Though he will have taken eight months to fully implement the $600 billion plus QE2 Treasury purchase program, Chairman Bernanke is on the record as saying he will need only 15 minutes to reverse his mad money printing should things go awry. Among his tools to reign in liquidity is the ability to conduct reverse repos with money market funds. Today, the Fed updated its list of counterparties, adding the following:
Investment Manager
Fund Name
BlackRock Advisors, LLC
Master Institutional Portfolio Master Money LLC Master Premier Institutional Portfolio
BlackRock Fund Advisors, LLC
Money Market Master Portfolio Prime Money Market Master Portfolio
BlackRock Institutional Management Corp
BlackRock Liquidity Funds: FedFund
BofA Advisors, LLC
BofA Money Market Reserves
Charles Schwab Investment Management, Inc.
Schwab Advisor Cash Reserves Schwab Government Money Fund Schwab Money Market Fund
The Dreyfus Corporation
Dreyfus Institutional Preferred Money Market Fund Dreyfus Treasury & Agency Cash Management General Money Market Fund
Federated Investment Management Company
Federated Treasury Preferred Money Market Fund Federated Prime Cash Obligations Fund Federated Treasury Obligations Fund
Fidelity Investments Money Management, Inc.
Fidelity Cash Central Fund Fidelity Securities Lending Cash Central Fund
Fidelity Management & Research Company
Fidelity Prime Fund Fidelity Retirement Money Market Trust Fidelity Treasury Portfolio
Goldman Sachs Asset Management
Goldman Sachs Financial Square Treasury Obligations Fund
Invesco Advisers, Inc.
STIT Treasury Portfolio
J. P. Morgan Investment Management Inc.
JPMorgan U.S. Treasury Plus Money Market Fund
Legg Mason Partners Fund Advisor, LLC
Western Asset/Institutional Cash Reserves Portfolio Western Asset/Institutional Government Reserves Portfolio
Morgan Stanley Investment Management, Inc.
Morgan Stanley Institutional Liquidity Fund Prime Portfolio
Passport Research, Ltd.
Edward Jones Money Market Fund
RBC Global Asset Management (U.S.) Inc.
RBC Prime Money Market Fund
T. Rowe Price Associates, Inc.
T. Rowe Price Reserve Investment Fund
U.S. Bancorp Asset Management, Inc.
First American Government Obligations Fund
Wells Fargo Funds Management
Wells Fargo Advantage Cash Investment Money Market Fund
Will any of Ben's tools actual work when price inflation is the 800 lb gorilla that can no longer be ignored? If nothing else, it's merely another way to subsidize the financial industry with favorable prices and commissions for the primary dealers that operate as counterparties.
We were [half] joking yesterday in our post about the CFTC's budget woes, when we said, "we're sure [Gary Gensler] will get his budget money and finally upgrade the Win98 box used to run the position limits calculator". From Reuters (emph. ours):
(Reuters) - Regulators seeking a barcode-like system to keep track of thousands of traders and millions of swaps contracts face an uphill battle to do it quickly and efficiently, firms that will be impacted by the new framework said on Friday.
The U.S. Commodity Futures Trading Commission is crafting an identification system for the swaps industry -- one that it wants to mesh with similar ID systems under consideration by securities and systemic risk regulators in the United States and Europe.
The numbers and the databases behind them will be a key part of the market infrastructure, and must be accurate and secure, said participants at a roundtable held to collect input from those who would be assigned a ID and organizations vying to collect the data.
"If you launch something, it must be bulletproof from the start," [apt metaphor, with CFTC Commissioner Chilton poised to "pull the trigger"] said Paul Janssens, product manager with the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which records most global money transfers.
Currently, the financial services industry has a hodgepodge of many identifiers that regulators are trying to mesh.
The CFTC sees the ID system as a "crucial regulatory tool" for monitoring risk, preventing market manipulation and enforcing position limits, said David Taylor, part of the rule-writing team that put together the CFTC's proposal, which is open for industry comment until February 7.
Cost is an issue for the regulator, which currently collects some of the data for its oversight of the futures market by fax.
The CFTC is struggling with how to pay for the new staff it needs with its budget frozen by Congress, and may run out of room to store data by October because of cutbacks to its technology budget, Commissioner Scott O'Malia said this week.
Thanks to the computer technology industry being largely unregulated, there has been a 350,000 times reduction in the cost of storage over the last 30 years, costing less than $0.002/MB today.
So, it's virtually inconceivable that the CFTC can't afford an extra hard drive or two. But yes, if you're regulating the markets by fax, telegraph and other assorted eighteenth century innovations, the invoices for filing cabinets can add up (the "C" does stand for "Commodities", right?).
Despite running on budgetary fumes, the CFTC is proceeding at a blistering pace in its effort to rewrite the rule books and avoid another 2008-style meltdown in the multi-trillion global derivatives market. Taking his cues from Hank "Terminator" Paulson, CFTC Commissioner Bart Chilton doesn't hesitate to pull out the tried and true gun metaphor. From Bloomberg (emph. ours):
The Commodity Futures Trading Commission may have to impose “user fees” on traders if Congress doesn’t give the agency enough money to police the newly regulated $583trillion derivatives market, said Commissioner Bart Chilton.
The CFTC has asked Congress for a budget increase to $261 million from $169 million to implement the Dodd-Frank financial overhaul. The law expanded the commission’s jurisdiction to the over-the-counter swaps market for the first time since the products emerged 30 years ago.
The agency’s request for more money has been delayed as the newly empowered Republican House majority promises to slash spending and Democrats warn that cuts will undermine consumer protections. Lawmakers agreed last month to fund the government at current levels through March 4.
“It’s not my preference, but if the choice is no regulation of these markets or a user fee, then we will have to pull the trigger,” said Chilton, one of three Democrats on the five-member commission, in an interview.
Chilton said a fee would be a “last resort” to pay for staff and technology needed to prevent a recurrence of the 2008 financial crisis. The agency may need authority from Congress to levy such a fee, he said.
Looks like [ex-Goldmanite] CFTC Chairman, Gary Gensler, will be going to Congress hat in hand either way. However, we're sure he'll get his budget money and finally upgrade the Win98 box used to run the position limits calculator. From Reuters (emph. ours):
In a pointed letter, Representatives Frank Lucas and Michael Conaway urged the Commodity Futures Trading Commission to slow down, reorganize its rule-making process, and make sure it knows how much it will cost businesses to comply with its regulations.
"By prioritizing speed over deliberation in writing rules, the CFTC has created an irrational sequence of rule proposals that prevents stakeholders and the public from providing meaningful comments," said Lucas, chairman of the House Agriculture Committee, and Conaway, head of a key subcommittee.
The Agriculture Committee has oversight of the CFTC, and the letter, sent on Wednesday, was a signal that it intends to pay close attention to the details of the system the CFTC is developing to police the over-the-counter derivatives market, worth $600 trillion globally.
The pleas of Congressman Lucas are in fact irrelevant, as the purpose of the CFTC's reg-writing profligacy is to get as many arbitrary rules and regulations on the books as possible to be able to arbitrarily enforce them and protect its most favored players' hegemony. C'mon, did you really think the CFTC was going to clamp down on the Morgue's silver shorts? Not to mention, the ability to engage in price fixing of commodities and, yes, even breaking individual trades on a purely discretionary basis.
Higher fees, irrational regulations...sounds like the folks at the CFTC are creating a perfect storm to drive derivatives trading elsewhere. Already, one major derivatives player, a unit of the IntercontinentalExchange, has withdrawn its swaps-clearing application. Expect more to follow.
The Bernank/Gense tag team hereby gets our new "B4F" designation (Best Friends in Financial Fraud Forever).
We wrote the following in our daily trading letter to clients this morning, and it's worth repeating here:
As we prepare for February, a historically underperforming month for equities, it's worthwhile to consider the liquidity situation. As ZeroHedge recently speculated (subsequently confirmed by Bloomberg), the Treasury will soon begin drawing down its $200 billion Supplementary Liquidity Program. The details will not be available until February 2, but it is estimated that beginning about mid-February, $25 billion per week in additional liquidity will be available as the 56 day cash management bills used to finance the program are not rolled over. Combined with the nearly $28 billion per week of QE Lite plus QE 2, a total of $53 billion per week will be flooding the markets in search of a home. Thus, it's difficult to conceive an intermediate correction developing and any weakness over the next few weeks would likely be an excellent buying opportunity.
We first wrote about Treasury's SFP back in September 2009, the last time it was announced it would be drawn down. We speculated (quite correctly as it turns out) that the additional "stimulus" would lower short term interest rates and would provide more potential market-ramping liquidity (QE 1 Treasury POMO having been nearly completed). At the time (and similar to now) the US was bumping up against its pesky debt ceiling, hence the timing. After Congress raised the debt ceiling, Treasury rebuilt the SFP account to $200 billion from March to April, 2010.
Inasmuch as the Fed's ability to pay interest on excess reserves (which it did not have at the inception of SFP in September 2008) largely makes the SFP irrelevant, we find it curious as to why it was ever refunded. As we wrote in 2009:
Treasury announced special auctions for cash management bills, the proceeds of which were placed on deposit with the Federal Reserve in a special account (as opposed to the proceeds being kept by Treasury to fund the government). This allowed the Federal Reserve to use these funds (which topped out at $558.9 Billion in November 2008) to borrow or buy securities primarily from banks and broker dealers to help “unfreeze the credit markets.” The Fed could have simply borrowed or bought securities with money it printed, but this would have expanded its balance sheet by creating excess reserves in the accounts that banks are required to keep with the Fed [and the funds may or may not have remained as excess reserves].
...
Congress granted the authority to the Fed to pay interest on excess reserves held by banks on deposit with it as of October 1, 2008. This new tool obviated the need for the SFP as the Fed could now simply incentivize banks to not lend against their excess reserves (by paying them interest to keep their reserves at the Fed). Accordingly, in November 2008, Treasury announced it would reduce the SFP, and it has held steadily at $200 Billion for most of 2009.
As yet another illustration of how dramatic liquidity swings by central planners affect risk markets, we find it no coincidence that after the QE 1 spigots were turned off and the $200 billion liquidity drain from the SFP was complete, the May 6 flash crash ensued, wiping out $1 trillion (intraday) in the US stock markets alone. Headlines of debt deflation pervaded the summer and would be used for justification of renewed money printing by the Fed (a/k/a QE 2).
Based on the following White House mid-session budget review published in July, 2010, it was already contemplated that the SFP would be drawn down by September, 2011 (the end of the US' fiscal year), never to be used again.
Which begs the question we echo from ZeroHedge: what liquidity draining method or event lies ahead to be used to justify continued money printing? For the time being, enjoy the ride as the mid-February to mid-April period could see as much as $425 billion ($212.5 billion per month!) in hot money hit the markets. JBTFD indeed.
The U.S. government has so many regulations that it should come as no surprise that some work at cross purposes.
The government continues to increase the rules and regulations under which it can gain access to information about your financial transactions. The surveillance state is obviously growing. Yet, at the same time, other new regulations will drive customers away from using bank services, making those ex-customers much more difficult to track. These former customers are being called the "unbanked".
According to Jamie Dimon, federal limits on debit card processing fees will force banks to charge customers more for services, making accounts too expensive for as many.
Indeed, banks are getting more creative now that the government is setting transaction fees below market rates (though offset, if you're a primary dealer, by the Fed continuing to pay above market rates). Ever wonder why recently, every bank teller experience involves a sales pitch for a savings account (assuming you don't have one with that particular bank already)?
There are no required reserves on savings account deposits. They immediately can be lent out at 100 cents to the dollar. So it's no surprise that banks incentive their customers to put as much of their money as possible into savings accounts. And, with savings accounts yielding a whopping 1% annually, it's only natural that JP Morgan Chase would craft a pitch worthy of Billy Mays or Ed McMahon:
That's right kids: double your money, betting on future bailouts and other assorted moral hazard while we blow your money on leveraged silver shorts and non-creditworthy borrowers (don't worry, we'll sell the 95% LTV loan to Fannie). The free lunch promise parade marches on to the drum beat of fractional reserve banking fraud. Ironic that savings--the bane of Keynesians everywhere--is now one of the large banks' few remaining cash cows.
Across all operations in the schedule listed below, the Desk plans to purchase approximately $112 billion. This represents $80 billion in purchases of the announced $600 billion purchase program and $32 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-January and mid-February.
The $7 billion increase from the prior period is composed of $5 billion as part of QE2 ($80 billion, up from $75 billion for the previous period) and an extra $2 billion as part of so-called QE-Lite ($32 up from $30 billion). We checked, and the MBS portion of the Fed's balance sheet is accelerating its drawdown, reaching an all-time high 4 week rolling drawdown of -$30.5 billion, from December 8, 2010 to January 5, 2010. Curious, as this is in the face of rising mortgage rates, where we would expect refinancing and the resulting prepayments to dwindle. There could be a lagging effect, or we could be witnessing Fannie and Freddie accelerating the modification and payoff of delinquent mortgages (in February, 2010, Freddie instituted a policy of automatic paydown of loans delinquent 120 days).
The extra $2 billion for QE Lite might be justified as business as usual from the perspective of the NY Fed, but why the extra $5 billion? RW at EPJ Central recently raised the question, "Is the Federal Reserve Propping Up Europe, Again?" As of last Thursday's figures, the Fed's liquidity swaps with other central banks went largely unused. Not surprising after the grilling Bernanke got in front of Alan Grayson (see below). However, as the Fed's expanding primary dealer list now includes banks housed in every major money printing hot spot, from Switzerland to Japan, the Fed can shovel money anywhere under the radar through it's "normal" money printing operations.
Oh, and as we pointed out last month, the actual amount of money printing is materially more than the pre-announced POMO schedule suggests, because prices paid are materially higher than the par amount reported. Now that the NY Fed publishes prices paid, we know that instead of $105 billion printed in the last 30 days, it was $110.4 billion, brining the grand total of "extra" money printed surreptitiously since November to $16.8 billion. Every billion counts!
ZeroHedge comments and links to a NYT article offering a rare glimpse of the wizards operating the Federal Reserve Bank of New York's massive and ongoing large scale asset purchases, and it's every bit as instructive as Toto's little curtain-pulling stunt: (emphasis and brackets ours)
But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easing — QE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm.
...
Each morning Mr. Frost and his team face a formidable task: they must try to buy Treasuries at the best possible price from the savviest bond traders in the business.
The smallest miscalculation, a few one-hundredths of a percentage point here or there, could unsettle the markets and cost taxpayers dearly. It could also embolden critics at home and abroad who say QE2 represents a dangerous expansion of the Fed’s role in the markets.
“We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses.
...
Louis V. Crandall, the chief economist at the research firm Wrightson ICAP, said Wall Street bond traders were driving hard bargains. The Fed has tipped its hand by laying out which Treasuries it intends to buy and when, giving the bond houses an edge.
“A buyer of $100 billion a month is always going to be paying top prices,” Mr. Crandall said of the Fed. “You can’t be a known buyer of $100 billion a month and get a good price.”
Nevertheless, Mr. Frost and his team have been praised on Wall Street for creating a simple, transparent program. Neither the Fed nor Wall Street want any surprises. The central bank is even disclosing the prices at which it buys [though, as ZeroHedge points out, not the prevailing bid/offers].
Mr. Frost and his team work out of a small, beige corner office with arched windows that used to be a library. There, at about 10:15 most workday mornings, one of them pushes a button on a computer. Across Wall Street, three musical notes — an F, an E and a D — sound on trading terminals, alerting traders that the Fed is in the market.
On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.
Mr. Frost and his team drew up the daily schedule for what the Fed calls its Large-Scale Asset Purchase program. And that program is, by any measure, large scale: through next June, these traders will buy roughly $75 billion of Treasuries a month — on top of another $30 billion it is reinvesting in Treasuries from its mortgage-related holdings.
But depending on daily market conditions, Mr. Frost can decide not to buy certain bonds if they are already in short supply.
As offers to sell Treasuries flash on a bank of trading screens, a computer algorithm works out which ones to accept. The computer compares the offers from Wall Street against market pricesand the Fed’s own calculation of what constitutes a “fair value” price. [Got that? There are three prices: Wall Street offers, market prices and some Fed black box algo's interpretation of "fair value" which, according to the sentence structure, is distinct from market prices!]
The real work is done by three traders who are referred to during the operation as trader one, trader two and trader three. They sit at a long table against the wall, tapping at seven screens.
On one recent morning, trader one was [current NYU student] Tiffany Wilding, 26. While she reviewed[this is the "real work"?] the stream of offers and then the prices finallyaccepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions[these "decisions" were only the review of the algo's decisions] and trader three, James White, 29, made a duplicate of everything in case the computers crashed [basically, a stenographer].
All the while, Mr. Frost stood behind his colleagues, ready to intervene — and even cancel the Fed’s purchases — at any sign of trouble.
With humans serving as mere spot checkers for the Fed's trading robot, one wonders what trouble might be detected outside of the odd coffee spill on the keyboard. Certainly, we would not expect any alarm bells to sound regarding skewed bid/ask spreads or the like--what with the Fed's own fair value engine cranking out non-market-based prices. Not even the mark-to-myth hallucinations of BlackRock (remember Maiden Lane?) are needed for this endeavor.
For the record, we would like to know just who programmed the Fed's Treasury purchasing algo, their historical affiliations, along with details of [any] competitive bidding procedure used to source the contract for the programming work. If the job were sole sourced or sourced to an industry insider affiliated with any primary dealer, we would like to know on what basis the FRBNY's office of General Counsel approved this.
For that matter, we'd like to know why BlackRock management of Maiden Lane I was sole sourced without a "clear reason", as is implied by the below email to FRBNY [then] Senior VP, Sarah Dahlgren, which we excerpt from the below document presented to Congress, with emphasis and brackets ours:
To Sarah Dahlgren/NY/FRS@FRS
Re: Sole Source
Spent some time with him [Tom Baxter, Jr., FRBNY GC] tonight. (He doesn't understand ML3, and I can't begin explain it either -- so don't needle him! -- and I am going to have [Paul] Whynott [FRBNY VP] spend some time with him tomorrow, BTW, you might touch base with Joyce [Hansen, FRBNY Deputy GC] about her reaction to Sunday's briefing; I think she had some concerns about how ML3 was presented to Geithner, which she expressed to Paul.) He knew that Stephanie [Heller?, FRBNY Asst. GC] was handling the Blackrock contract -- he didn't express any concerns -- and I explained that, in contrast to MLI, we had a clear reason to sole source it this time (that they had already modeled, etc.). So, although I have no worries, yes, probably worth reviewing it with him [Geithner] before taking it to Tom."
For that matter, we'd still like to know why the Fed's web page says, "Outright [MBS] purchases were conducted via competitive bidding to ensure that trades were executed at market rates" when a paper written in part by the manager of the FRBNY's purchase operations, Brian Sack, says, "Because the MBS purchases were arranged with primary dealer counterparties directly, there was no auction mechanism to provide a measure of market supply", as we pointed out in detail here.
A theme running through our posts since the termination of so-called QE1 in late 2009 has been the Fed's institutionalization of its large scale asset purchases. That is, far from any suggestion that this period in history will be viewed as an aberration of FOMC policy, it is in fact preparing the infrastructure for the permanent (at least as far as its own existence goes) deployment of Bernanke's wiley money printing schemes. Significant confirmation was made by SOMA Manager, Brian Sack's speech regarding balance sheet targeting in early October. And, today, the NY Fed announced it would employ Fannie and Freddie to aggregate the nearly 44,000 individual MBS securities it holds into groups, with the effect of whittling the list down to 10,000, ostensibly to improve back office management:
Next week, the Federal Reserve Bank of New York Open Market Trading Desk will begin a process to streamline the administration of the agency mortgage-backed securities (MBS) held in the System Open Market Account (SOMA) portfolio by consolidating some of these securities through a service offered by Fannie Mae and Freddie Mac called CUSIP aggregation. Through this process, aggregated CUSIPs are formed by consolidating existing agency MBS with similar characteristics into larger pass-through securities. This process is commonly used by investors, although the scale of coupon aggregation in this case will be large by market standards. No inference should be drawn from CUSIP aggregation about the timing or nature of any future monetary policy actions.
The aggregation process will significantly reduce the number of individual agency MBS CUSIPs held by the Federal Reserve, thereby reducing the administrative costs and operational challenges associated with managing the MBS portfolio. The Federal Reserve currently holds more than 44,000 individual agency MBS CUSIPs in the System Open Market Account. The aggregation process will reduce the number of CUSIPs to less than 10,000. Because all of the payments on the underlying agency MBS flow through to the aggregated CUSIPs, the aggregation process will not otherwise affect the size or characteristics of the SOMA portfolio.
The New York Fed publishes detailed data on all settled SOMA agency MBS holdings on its public website on a weekly basis. As CUSIP aggregation takes place, this weekly publication will include a listing of the individual agency MBS CUSIPs underlying each aggregated CUSIP. In addition, Fannie Mae and Freddie Mac provide information about aggregated CUSIPs, including the underlying agency MBS, on their public websites. Thus, the public will continue to have access to listings of all the MBS CUSIPs that are included in this aggregation effort. For more details on the aggregation strategy, please refer to the frequently asked questions page.
The more detailed FAQ may be found here, and while this will generate some nominal fees for the twin GSE's, we are told not to infer anything regarding future policy. But, how can we not? As ZeroHedge has noted, Bill Gross is once again stuffing his PIMCO funds with MBS securities. And, as mortgage rates are set to surge above 6% in the coming months, given Ben's historically itchy trigger finger, it become a matter of when, and not if, he will restart MBS purchases in line with the long-forgotten third Fed mandate of "moderate long-term interest rates".
