which rehypothecation is the “source” of tens of trillions in deposit-free credit money), however, the vast majority of modern economists and those espousing modern “magic money tree” theories, still view the world through the lens of a 1980s textbook, which is absolutely insufficient when attempting to explain marginal credit creation amounting to tens of trillions in the shadow banking system. Ironically, it was precisely the collapse in collateral chains and the freeze in shadow counterparty derivative exposure just before the failure of Lehman, captured with stunning precision by Matt King’s “Are the Brokers Broken?” report issued a week before the Lehman bankruptcy, that explained more about the perilous nature of modern finance, than any other paper written before or after (p.s. Yes, the brokers were, and still are, broken).
Not surprisingly, the topic of “high quality collateral” and specifically, its disappearance, has been the topic of not one but both of the last Treasury Borrowing Advisory Committee refunding presentations (here and here). And since Tapering was fundamentally, all about slowing down the rate of high quality collateral extraction, one can expect the next TBAC refunding presentation be a veritable screamfest of warnings from the likes of Citi’s Matt King and CS’ James Sweeney (sadly it seems they will fall on increasing more deaf ears). That said, if and when the Fed is compelled by the JPM/Goldman-chaired TBAC to finally slow down and/or halt the pace of collateral extraction, the question is what will happen then, especially as pertains to the all important shadow banking system.
About a month ago, the IMF’s Manmohan Singh wrote a White Paper titled simply enough “Collateral and Monetary Policy” where in 17 pages, which dealt precisely with this issue, which among other things did a great job of explaining the logic behind the Fed’s proposal to commence a reverse repo program which would be expanded to include non-bank participants, in effect expanding the eligibility of the Fed’s “reserves as collateral” away from pure-play bank institutions. However, more than anything, Singh was lamenting the ongoing collapse in the velocity of collateral, as follows: “The economy needs the collateral services that these securities can offer, which transfers with possession, not ownership. Securities in the market domain have a velocity; those at the central bank do not. So, D (excess reserves) does not substitute for C1 (good collateral) and thus there is a net reduction in overall financial lubrication.”
That also suggests that a perfectly centrally-planned market should be oblivious of counterparty (ownership less important than possession) risk, in order to preserve financial “lubrication” – a commandment which so far markets have failed to comply with. In fact the more Bernanke absorbs quality collateral, the lower the velocity of existing collateral. This is also one of the main difficulties facing the Fed. Recall slide 30 of the TBAC’s Q1 presentation appendix on liquid private collateral:
Here again is the punchline:
- “the more restricted the private sector’s ability to create safe, liquid, and moneylike collateral, the harder the public sector must work to supply it through deficits and easy monetary policy”
In other words, until such time as the housing bubble has been reflated enough and yield-chasing through RMBS and CMBS securitization is once again a staple of the daily “financial innovation” (which makes housing a Treasury-equivalent HQC), there is little the Fed can do to truly pull away, and the Treasury will be forced to come up with any and every excuse to “supply collateral through deficits.” Hence the need for acute regional conflicts such as Syria et al.
But going back to the original topic, namely what are the (increasingly more limited) options for the Fed as it seeks to unwind QE from a shadow banking perspective, we go to the abovementioned Peter Stella, who over the weekend wrote an excellent article in VoxEU titled “Exit-path implications for collateral chains” dealing with just this. His summary:
QE is still on, but central banks are pondering exit pathways. Exit requires vacuuming up excess reserves, winding down massive securities holdings, and restoring normal interest rates – all without killing the recovery. This column points to the importance of a seemingly technical issue – the impact of the exit on the supply of high-quality collateral. This matters since collateral plays a critical role in today’s credit and money creation processes. When reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’.
First, here is what according to Stella “needs exiting”
The Federal Reserve balance sheet is much simpler than at the height of the crisis.
- If Rip Van Winkle awoke today after a five-year nap, he would see only one key development in the Fed’s balance sheet – securities holdings higher by $2.9 trillion and deposits of depository institutions (banks) higher by $ 2.2 trillion.2
If he asked how this happened, Rip would be given a very simple answer.
- The Fed bought securities to lower interest rates; it paid for them by creating bank reserves.
That is, the Fed credited the securities seller’s commercial bank with a deposit at one of the 12 Federal Reserve Banks, and the commercial bank then credited the seller’s account. On net, privately held securities were exchanged for Fed deposits.
If pressed further as to why banks are holding enormous reserves at the Fed, Rip would get an equally simple answer: Banks have no choice.
- It is – for all intents and purposes – technically and legally impossible for a bank to transfer deposits at a Federal Reserve Bank to a nonbank.
Reserves in the US are defined to comprise bank deposits held at one of the 12 Federal Reserve Banks (plus qualifying vault cash).
- Fed deposits may be transferred only to entities entitled to hold Fed accounts.
This is a key point when thinking about the various exit paths ahead. Fed deposits are not fungible outside the banking system, but Treasuries are.
Bullet point three is not exactly correct, but we’ll get into the nuances shortly. For the most part, this is an accurate and comprehensive summary of the bind the Fed-cum-Commercial Banking monetary creation mechanism has found itself in.
Stella goes on to explain the impact of the “portfolio effect” on collateral:
Large Scale Asset Purchases (LSAPs) have inadvertently caused a significant change in the composition of assets available in the open market.
- The stock of marketable, highly liquid, AA+ collateral fell by trillions (disappearing into the Fed’s portfolio, i.e. System Open Market Account).
- The stock of assets available only for interbank trade (bank reserve deposits at the Fed) rose by trillions.
The essence of this change has nothing to do with credit risk. Treasuries and Fed deposits are equally safe. But they differ significantly in their marketability. Anyone can trade Treasury securities; only banks can exchange Fed deposits. The massive importance nonbanks play in today’s markets means that this portfolio effect can be important. To understand why marketability beyond banks matters, it is necessary to understand the modern money and credit creation process.
The bolded above is also the reason why the Fed is currently considering ways to expand its reverse repo pathways (when the time comes to unwind liquidity) to non-bank actors as we explained before.
Stella then proceeds into a useful historical lesson, explaining why those who don’t or can’t grasp the nuances of shadow banking and modern money creation, are completely clueless as they approach the Fed’s action from the perspective of finance as it existed in the 1980s.
One cannot think straight about the future impact of different exit strategies without understanding of the role of bank reserves in today’s financial markets.
- Banking and money creation has not worked for at least two decades in the way that most people learned in school.
The old system was rather simple in the textbooks. The basic assumptions were (i) all credit was provided by banks; (ii) all bank credit (assets) were funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement; and (iii) central banks controlled credit/money/inflation by rationing bank reserves. A stable ‘money multiplier’ was hypothesised to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit.
style=”border-style: none”The problem with the old theory of monetary operations is that none of the three assumptions has been true for at least a generation.
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements, and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.
- Today, credit creation in general and money creation in particular are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).
Today, bank deposits at the Fed have only one real role – to facilitate management of the payments system. They are used to settle transactions among banks. Thus:
- The old notion that the quantity of bank reserves constrains lending in a fiat money world is completely erroneous.
- Traditional monetary policy has virtually nothing to do with money.
This is clearly seen in the long-term evolution of reserves and credit.
- In 1951, total commercial bank deposits at the Fed were $20 billion larger than they were at the end of 2006.
- Over the same period, total US credit-market assets rose by over 10,000%.5
Plainly the stock of reserves is no longer connected to credit or meaningful measures of “money” via the old-notion of a reserve-ratio-based money multiplier.
Here, Stella gets into a tangent that while accurate is not comprehensive. He believes that “One of the unintended consequences of Fed LSAPs has been the withdrawal of high quality liquid collateral such as US Treasuries from the financial markets paid for by crediting commercial bank reserve accounts. As discussed above, the banking system as a whole cannot dispose of these assets (reserves). At the same time, banks are under massive pressure world-wide to deleverage. This can take place either by increasing capital (a bank liability), which is costly to shareholders, or by reducing assets. Thus banks’ massive holdings of reserves at the Fed are ‘deadwood’ as far as the banks and their credit-creation capacity are concerned. They may crowd out credit. The deadwood problem will get worse if the US tightens regulatory leverage ratios – that is, reduces the maximum ratio permitted between a bank’s total assets and capital.” This is correct, but there is more as we will shortly show.
Which brings us to what we believe is Stella’s punchline:
There is a great irony in the journalistic history of monetary policy. What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures. And all this is occurring while the spectre of uncontrolled credit expansion and monetary debasement are being decried countless times by those who have not recognized that yesteryear’s monetary paradigm is defunct.
Well, no. While indeed forced deleveraging and crowding out of “assets” with reserves may result in lower asset prices (if Basel III were to actually be implemented that is, instead of constantly postponed to some point in the indefinite future), the bigger question is how the Fed would respond to such a deflationary phenomenon. The answer: is simple – more of the same, resulting in such a deluge of nominal dollars in the monetary base that inevitably the reserve status of the US currency becomes questioned (especially if preceded by such Fed-confidence shaking events as the Non-taper debacle of last week). So while there may well be a nominal deflation problem in the future, the offset will be one and the same not only in the US but all developed world central banks (as the BOJ has recently shown can imitate the Fed so well when necessary). From there, the distance to a wholesale refutation of a broken fiat-monetarist-Keynesian paradigm is progressively shorter. And keep in mind, hyperinflation is not lots of inflation: it is an outright loss of faith in a currency (and/or loss of reserve currency status), for political or monetary reasons.
At this point Stella touches on a topic we have discussed before, namely the tactical, operational aspects of reserve drainage: whether they should proceed by reverse repo or term deposits. Needless to say, Stella is, correctly, a fan of the repo extraction route, and is why the Fed is also recently contemplating just this. In an ideal world, where the Fed actually gets to a point where it can implement not only a tapering without destroying Emerging Markets, but actually commence to withdraw liquidity from the market without the most epic market tantrum ever, this is the so called “exit pathways.”
Term deposits and reverse repos might appear very similar reserve draining tools to the proverbial Rip Van Winkle who slept through the radical changes in credit creation, collateral chains, and expansion of the shadow banking system.
- To Rip Van Winkle, term deposits and reverse repos are both simple transformations of overnight deposits into 7, 14 or 28 day “term” deposits, or to 7-, 14-, or 28-day reverse repos.
Well informed observers, however, will immediately see the critical difference (a good start on getting informed is to read Singh and Stella 2012).
- A reverse-repo has a portfolio effect that term deposits do not.
The reverse-repo takes cash out of the market and replaces it with high-quality collateral. Thus a key difference is the enlargement of the market supply of good collateral that banks and nonbanks would posses and thereby be able to use to fund their asset positions and create credit via ‘collateral chains’. (Technically this re-lending of collateral is called re-hypothecation.) Thus reverse repos add to financial lubrication in a way term deposits do not.
This ‘sweetener’ would soften the bitter medicine of rising interest rates and alleviate the so-called ‘high quality collateral shortage’ pointed out by Treasury Borrowing Advisory Committee members (US Treasury 2013).
The magnitude of the task would be substantial: somewhere in the neighborhood $3 trillion (or more) in reserve reduction.
What is the rough magnitude of the task if the Fed balance sheet were to remain at its current size?
- In the two weeks ending 27 August 2008, average daily reserves held by depository institutions (banks) were $46.1 billion; required reserves were $ 44.1 billion.12 Of this, vault-cash used to satisfy required reserves was $36.4 billion and reserve balances held at FRB were $9.7 billion.
- In the two weeks ending 21 August 2013, average daily reserves held by banks were $2.2 trillion – that’s trillion with a ‘t’; required reserves were $115 billion – that’s billion with a ‘b’. Of this, vault cash used to satisfy required reserves was $53.4 billion and reserve balances held at FRB were $2.1 trillion.
- Thus bank excess reserves rose by $2.123 trillion during the last five years.
Of course, the Lehman bankruptcy convinced banks that they want more excess reserves than before, so the Fed will not need to drain the full $2.123 trillion. Let us say the task is to eliminate about $2 trillion in excess reserves. But of course the world does not stand still. The number could be closer to $3 trillion by the time LSAPs end.
What this means is that the change in the availability of good collateral could be quite significant.
So to summarize Stella’s take on the Fed’s exit pathways, when contemplating such an event on broader structural collateral limitations:
Many major central banks are thinking strategically about exit pathways – how best to return to normal central banking. The main point of this column is to point to a key issue – the role of collateral – that has been under appreciated by many economists who are not in daily contact with financial markets.
When economies strengthen and central banks begin to drain reserves from the system, they will inevitably alter the composition of private sector asset portfolios.
- If good collateral is swapped for reserves, banks and nonbanks can use the collateral to fund create credition via what are known as collateral chains.
- If only term deposits are swapped for reserves, or if interest rates are raised only through IOR, the opportunity to lengthen collateral chains will be missed.
In today’s financial world, these chains are critical sources of money and credit creation – the days of textbook money-multipliers are long gone.
When it comes to reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’. Understanding this point requires mastery of the brave new world of shadow banks and re-hypothecation – a world that either did not exist or was truly in the shadows when most of us were taught about money and credit creation.
All of the above deserves a careful re-reading in its original VoxEU format (found here).
And now for a quick, and important, tangent. Stella’s key contention is that Fed reserves parked with commercial banks are inert: that is, the securities (assets) they replace on bank balance sheets, could have participated in collateral chains and generally increasing the velocity of collateral, which by the way as Singh showed a month ago, has dropped to the lowest, 2.2, since 2007 and probably long prior:
This is correct, and through second-order effects (i.e., reflexivity) is forcing the continued deleveraging in shadow banking credit-money (ABS, repos, GSEs, etc), as we show every quarter following the release of the Fed’s Flow of Funds statement.
However, there is a very key trade-off to the banks, and perhaps this goes to the heart of the argument of just how the Fed engages in goosing risk assets, a topic which many still are confused by.
To make it all crystal clear, we present Exhibit A: a chart showing total loans and deposits at US commercial banks (local and foreign) just after the failure of Lehman, compared to their balance sheet as of the most recent week (as reported by the Fed’s H.8 statement).
What it shows is the following:
This is perhaps the one chart that explains not only all that is wrong with US banks currently, but also why the US stock market is where it is.
It shows, among other things, that while over the past five years, total loans and leases in US commercial banks have not increased by one dollar, total deposits have risen by $2.2 trillion to $9.5 trillion. Why is this important? This is what Singh had to say about deposits:
When central banks buy securities, one of the immediate effects is to increase bank deposits, which adds to M2 (in the U.S., practically the Fed has bought from nonbanks, not banks). Whether banks maintain those added deposits as deposits, or convert them into other liabilities (or, by calling in loans, reducing or moderating the growth of their balance sheets), is an open question.
Sure enough, as the chart above shows, the total loan hole resulting from the increase in deposits was plugged by none other than the Fed, which over the past 5 years has injected $2.2 trillion in securities into commercial banks, leading to the observed increase in total deposits to nearly $10 trillion.
Furthermore, we, or rather, JPMorgan is happy to respond to Singh’s “open question”, courtesy of none other than the London Whale fiasco, which “closed” said question quickly and effectively.
Presenting Exhibit B, which comes directly from page 24 of JP Morgan’s June 13, 2012 Financial Results appendix, in which the firm laid out, for all to see, just how it is that the Firm generated over $5 billion in prop trading losses in its Chief Investment Office unit – a department which had previously been tasked with “hedging” trades but as it turned out, was nothing but a glorified, and blessed from the very top, internal hedge fund, one with $323 billion in Assets Under Management! To wit:
The chart above shows the snapshot – from the horse’s mouth – of how a major “legacy” bank, one engaged in both deposits and lending, decided to use the “deposit to loan gap” which had swelled to $423 billion at just JPM (blue box in middle), and led to $323 billion in CIO “Available For Sale securities.”
What happened next is well-known to all: JPM’s Bruno Iksil, together with Ina Drew and the rest of the CIO group, decided to put on a massive bet amounting to hundreds of billions in notional across the credit spectrum (the one place where a position of this size could be established without becoming the entire market, although by the time it imploded Bruno Iksil was the market in IG9 and various other indices and tranches). The loss was just as staggering, and amounts to what is one of the largest prop bets gone horribly wrong in history.
The aftermath for JPM is well-known, and as was disclosed last week, the “tempest in a teapot” would cost JPM $950 million to settle everything.
However, what is more important for those concerned by goings on in the Shadow banking system, JPM revealed just how those supposedly “inert” reserves end up being transformed on a bank’s balance sheet into an ROI, without them ever leaving the bank.
As the London Whale showed without a shadow of a doubt, the key steps are as follows:
- Excess reserves (assets) are represented as cash deposits (liability)
- The excess cash is then used as collateral for margined securities – futures, swaps, options, and any other derivatives – that express a risky position, such as IG9 (long or short), or for that matter any security that simply needs initial margin, and better yet, allows massive leverage. For example the ES, aka E-mini contract, which as everyone knows is the main driver of market risk in the US capital markets, and which allows for constant resetting of risk-levels higher (in alignment with the Fed’s primary directive).
And that’s it. We, or rather JPMorgan, demonstrated how excess reserves, without ever leaving a bank’s balance sheet and being used to actually purchase securities, can be transformed, via lending and rehypothecation, and thanks to incremental leverage on the underlying cash, are able to generate far greater returns to commercial banks (or rather their prop trading groups, such as JPM’s CIO) than simply lending out said cash. This shows that for as long as the Fed is engaged in withdrawing quality collateral (via QE), a bank’s liquidity preference will always be to using reserve cash as collateral instead of lending it out (in the process further lowering the velocity of money, but who cares as long as the bank’s ROI is the highest possible). All of this, of course, is made possible thanks to Glass-Steagall which allows banks to take deposit, reserve or any other sources of funds, and lever them up via prop trading desks and generate outsized returns.
Which takes us back to Stella’s punchline:
There is a great irony in the journalistic history of monetary policy. What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures. And all this is occurring while the spectre of uncontrolled credit expansion and monetary debasement are being decried countless times by those who have not recognized that yesteryear’s monetary paradigm is defunct.
Ah yes, the spectre of uncontrolled credit expansion may be defunct, but that does not mean that the “helicopter money” created by the Fed is not re-entering capital markets. As shown above, and as anyone can see when looking at daily record highs in the S&P500, it most certainly is.
For that matter, banks couldn’t care one bit if the underlying reserves are inert and excluded from non-bank participants: what is far more important is that its margined equivalent in the capital markets, is perfectly fungible, and that the cash collateral supporting it can and will result in much higher asset prices with every day that Bernanke injects more liquidity into bank reserves and thus, deposits.
Of course, the flipside is the inverse: once bank liquidity preference inverts, if and when the Fed were to finally engage in exiting its current policy, one effect would be the immediate collapse of the stock market (and any other marginable) bubble.
However, the resulting monetary expansion via far more conventional lending channels would then promptly, and long-overdue, re-enter the broader economy. The paradox is that for the Fed to finally start “fixing” the economy, instead of the brokerage accounts of a few billionaires, it has to finally stop QE, because as long as it is running, the only “inflationary” sink hole will be global risk markets, and the only thing levitating are all asset prices enveloped in this bubble.
The far bigger problem is that once all those risky positions which have found a price-clearing manifestation through capital markets, and are leveraged exponentially more than the mere $2.2 trillion in reserves injected to date by the Fed, begin to unwind, the “flow” exodus away from paper and into physical assets of all shapes and sizes (i.e., BLS-measured inflation) will be precisely the long-deferred advent of all that inflation which the Fed had so far been able to redirect into market asset bubbles.
At that point, when faced with a liquidity tsunami in full reverse mode away from asset bubbles, the last thing on anyone’s mind unfortunately will be whether the proper liquidity extraction mechanism will be Reverse Repos or Term Deposits.
But for things to get there, the US banking system has to be ready and willing to allow the great asset bubble deleveraging, which also means having bought sufficient amounts of hard assets in advance, mostly from their clients, ahead of the great “paper asset” unrotation. Keep a close watch for even more aggressive “sell” recommendations for gold, silver, and everything else that can be nailed down…
by Jim Willie
Events in the last decade displayed a vigorous effort to defend the USDollar. The rogue nation of Iraq sold crude oil in Euros for three years, until they were liberated. Its tyrant was a scourge to be sure. Weapons of financial mass destruction seem to have replaced the traditional type, the new variety being derivatives, mortgage bonds, and even sovereign bonds from weak nations. Newer weapons from the United States feature extended hands from clearing house fronts that snatch and grab segregated private accounts, and backdoor raids of exchange traded fund precious metal. Let’s not overlook the more frontal assault weapons deployed like unseating Qaddafi and capturing his gold held in foreign accounts, along with all that cash. Liberation has its benefits. The confrontation with Iran would be comical if not so dangerous. The claims have been silly in my view for years, in the perception of Iran as a serious threat to the West. They have been subjected to cut communication lines on the Persian Gulf seabed. They have been subjected to Stuxnet viruses to obstruct their nuclear refinement process, via the Siemens rear door. They have been subjected to an influx of heroin from the north, where the USMilitary manages the Afghan situation and locale.
To be sure, Iran’s clergy qualify as a bunch of clownish fools with a tight grip on power and security forces. The shock here is that the relatively educated Tehran crowds have not disposed of their corrupt class of leaders. The clergy has been skimming from oil revenue for years, complete with hidden Swiss accounts. The same goes for the American corrupt class of leaders, with their USDollar control levers, their failures to deliver USTreasury Bonds (aka naked shorting by Wall Street firms), their hidden mechanisms behind Quantitative Easing to Infinity (QE never stopped), their insider trades to exploit financial markets (flash trades with a peek), their ETF dampers on numerous individual markets (regular inventory raids by Wall Street), their nationalization of Fannie Mae & AIG in order to put the fraud records in a warehouse (bond counterfeit, duplicate income stream usage), and their absurdly positive economic drivel data (more like chronic 10% CPI and chronic minus 3% GDP).
The big events in the last several weeks focus on the inability for US combined forces, both military and financial, to put Iran on a leash. The Tehran mongrel still roams and shares meals with neighbors. The Hat Trick Letter does not delve much into geopolitics and military weapon analysis, but the next generation Sunburn and Onyx missiles that Russia has supplied to Iran stand out as significant in their ability to neutralize great opposite forces. These two missiles are a step ahead of the Cruise, something perhaps not 5% of the US population is aware, but something that 95% of the USMilitary brass is aware. The US Fleet in the Persian Gulf might be rather easy vulnerable targets. The annual August belligerent war posturing against Iran invited my dismissals from 2004 to 2005 to 2006 to 2007 to 2008 to 2009 to 2010. But in 2011 the posturing and siren calls seemed more serious, yet still worthy of dismissal since waged battle would render massive damage to both sides. See Sunburn & Onyx again. The military maneuvering behind the scenes is not so easily tracked, which lately has extended to Syria with a Russian shadow. The entire reduced theater seems chock full of standoff factors. China might have sounded off threats of retaliation if Iran were attacked, but Russia delivers the same threats in more subtle private tones.
The USGovt has attempted to isolate Iran. To some extent they have succeeded. Price inflation inside Iran has turned acute, with numerous stories seeping through the information curtain. The pain, just like in Cuba, has been handed to the people and hardly to the leaders. One can be very certain that the mullahs continue to enjoy the good life, work little, eat well, enjoy ample time to pray, while skimming $million every week from oil revenues. However, a defiance seems more successful at the higher levels. The trend of bilateral trade deals fashioned by China has been growing, made popular by the same grand holder of over $3.2 trillion in US$-based debt securities of dubious value. Behind the trade deals are agreements to continue in crude oil purchases from oil-rich Iran.
INDIA CAUGHT IN CROSSFIRE
The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It’s Potential Ramifications of Lehman 2.0!!!
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Forthose who do not know, I was a real estate investor between 2000 and2006. By 2006, I came to the realization that there were no longerprofitable deals to be had on a sound risk/reward basis, and the entirePonzi scheme looked to be ready to do the Humpty Dumpty thing. So, Itook a year off to raise my brand new baby girl, and came back to pursueplans to start a hedge fund that focused on shorting the FIRE sectorand European banks – basically any and everybody who ever did businesswith me and my colleagues in real estate – the writing was evidently onthe wall for anyone who bothered to look at walls.
At a fundraiser that MF Global threw in Rockefeller Center’s rollingskating rink, I sat down with the then CEO of MF Global and his wife andinformed them of my plans. They sincerely wished me luck and told me tolet them know when I got started (I would speak to them on and offannually at the skating rink event or over lunch). I said nothing then,but I was highly suspect of the firms prospects going into what I sawwas a risky asset firestorm of a correction. As it turned out, itappears I may have had a point. Even more interesting is the fact that Iwas the only one that I knew of who proclaimed that Fed ZIRP policy wastruly poison laced in Myrrh. Contrary to that espoused by ink stainedivory towers of academia and those who so often correct in the SellSide, ZIRP is killing the banks while regulatory capture is hiding themetastizing tumors. I also now a few who used to work in the riskdepartments of MF (yes, they did have one) and they said thatGoldman/governer guy was the one that ran MF into the ground.Accordingly, MF was a good brokerage, but he came in and tried to makethem bankers and traders, which they were not (at least they weren’tgood ones, anyway). By forcing the firm to carry inexperiencedproprietary risk, he doomed the firm (according to this insider).
Hmmmm… Up is down, and down is up, I bendeth you over if you spilleth my cup! Again, as excerpted from There’s Something Fishy at the House of Morgan“:
Again,I have warned of this occurrence as well. See my interview with MaxKeiser below where I explained how the Fed’s ZIRP policy is literallystarving the banks it was designed to save. Listen to what was a highlycontrarian perspective last year, but proven fact this year!
Provisionsand charge-offs: I have been warning about the over-exuberant releaseof provisions to pad accounting earnings since late 2009!
Declinesin provision was one of the major contributors to bottom line. JPMorganreduced its provision for loan losses to $1.2bn (0.7% of loans) in Q12011 from $7.0bn (4.2% of loans) in Q1 2010 and from $3.0bn (1.8% ofloans) in Q4 2010 while charge-offs declined to $3.7bn (2.2% of loans)in Q1 2011 from $7.9bn (4.4% of loans) in Q1 2010 and from $5.1bn (2.9%of loans) in Q4 2010. Although banks delinquency and charge-off rate hasdeclined, the extent of decline in provisions is unwarranted comparedto decline in charge-off rates. As a result of higher decline inprovisions compared to charge-offs, total reserve for loan losses havedecreased to 4.3% in Q1 from 5.3% in Q1 2010 and 4.7% in Q4 2010. At theend of Q1 the banks allowances to loan losses is lowest since 2009.
Althoughthe reduction in provisions has helped the banks to improve itsprofitability it has seriously undermined the banks’ ability to absorblosses, if economic conditions worsen. As a result of under provisioningfor the past five quarters, the banks Eyles test, a measure of banks’ability to absorb losses, has turned to a negative 7.7% in Q1 2011compared with +6.4% in Q1 2010. A negative Eyles test has seriousimplications to shareholders – the losses from banks could not onlydrain entire allowances for loan losses which are inadequate but canalso wipe off c7.7% of shareholder’s equity capital. The negative valueof 7.7% for JPM’s Eyles is the lowest in this downturn.
MF Global Holdings filed for Chapter 11 bankruptcy protection in New Yorkon Monday morning, after an effort to sell itself to Interactive BrokersGroup failed.
MFGlobal [MF 1.20 — UNCH ] had a tentative deal to sell assets toInteractive Brokers [IBKR 15.55 0.33 (+2.17%) ] as of late Sunday, butthe agreement fell apart as talks continued overnight, said peoplefamiliar with the matter. Discussions ended around 5 a.m. ET, one ofthese people said.
MFGlobal had been considering filing just its holding company forbankruptcy protection and then executing the sale. That plan is now offthe table, one of the people said.
Thisperson said MF Global’s parent company would be included in thebankruptcy filing. Voluntary bankruptcy petitions for MF Global Holdingsand MF Global Finance USA hit the docket in a U.S. bankruptcy court inManhattan mid-morning on Monday.
TheChicago Mercantile Exchange said on Monday that customers ofbroker-dealer MF Global were limited to liquidating their positions. Theexchange, which owns the Chicago Board of Trade, said it would nolonger recognize MF Global, which has filed for Chapter 11 bankruptcyprotection, as a guarantor for floor trading.
…”It was quite difficult to get our money out on Friday, because theyhad a lot of redemption calls,” a trader, whose firm used MF Global as abrokerage said. “The company is not initiating any new position. Theyare trying to close down positions that they already have with clientsthat are open.”
At MF Global’s London office, in Canary Wharf, staff were coming and going from the office as normal at Monday lunchtime.
There was a tense atmosphere and most declined to speak to CNBC.com.
“We’re not allowed to speak to you; so you can probably read into that what you will,” one MF Global worker told CNBC.com.
Thelast set of statements are teiling, indeed. MF Global is a mini-Lehman,and while many may not be taking MF Global’s demise as seriously, itdefinitely is. They died from the same disease that afflicts much ofWall Street, and most of European banking. They are smaller, that’s theonly real difference – and the asset management company that they werespun off is doing just as bad. I said it before, and I’ll say it again,Europe is housing Lehman Brothers x 4!
From ZeroHedge: Presenting The Bond That Blew Up MF Global
Reaching for yield (and prospectively capital appreciation) while shorteningduration had become the new ‘smart money’ trade as we saw HY creditcurves steepen earlier in the year (only to become the pain trade veryquickly). The attraction of those incredible yields on short-datedsovereigns was an obvious place for momentum monkeys to chase and itseems that was the undoing of MF Global. The Dec 2012 Italian bonds (inwhich MF held 91% of its ITA exposure), as highlighted in today’sBloomberg Chart-of-the-day, appears to be the capital-sucking instrumentof doom for the now-stricken MF. As if we need to remind readers, thereis a reason why yields are high – there is no free lunch – and whilesome have already leaped to the defense of the bet-on-black Corzine riskmanagement process with comments such as ‘He was simply early and willbe proved correct’ should remember that only the central banks havebottomless non-mark-to-market pockets to withstand the vol. It also setsup a rather useful lesson for those pushing for EFSF leverage to buy risky sovereign debt – but given today’s issue demand, perhaps that is moot.
Hmmmm!I remember over the summer, when MF probably put these trades on, Iwarned about Italy sparking France while NEARLY EVERYONE ELSE was stillfocusing on Greece! Reference the following excerpt from Wednesday, 03August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer
Incase the hint was strong enough, I explicitly state that although thesell side and the media are looking at Greece sparking Italy, it isFrance and french banks in particular that risk bringing theFranco-Italia make-believe capitalism session, aka the French leveragedItalian sector of the Euro ponzi scheme down, on its head.
I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!
- French Bank Run Forensic Thoughts – Retail Valuation Note – For retail subscribers
- Bank Run Liquidity Candidate Forensic Opinion – A full forensic note for professional and institutional subscribers
So, how accurate was I? Well, we’ll see in a few… In this morning’s headlines:
So, What’s the Next Shoe To Drop? Read on…
Forthose who claim I may be Euro bashing, rest assured – I am not. Just aweek or two later, I released research on a big US bank that will quitepossibly catch Franco-Italiano Ponzi Collapse fever, with the prodocument containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers,be sure to be prepared. Puts are already quite costly, but there areother methods if you haven’t taken your positions when the research wasfirst released. For those who wish to subscribe, click here.
Now, let’s refresh the output from And The European Bank Run Continues…and more importantly BoomBustBlog BNP Paribas “Run On The Bank” Models (they range from free up to institutional, I strongly urge those who haven’t to click upon said link and download your intellectual weapon of choice!) where I modeled Greek losses on BNP. Below is sample output from the professional level model (BNP Exposures – Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail…(Click to enlarge to printer quality)This scenario was run BEFORE the Greek bonds dropped even further in price…
Using more recent market inputs (you know, assuming this stuff was Level 1), we get the following…
Noticehere the base case TEC impairment is now approaching the adverse casefrom just a few weeks ago – and this is using market pricing, not somepie in the sky model!
Ihave not recalculated the adverse scenario in this example, but you cansimply use your imagination, or download the model and run it foryourself.
A Greek default with haircuts somewhat inline with market prices willwipe out 13% of BNP TEC, with a more severe cut (quite likely) takingout nearly 20%. This is not even glancing upon the many problems wediscussed in our forensice reports ( French Bank Run Forensic Thoughts – Retail Valuation Note – For retail subscribers, Bank Run Liquidity Candidate Forensic Opinion – A full forensic note for professional and institutional subscribers).
Now,if the ZH referenced report above is accurate (and I believe it is) thebanks are going to try to delever by selling assets in the open markets(all at the same time, selling the same assets to the same pool ofpotential buyers at the same bad times). This means that the prices usedto populate this model are probably still too optmistic. Even if theyweren’t, look at the capital short fall the Greek default will leave BNPwith assuming our institutional bank run thesis holds true and they seea slight withdrawal of liquidity of 10% this year and 15% next (knowingfull well the numbers for Lehmand and Bear were much, much higher thanthat before they collapsed). First, a refesher on our European bank runtheory expoused 5 months ago…
- The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
And the BNP results????
Halftrillion euros here, half trillion euros there… Sooner or later,we’ll be talking about some real money! Since the problems have not beencured, they’re literally guaranteed to come back and bite ass.Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas “Run On The Bank” Models (they range from free up to institutional).
On Derivatives Implosions and Debt Destruction…
Just like the US banks and EU leaders have somehow gamed (or at least triedto game) the CDS market into a sham, they look to do the same in thediscorporation of those entities who have been destroyed by the highlydeflationary forces taking hold. To wit: MF Global Creditors Led By JPMorgan
The following are MF Global Holdings’ largest unsecured creditors and shareholders, according to the company’s bankruptcy filing and related court papers submitted today in U.S. Bankruptcy Court in Manhattan.
Unsecuredcreditors rank behind secured lenders in getting repaid in abankruptcy, and are ahead of preferred and common shareholders.
JPMorgan Chase & Co. (JPM)’s JPMorgan Chase Bank, bondholder trustee, $1.2 billion.
Deutsche Bank AG, trustee for $1.02 billion in bonds:
Deutsche Bank Trust Co., bondholder trustee for 6.25% notes, $325 millionbondholder trustee for 3.375% notes, $325 million bondholder trustee for1.875% notes, $287.5 million bondholder trustee for 9% notes, $78.6million.
From ZeroHedge, we are sourced the ISDA “determinations committee“:
Americas Voting Dealers Bank of America / Merrill Lynch Barclays Citibank Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Chase Bank, N.A. Morgan Stanley Société Générale UBS
Voting Dealers Bank of America / Merrill Lynch Barclays BNP Paribas Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Chase Bank, N.A. Morgan Stanley Société Générale UBS
To suscribe to our research services, click here. This will be a very, very profitable quarter!
More from Reggie Middleton…
Jon S. Corzine
One by one, the big banks and investment firms appear destined to go broke. Behind all other crises looms the mother of all bubbles – the derivatives debacle. The worsening situation is simply sped up by the criminal actions of brokerage firm MF Global, so desperate to stay afloat that it sank hundreds of millions of dollars of customers’ money into its losing position and failed. This latest example of crony capitalism will hurt a lot of people, although NESARA will save most of them.
Two articles here, the first one from the New York Times and the second one from Zero Hedge. Someone will have to go to jail, says Zero Hedge. This time I think that very well may happen. Thanks to Luisa and Ramona.
Regulators Investigating MF Global for Missing MoneyBy BEN PROTESS, MICHAEL J. DE LA MERCED and SUSANNE CRAIG
New York Times, Oct. 31, 2011
Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.
The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.
Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.
The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.
But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.
In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.
Neither MF Global nor Mr. Corzine has been accused of any wrongdoing. Lawyers for MF Global did not respond to requests for comment.
Now, the inquiry threatens to tarnish further the reputation of Mr. Corzine, the former Goldman Sachs executive who had sought to revive his Wall Street career last year just a few months after being defeated for re-election as New Jersey’s governor.
When he arrived at MF Global — after more than a decade in politics, including serving as a Democratic United States senator from New Jersey — Mr. Corzine sought to bolster profits by increasing the number of bets the firm made using its own capital. It was a strategy born of his own experience at Goldman, where he rose through the ranks by building out the investment bank’s formidable United States government bond trading arm.
One of his hallmark traits, according to the 1999 book “Goldman Sachs: The Culture of Success,” by Lisa Endlich, was his willingness to tolerate losses if the theory behind the trades was well thought out.
He made a similar wager at MF Global in buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount. Once Europe had solved its fiscal problems, those bonds would be very profitable.
But when that bet came to light in a regulatory filing, it set off alarms on Wall Street. While the bonds themselves have lost little value and mature in less than a year, MF Global was seen as having taken on an enormous amount of risk with little room for error given its size. By Friday evening, MF Global was under pressure to put up more money to support its trading positions, threatening to drain the firm’s remaining cash.
The collapse of MF Global underscores the extent of investor anxiety over Europe’s debt crisis. Other financial institutions have been buffeted in recent months because of their holdings of debt issued by weak European countries. The concerns about MF Global’s exposure to Europe prompted two ratings agencies to cut their ratings on the firm to junk last week.
The firm played down the effect of the ratings, saying, “We believe that it bears no implications for our clients or the strategic direction of MF Global.”
Even by Sunday evening, MF Global thought it had averted its demise after a disastrous week. Over five days, the firm lost more than 67 percent of its market value and was downgraded to junk status, which prompted investor desertions and raised borrowing costs.
Mr. Corzine and his advisers frantically called nearly every major Wall Street player, hoping to sell at least some of the firm in a bid for survival.
On Friday, the asset manager BlackRock was hired to help MF Global wind down its balance sheet, which included efforts to sell its holdings of European debt. BlackRock was able to value the portfolio, but did not have time to find a buyer for it given the other obstacles MF Global faced, according to people close to the talks.
By Saturday, Jefferies & Company became the lead bidder to buy large portions of MF Global, before backing out late in the day.
On Sunday, a rival firm, Interactive Brokers, emerged as the new favorite. But the Connecticut-based firm coveted only MF Global’s futures and securities customers.
While MF Global was resigned to putting its parent company into bankruptcy, Interactive Brokers was also willing to help prop up other MF Global units, including a British affiliate.
By late Sunday evening, an embattled MF Global had all but signed a deal with Interactive Brokers. The acquisition would have mirrored what Lehman Brothers did in 2008, when its parent filed for bankruptcy but Barclays of Britain bought some of its assets.
But in the middle of the night, as Interactive Brokers investigated MF Global’s customer accounts, the potential buyer discovered a serious obstacle: Some of the customer money was missing, according to people close to the discussions. The realization alarmed Interactive Brokers, which then abandoned the deal.
Later on Monday, when explaining to regulators why the deal had fallen apart, MF Global disclosed the concerns over the missing money, according to a joint statement issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission. Regulators, however, first suspected a potential shortfall days ago as they gathered at MF Global’s Midtown Manhattan headquarters, the people briefed on the matter said. It is not uncommon for some funds to be unaccounted for when a financial firm fails, but the magnitude in the case of MF Global was unnerving.
For now, there is confusion surrounding the missing MF Global funds. It is likely, one person briefed on the matter said, that some of the money may be “stuck in the system” as banks holding the customer funds hesitated last week to send MF Global the money.
But the firm has yet to produce evidence that all of the $600 million or $700 million outstanding is deposited with the banks, according to the people briefed on the matter. Regulators are looking into whether the customer funds were misallocated.
With the deal with Interactive Brokers dashed, MF Global was hanging in limbo for several hours before it filed for bankruptcy. The Federal Reserve Bank of New York and a number of exchanges said they had suspended MF Global from doing new business with them.
It was not the first time regulators expressed concerns about MF Global.
By midmorning on Monday, the firm filed for bankruptcy.
Azam Ahmed contributed reporting.
Someone Is Going To Jail For This: MF Global Caught Stealing Hundreds Of Millions From Customers?
Say you are the head back office guy at MF Global, it is the close of trading on Thursday, the firm has already completely drawn down on its revolver, and all the resulting cash in addition to all the firm’s cash at your disposal in affiliated bank accounts, up to and including petty cash, has been used to satisfy margin demands due to declining collateral value, yet the collateral calls just won’t stop, and impatient voices on the other side of the phone line demand you transfer even more cash over immediately or else risk default proceedings commenced against you within minutes.
This is not a fictional tale. This is precisely what very likely happened at MF Global in the past 72 hours. And someone has to go to jail. That someone, if indeed this criminal act is proven to have taken place, should be none other than Jon Corzine himself.
The sad truth of just how low Wall Street has fallen comes to us courtesy of the New York Times:
Federal regulators have discovered that hundreds of millions of dollars in customer money have gone missing from MF Global in recent days, prompting an investigation into the company’s operations as it filed for bankruptcy on Monday, according to several people briefed on the matter.
The revelation of the missing money scuttled an 11th hour deal for MF Global to sell a major part of itself to a rival brokerage firm. MF Global, the powerhouse commodities brokerage run by Jon S. Corzine, had staked its survival on completing the deal.
As for the details:
What began as nearly $1 billion missing had dropped to less than $700 million by late Monday. It is unclear where the money went, and some money is expected to trickle in over the coming days as the firm sorts through the bankruptcy process, the people said.
But regulators are examining whether MF Global diverted some customer money to support its own trades as the firm teetered on the brink of collapse. If that was the case, it could violate a fundamental tenet of Wall Street regulation: Customers’ money must be kept separate from company money.
And just like in the Lehman collapse where tens if not hundreds of international prime brokerage hedge fund clients, due to no fault of their own, found themselves insolvent after their cash ended up being caught at the London Lehman office (the details of how that money was illegally transferred from London to the US is a different topic entirely) and never to be seen again except to satisfy general unsecured claims, so thousands of MF clients are about to realize that money they thought they had, even if completely unencumbered with other assets, read pure cash, read money not at risk, is now gone forever, and they will have to wait years until the bankruptcy process determines if the claim deserves priority status to the unsecured bondholders. Best case: assume a 70% haircut on the money, if it is ever to be seen again at all.
So who can be sued? Who can be blamed for this malicious and purposeful criminal act? Why everyone from the back office clerk presented in the thought experiment above, all the way up to the man at the very top, Jon himself, who, like in every other act of Wall Street impropriety will plead stupidity and deny he ever knew of this crime. Unfortunately, our criminal regulators, who will be just as complicit in clearing him of all wrongdoing, will aid and abet this latest destruction of faith in US capitalism.
What happens next? Why customers at all other brokerages, all other exchanges, afraid that their money will suffer the same fate as MF, even if they transact with perfectly solvent clearers and agents, will proceed to pull their money, as they know they have nobody to trust but their own prudent and forward looking actions. Which in turn will start the kind of liquidity drain that killed not only Lehman, but froze money markets, and with that brought the complete capital markets to a standstill, only to be thawed after the Fed pledged multiples of the US GDP to rescue Wall Street in October of 2008.
And that, dear reader, is called unintended consequences, and how the bankruptcy of a small exchange can avalanche into a crippling Ice Nine of what is left of capital markets all over again, courtesy of crony capitalism, rampant criminality and a regulator and enforcement body that is more fascinated with midget porn than any regulating or enforcing of the very firms it hopes to get an assistant general counsel job from in a few short years.
Here are some semi-random notes on the Occupy Wall Street movement, based partly on some “insider” contacts.
I am honored to have long been in email correspondence with David DeGraw ofAmped Status, one of the key initial organizers of the Occupy Wall Street movement. As a result of our mutual support society/correspondence, I am also honored to be included in an email group of people I consider the leading lights in the movement to restore democracy and fiscal sanity to this nation, people like Matt Taibbi, Barry Ritholtz, William Black, Max Keiser, Dylan Ratigan, Karl Denninger, Yves Smith, Michael Hudson, Nomi Prins, David Cay Johnston, Paul Craig Roberts, “George Washington” and Tyler Durden, to name some whose work you have probably read.
I want to start by saying that David DeGraw has acted under extreme pressure with integrity and grace at every step of this amazing journey. He is an American hero in my book, along with all the other initial organizers of the OWS movement: someone who cannot be bought, someone with the uncommon courage to act (virtually alone at times) against the united forces of oppression, exploitation and thuggery that is the Wall Street/Washington, D.C. Power Elite.
The OWS story appears to begin in late September, but it actually started in March, when David, Anonymous and other activists began organizing a June 14 “occupation” of Liberty Park: Acts of Resistance: What Are You Going To Do To Rebel Against Economic Tyranny? (June 1, 2011), Prepare For Revolution: The Empire State Rebellion Begins on June 14th (March 31, 2011), The A99 social network group, etc.
David has summarized his 19-month experience on the front lines of the movement:Report from the Frontlines: The Long Road to #OccupyWallStreet and the Origins of the 99% Movement.
What few people know or recall is that the June 14 occupation attracted a total of four citizens: David and three other brave souls: event organizer Gary Roland, Oren Clark and Kevin Dann. (Other sources say 16 people showed up but only these four were prepared to occupy the park.)
Here is David’s statement after the disappointing turnout: Back home from Liberty Park(June 15, 2011).
David does not try to take credit as a leader; rather, he repeatedly states the movement is decentralized and leaderless, mentioning the key roles played by Anonymous, A99 OpESR, US Day of Rage and the NYCGA (New York City General Assembly) among many others:
There are definitely other significant groups that played a key role. In such a decentralized movement, it’s hard to keep track of all the efforts being put forth. We will feature other perspectives in the days ahead.
As Anonymous A99 wrote in response to questions about their movement:
“We are a DECENTRALIZED non-violent movement. If you are looking to contact one of our leaders, go to the nearest mirror and peer deeply into it. It may take some time, but, eventually, one of our leaders will appear with answers to all of your questions.”
This lack of identifiable leaders and shadow financial backers is driving the Power Elites and their Mainstream Media lackeys crazy. Since they are all pimps or prostitutes for one special interest or another, the storm troopers of the Elite cannot believe there isn’t some interest group behind the whole thing. A decentralized, self-organizing mass protest movement against their rule simply doesn’t compute.
I have also been honored to be included in another small email group formed by an anonymous Elite insider who uses the nom de guerre Guy Fawkes. I won’t divulge this list for reasons of confidentiality, but the key point made by Mr. Fawkes is thatWashington D.C. is a bath-house/whorehouse where everyone is for sale and/or hustling:
The key to understanding Washington is to understand that the whole place is for sale. It’s not just politicians. It’s interest groups (right and left), media, foundations, lobbyists, etc.
Companies/foundations/labor all essentially manufacture “public opinion” from thin air simply by routing money to the right mouthpieces — public interest groups, non-profits, academics & universities, analysts. It’s hugely sophisticated and the budgets are enormous.
They are all competing (and paying) to either get the government to screw their competitor or convey some government benefit to them.
The voice of the electorate — the real “grassroots” — gets completely lost in the din. As soon as a “movement” picks up steam (e.g. Tea Party, MoveOn.org) it becomes completely co-opted… Tea Party becomes about “Guns, God & Gays” as Denninger rightly points out. Huge sums of money are dangled in front of the movement’s leaders and the original purpose of the movement is transformed into something that the status quo can tolerate.
There’s no room in this town for anyone who challenges the status quo — be that a Ron Paul, a Dennis Kucinich, a Noam Chomsky, etc. (Republicans ridicule Ron Paul just as much as Democrats do… It’s NOT his ideas that they are afraid of, it’s that he’s a huge threat to their power and perks.)
We all know this, and some try to dismiss it as “business as usual”: politicos have always been corrupt, money is the mother’s milk of politics, etc., but these are excuses, not explanations. A nation ruled by a deeply, pervasively corrupt political/financial class is not a democracy or a haven of free market capitalism: it is a neo-feudal kleptocracy organized along a neo-colonial “plantation economy” model with debt-serfs kept in line by the toadies, lackeys and apparatchiks of government, media and finance–a class of enforcers, propagandists and regulators that constitute a Technocratic Caste, a caste with a taste for power and the big bucks that flow to those willing to sell their souls and bodies in service to extreme concentrations of wealth and power. (All of this is explained in depth in my book Survival+.)
The corporate media is bought and paid for, and “journalists” toe the line or they’re fired. It’s really that simple.
That’s why the Web/blogosphere drives the Power Elites crazy: they can’t co-opt it with cash. You want to buy this site’s content and message? Sorry–I already have enough money. It really doesn’t matter how much money I have–it’s always enough. This is something else the Power Elites and their prostitutes/pimps simply cannot understand: how can someone not be bought? Doesn’t everyone crave the “Elite status” of special passes, big salaries, shiny gew-gaws and luxury possessions? Those who have sold their souls for a few beads and bangles are unable to understand those for whom integrity and independence are the only types of “wealth” they recognize. All that the pimps and whores of Washington value so much–the access to corridors of power, the fancy cars, the costly cozy dinners, and all the other perks of servitude–are meaningless to us, crass, ugly baubles marking depraved, lost souls.
Though it’s early, there are a number of lessons to be drawn from Occupy Wall Street. Others have already filed excellent reports, for example Chris Martenson-Occupy Wall Street: What’s Really Going On, and David Graeber, via Yves Smith (Naked Capitalism): On Playing by the Rules.
Here are my observations.
1. As an old activist myself (circa the early-mid 1970s), I learned that timing is everything but it is out of our control. A well-publicized mass demonstration in June draws 16 people (or four), and one three months later draws thousands of people. The difference is a change of awareness/ consciousness crystallized in the broader culture.
Concepts and phrases that placed me and other bloggers firmly in the farthest fringes of American society in 2005 and 2006 are now mainstream, bantered around on thousands of blogs and social media sites. People usually gain an awareness of propaganda and servitude slowly, and often only when their servitude and the dominance of self-serving Power Elites actually start impacting their own lives. That is now happening to more and more people.
The key to this process is having explanations and models which make sense of what’s happening. As the Status Quo unravels/devolves, the propaganda becomes less and less persuasive as an account of how the world actually works. Alternative explanations suddenly “make sense.” For me, the neo-colonial “plantation” model of financial/political exploitation and oppression neatly explains how America functions in the real world: debt-serfs, a Technocratic Caste of enforcers/managers, etc., just like on a colonial plantation ruled by a distant, cloaked, unreachable Elite. Others have different models, but the key feature is that each alternative explanation disrupts and subverts the Status Quo narrative.
This process cannot be co-opted or stopped. The only question left to be answered going forward is how much pain and suffering the Status Quo Power Elites and their armies of technocrat toadies, lackeys and prostitutes will impose on the nation before their grip on power is finally relinquished.
2. Given the vast armies of toadies, lackeys and prostitutes at their command, the Power Elite likes nothing better than “illegal action” which it can then ruthlessly suppress (truncheon-wielding cops, media smears, financial harrassment via the agencies of regulation/enforcement, etc.)
This is why I favor direct, perfectly legal action by individuals and households to divest themselves of servitude/complicity in the Status Quo. Max Keiser’s campaign to cripple Power Elite speculators in silver is one example: if 100 million households each bought 10 ounces of physical silver, that would completely disrupt the speculative game played by Wall Street.
One way to take direct action is to avoid student loan servitude: whatever it takes, get an education and degree without burdening yourself (and enriching Wall Street) with huge student loans. It can be done, but it means moving outside the Status Quo propaganda and narrative.
There is no law (yet) requiring citizens to have a mortgage, or credit card debt or an auto loan. Imagine what would happen to Wall Street’s ponzi financialization schemes if there were no mortgages to slice and dice and sell. Removing your interest payments and debt from the system is a direct action against servitude and the dominance of the Wall Street/Washington Power Elite.
Debt forces our complicity and servitude. The first step to true independence and freedom is to owe Wall Street and the other systemically dangerous institutions (SDIs) nothing. Owing them nothing is still perfectly legal. Once their income streams collapse, then buying the pimps and prostitutes of Washington becomes much more difficult.
The storm troopers of the Elite in Washington will protect their interests at every turn; that is why “reforming the system” is essentially impossible.
There are three ways not to have a mortgage:
1. don’t get a mortgage
2. pay off your existing mortgage
3. If you are insolvent, declare bankruptcy and dismiss the mortgage debt via the legal process of bankruptcy.
Others have taken the route of strategic default.
Other direct actions include:
–remove your money from Wall Street firms and “too big to fail” banks, opting for credit unions and online securities accounts.
–closing credit card accounts and/or minimizing your use of credit cards, which generate vast fees and profits for Wall Street and TBTF banks–what William Black calls systemically dangerous institutions (SDIs).
— don’t vote for either criminal gang–the Demopublicans or the Republicrats. Vote for an alternative, or the non-incumbent, or at least someone who refuses to play the game (for example, Ron Paul or Dennis Kucinich). Not voting plays right into the Power Elite’s hands: the passivity and complicity of the average citizen is their greatest ally in maintaining their neo-feudal power.
There are other direct actions we can take in the privacy of our own lives and homes. The basic idea is simple: stop being complicit in an exploitative, oppressive Status Quo, and stop passively accepting the governance of prostitutes and pimps and the lackeys they appoint (Geithner, Bernanke, et al.) It is perfectly legal (so far) to be debt-free, to own silver and to vote against the two criminal gangs that run Whoretown (Washington, D.C.)
Demonstrating is a good way to join in common cause and to raise awareness within the passive public, but being debt-free and thus a free citizen is even more powerful. Removing your debt and interest from Wall Street and the other systemically dangerous institutions (SDIs) will cripple their power in a way that toothless political reforms cannot.
Becoming a free, independent citizen won’t solve all our nation’s problems, but it will certainly enable solutions that are now impossible in the current neo-feudal, neo-colonial plantation run by Wall Street and Washington.
NOTE: I am jetlagged, exhausted and under the weather; I owe many of you books and emails, and your continued patience is greatly appreciated.
Readers forum: DailyJava.net.
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Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.
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