
New York Fed Again Upsizes Liquidity Plans for Turn of the Year - corporate_shi11
https://www.wsj.com/articles/new-york-fed-again-upsizes-liquidity-plans-for-turn-of-the-year-11576187805
======
dang
Url changed from [https://wallstreetonparade.com/2019/12/new-york-fed-plans-
to...](https://wallstreetonparade.com/2019/12/new-york-fed-plans-to-
throw-2-93-trillion-at-wall-streets-trading-houses-over-next-month-as-new-
york-times-remains-silent/), which points to this.

If you see comments complaining about how misleading the article and headline
are, they were probably about that one, not this one.

------
neonate
[http://archive.md/IxHDK](http://archive.md/IxHDK)

------
AnimalMuppet
> The $2.93 trillion that the New York Fed will funnel to Wall Street over the
> next month consists of up to $120 billion each weekday in overnight loans
> through January 14 and $440 billion in term loans ranging from 3-days to 32
> days.

We're talking about an _overnight_ loan of $120 billion (that is, a loan that
is paid back the next morning, lent again the next night, paid back in the
morning, etc. This article is treating it as a _cumulative_ loan - that is,
the second day, it's now $240 billion (never mind that the first $120 billion
has been paid back by then), and the third day it's $360 billion (never mind
that the first $240 billion has been paid back by then).

That's either incredibly stupid, or propaganda. My money is on propaganda.

~~~
corporate_shi11
Except it's not all overnight now.

>"The $2.93 trillion that the New York Fed will funnel to Wall Street over the
next month consists of up to $120 billion each weekday in overnight loans
through January 14 _and $440 billion in term loans ranging from 3-days to 32
days._ "

~~~
cheald
The point, more broadly, is that these are loans with a quick expiry baked in.
The money comes into and poofs out of existence on a relatively short
timescale (ranging from overnight to a couple of weeks); we aren't going to
see an extra ~$3T in circulation. They're providing lubrication in the repo
markets, they aren't just shoveling cash into the banks' vaults.

Most people misunderstand this point when discussing repo operations, so it's
worth emphasizing.

~~~
thisisnotmyname
What happens if banks systematically are unable to pay these loans back?

~~~
aguyfromnb
> _What happens if banks systematically are unable to pay these loans back?_

And how would that happen exactly?

But if it did, the Fed would extend the loan, or loan more. Not very
complicated.

~~~
bendbro
So it's not a loan

------
PeterStuer
In case like me you wondered "Why would anyone need money overnight? (or just
for a second, actually)" EDIT: As the commenter below points out, it is
actually over very short periods to even out a 2 week average period, but the
mechanic is indeed as explained

AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements
for banks. In theory the bank is not allowed to fall below a certain reserve
threshold because they would be too fragile towards bank-runs. This is needed
because left to their own devices banks would just leverage to the max
regardless of their cash position.

The crucial point is that the reserve is only measured at the end of day, so a
bank can dip below the safety thresholds as long as they make it up by the
evening. Overnight loans allow them to ignore the safeties since they just
loan the cash for a brief moment to be in the clear with regulation come the
daily measuring, but just return the money straight after the measurement has
taken place.

It is an organized method by which the Fed facilitates regulation dodging for
the financial sector.

~~~
apacheCamel
Why would the Fed allow this? Who created the regulation saying they needed a
threshold and why aren't they putting more teeth into it? It seems silly to me
to have a regulation without proper enforcement and it seems insane to me that
the Fed is complicit.

~~~
quickthrowman
The banks have assets that are worth money they can post as collateral to
borrow the cash to meet reserve requirements.

Or would you rather have banks unloading massive stacks of treasuries at
market close daily to meet their cash needs, creating volatility in bond
markets?

Repo lending means banks don’t have to unwind their positions daily due to a
cash shortage, because they have other assets they can post as collateral for
cash. It’s not a bad thing.

~~~
PeterStuer
Tell me:

Why was the cash reserve regulation introduced? What problem did it address?

Why, if banks are not able to comply with this regulation without "unloading
massive stacks of treasuries at market close daily", are they allowed to load
up on "massive stacks of treasuries" flaunting the cash reserve regulation in
the first place?

~~~
MichaelConlon
The cash reserve system was introduced to protect against a 1920's style bank
run. The idea being that a bank should have enough liquid assets to cover 10
or 15% of their customers pulling all of their deposited funds out of the
bank.

The goal of a bank is to make as much money as it can with it's assets. It's
in the banks interest to loan out as much as it safely can while staying above
the reserve requirements. If a bank were to dump it's assets to ensure it met
reserve requirements it would likely sell at firesale prices which could drive
down the price of those assets for the rest of the market. By taking a loan
from the Fed and using those assets as collateral that scenario is avoided.
It's also worth noting that these loans are not free, the Fed does charge
interest.

So the bank avoids dipping below reserve requirements (and flooding the asset
market) and the Fed earns a small amount of interest.

~~~
apacheCamel
I guess my question would be then why did the bank originally allow themselves
to loan too much out? From what you said, it seems like they loaned too much
out and without the Fed they would then have to dip into their assets to meet
the regulation. So it still seems like the bank messed up and the Fed is
bailing them out (despite with interest). I agree it would be a problem for
them to dump the assets but it also seems like a problem they are in this
situation to begin with.

~~~
MichaelConlon
You're correct in that it means that the bank messed up. The idea is that this
is for (relatively) small amounts to cover reserve funds for a short period of
time. This may happen because large deposit accounts decided to withdraw
unexpectedly or loan repayments stopped coming in. Ideally this is to be used
for a day or maybe a week. However, you're correct that there is certainly
potential for abuse in the system if a bank is doing this repeatedly every day
for months or more. I'm not sure what, if any, measures are in place to
prevent that abuse.

------
funemployed
If I lend my friend $10 every day for lunch and he pays me back the next day
and this happens 5 days in a row in what context would it make sense to say I
have lent him $50 dollars? The linked discussion about cumulative liquidity
seems completely full of FUD and designed to obfuscate rather than illuminate
its readers. Less of this and more links to Matt Levine please.

~~~
SilasX
>If I lend my friend $10 every day for lunch and he pays me back the next day
and this happens 5 days in a row in what context would it make sense to say I
have lent him $50 dollars?

In a sense, kind of. If your friend is expected to be able to pay for his own
lunch (because it's costly to keep covering for him) and only very
sporadically need to borrow from you (because e.g. he forgot his wallet), and
suddenly you find yourself doing it every day for several days at a time...

Then yes, it's _worse_ than your friend having to "borrow $10 [once]" from
you, even if it's not as bad as him having a $50 shortfall (esp since he does
pay you back).

It also means your friend is making a systematic error he's not correcting,
and you should probably start charging him more to, in effect, carry his money
for him. If you don't, you're enabling his dependence.

Similarly, banks are expected to only very sporadically need liquidity
directly from the Fed. If they need it over such long intervals, that's bad,
and the daily amount borrowed, by itself, understates the significance. It
also feels like the Fed isn't doing its job if the banks aren't paying (and
savers aren't receiving) a premium for such an unusually scarce service.

~~~
funemployed
> The daily amount borrowed, by itself, understates the significance.

If someone tells me that the NY Fed is looking to significantly (>25%)
increase its overnight and short-term liquidity operations and the necessary
increases are in the range of tens of billions of dollars then that already
sounds pretty important. I don't see how anything you said is an argument that
cumulative liquidity is an appropriate measure here. Instead we both seem to
agree that if someone had said - the loans are only $150 billion (because that
seems to be the one day aggregate limit) then that person would also be
misleading.

My point is not that this isn't an important issue but rather that it is an
important issue and as such it deserves serious coverage and the linked
article is not it.

~~~
SilasX
>I don't see how anything you said is an argument that cumulative liquidity is
an appropriate measure here.

I agreed that accumulating the entire amount is also the wrong way to account
for it (but was pointing out that the daily amount is also an error in the
other direction):

>>even if it's not as bad as him having a $50 shortfall (esp since he does pay
you back).

------
harmmonica
Here is my admittedly ignorant question about this: is it possible that the
institutions borrowing these funds are actually using those funds not for
relatively low-risk purposes (e.g., paying taxes), but instead to trade
"overnight"? Similar to how a high-net-worth individual can borrow against
their assets for a very low rate and then turn around and invest those cheap-
interest-rate funds into higher-return (i.e., riskier) investments?

This is wholly unsubstantiated, but a link someone posted on this issue in a
previous submission on HN (I can't find it) suggested that hedge funds in
particular are the main institutions causing this, that the too-big-to-fail
banks (JP, BofA, etc.) are unwilling to lend to them in the repo market
because the hedge funds are taking too much risk with those funds, and the
hedge funds are in turn forcing the fed's hand by telling them that they
either step in with funds or they'll either be forced to sell assets en masse
or, worse, fail. I'm probably using the wrong language to describe the
mechanics of how this would actually take place (e.g., I'm not suggesting a
hedge fund actually calls up and forces the fed's hand).

I have seen multiple people assert there's a reasonable explanation for this
and others suggest this is just more QE and that the market, after years of
QE, can't function properly without it, and so I'm floating what is likely a
conspiracy theory as an attempt at getting an explanation from someone
informed. Nearly impossible to believe this is a benign event. The parties
(the fed, the big banks, hedge funds) haven't earned that trust so if it is
benign then maybe there's a first time for everything.

~~~
JumpCrisscross
> _is it possible that the institutions borrowing these funds are actually
> using those funds not for relatively low-risk purposes (e.g., paying taxes),
> but instead to trade "overnight"?_

Yes. That's the purpose. You want banks repo'ing Treasuries so they don't dump
them (or their mortgages) to pay taxes (or employees or creditors). Repos
finance the asset side of the borrower's balance sheet. Tying fungible dollars
to specific liabilities is a losing game.

And if someone wants to repo Treasuries to take a new risk position, that's
fine. The cash is still injected into the money market through the acquisition
of the position. That's the point of the Fed's repo operations.

Note that hedge funds aren't at the Fed's repo desks. They're at the banks'.

> _this is just more QE_

Repo pre-dates QE. And the Fed supporting money markets goes back to its
founding purpose. QE was novel in its scale and the assets it supported, not
its act _per se_.

~~~
harmmonica
Helpful info and I understand repo predates QE, but could you shed some light
on why this came about unexpectedly, why you think the funds dried up all of a
sudden (and caused the repo rate (rates?) to skyrocket), and why the fed said,
when it first started injecting funds, that it was a temporary measure (which
is what all the pundits also said when it first started), but now is
stretching the definition of temporary?

Believe me I want to believe it's benign, but as I understand it if the fed
hadn't stepped in the repo rate would've been high single digits and things
would've ground to a halt.

Also, I've heard the too-big-to-fail banks suggest that the funds would be
available in the repo market if not for all the regulations around reserves,
but I gotta be honest my trust level for what Jaime Dimon et al say is pretty
low and in fact if they're saying it it makes it even more suspicious. That's
my problem of course, but just looking for a more detailed explanation.

~~~
JumpCrisscross
> _could you shed some light on why this came about unexpectedly_

There are hypotheses. The involve post-crisis capital-requirement rules making
banks more conservative with their cash interacting with unexpected demand for
cash from tax payers. (There is another around carry trades [1].)

At the end of the day, this is all speculation. Predicting demand for cash is
difficult. It's also the Fed's job. That we can complain about an overnight
rate spiking for a few hours is, itself, a luxury.

> _as I understand it if the fed hadn 't stepped in the repo rate would've
> been high single digits and things would've ground to a halt_

Probably. Liquidity crises in leveraged markets force selling, which lowers
collateral values, which forces selling, _et cetera_.

The Panic of 1907 is one of the clearer cases of an unregulated money market
turning a liquidity crisis into a solvency crisis [2]. This is a known market
failure for which a lender of last resort is a solution.

[1]
[https://news.ycombinator.com/item?id=21827998](https://news.ycombinator.com/item?id=21827998)

[2]
[https://en.wikipedia.org/wiki/Panic_of_1907](https://en.wikipedia.org/wiki/Panic_of_1907)

------
codyb
So 100bn a night, these figures are about a third higher than what was
happening before when it was 75bn (IIRC)?

It’s odd to me the overnight market has contracted to the point this extra
liquidity is needed.

I’m not particularly concerned about Fed’s overnight loans since I believe
they probably technically make a small amount of money off interest.

What’s curious is why the overnight market has become so expensive at the
intrabank level?

On one hand it could be a positive result of greater capital requirements due
to post 2008 regulations. Alternatively banks could be holding greater amounts
of assets in less liquid forms such as properties or perhaps stocks?

Perhaps the high stock market has increased banks asset sheets causing greater
liquidity requirements reducing their ability to lend?

I’m very much not particularly well informed here, but if that’s the case,
this doesn’t really feel so much like news as the Fed just performing it’s
mandates as expected?

------
jdhn
Ever since this whole repo issue started, we've been told that the ever
incresing sums of money that are put into the system are just a "short term"
thing, yet no end date is ever announced. Not to mention that the actual cause
for the spike in repo rates has never been announced or identified.

~~~
JumpCrisscross
> _we 've been told that the ever incresing sums of money that are put into
> the system are just a "short term" thing, yet no end date is ever announced_

Short-term as in short-term financing, _i.e._ overnight lending.

Nobody expects repo to go away in the same way nobody expects interest paid on
excess reserves to go away. It's a tool the Fed uses to manage the money
markets. Because the Fed is the Fed, it's almost alway going to be the
cheapest counterparty to borrow from.

~~~
joncrane
>Because the Fed is the Fed, it's almost alway going to be the cheapest
counterparty to borrow from.

Wrong. It used to be this way but they switched it up in 2003.[1]

The Fed is considered the "lender of last resort" and they manipulate the
interest rates to keep it that way.

They used to target the Fed Funds rate to be higher than the discount rate.
But that didn't make sense if you think about the system the government wanted
(for a while it was thought that embarrassment/the risk of increased oversight
was enough of a barrier that the lower rate was OK).

1\.
[https://datawrapper.dwcdn.net/0jhQV/4/](https://datawrapper.dwcdn.net/0jhQV/4/)

~~~
JumpCrisscross
> _Wrong. It used to be this way but they switched it up in 2003_

There was no "switching up". The relationship between the discount [1] and Fed
Funds [2] rates is a lever for tightening and loosening monetary policy. Over
the Fed's lifespan, the discount rate has typically been higher than the Fed
Funds rate, to dissuade the former's use.

And neither is the topic of discussion, which are the repo reference rates
[3].

All that said, yes, when the Fed is tightening one may find market rates
cheaper than the Fed's.

[1]
[https://www.federalreserve.gov/monetarypolicy/discountrate.h...](https://www.federalreserve.gov/monetarypolicy/discountrate.htm)

[2] [https://www.bankrate.com/rates/interest-rates/federal-
funds-...](https://www.bankrate.com/rates/interest-rates/federal-funds-
rate.aspx)

[3] [https://www.newyorkfed.org/markets/treasury-repo-
reference-r...](https://www.newyorkfed.org/markets/treasury-repo-reference-
rates)

------
snowwrestler
This, from a WSJ article linked in the post, would seem to be important
context:

> Fed repo operations take in Treasury, agency and mortgage bonds from
> eligible banks in exchange for short-term loans of cash. They are
> effectively collateralized loans from the central bank, and they are
> designed to ensure the financial system has enough liquidity to keep short-
> term rates relatively steady.

> The Fed has used repo operations, as well as purchases of government
> securities, for decades to control short-term interest rates, which is key
> to its ability to influence the direction of the economy.

> The Fed’s response to the financial crisis and its aftermath, however, put
> repo operations on the shelf for just over a decade. The Fed started using
> them again in mid-September after interest rates in the repo markets, where
> firms borrow and lend securities and cash short-term, unexpectedly spiked.

[https://www.wsj.com/articles/new-york-fed-again-upsizes-
liqu...](https://www.wsj.com/articles/new-york-fed-again-upsizes-liquidity-
plans-for-turn-of-the-year-11576187805)

I think it matters quite a bit whether these operations are an unusual
emergency measure, or the Fed is merely resuming common operations that it
paused in the wake of the financial crisis.

------
cascom
This is a good pretty discussion of the issues (podcast) if you are
interested. One of the takeaways is that this is an unintended regulatory
effect from newer banking regulations

[https://news.ycombinator.com/item?id=21827424](https://news.ycombinator.com/item?id=21827424)

------
repler
> The New York Fed’s repo (repurchase agreement) loan program began on
> September 17 when repo loan rates spiked from approximately 2 percent to 10
> percent

Here is some context on the September 2019 bailout (dated September 23), and
they actually foreshadow that more intervention would be likely:

[https://fortune.com/2019/09/23/repo-market-big-
deal-400-bill...](https://fortune.com/2019/09/23/repo-market-big-
deal-400-billion-bailout-unnerving/)

------
jgalt212
This repo operation is YUGE, but the writer of the article is adding his/her
numbers up wrong (and perhaps on purpose).

If I lend you $50 overnight, and then you repay. And then I lend you another
$50 overnight and you repay, most market folks would consider this $50 in
credit/loans, not $100 in credit/loans.

~~~
ipnon
The distinction between credit and debt is crucial here.

~~~
jgalt212
only if you count your numbers in an unconventional manner.

------
gentle
It looks like we hugged the server to death. Does anyone have a repost?

------
resters
This stuff is normal. It is not a signal.

I do think there will be a crash similar to 2008, but this is not evidence
that it is coming.

~~~
deusofnull
> I do think there will be a crash similar to 2008, but this is not evidence
> that it is coming.

i agree but i lack a specific metric or analysis that supports my thinking. do
you have one?

~~~
resters
I think that there are significant incentives for financial institutions to
create financial products (derivatives, etc.) that contain (and magnify) the
systemic risk that is part of their inputs.

Systemic risk is very costly to hedge against, and to do so requires keeping
capital idle that could otherwise be productive.

Also, esoteric financial instruments are always going to be less liquid than
simple securities, yet the incentive of financial firms is to create them and
find markets for them. This is analogous to any industrial input (raw
materials) and output (finished product).

Complex financial products are desirable for use as underwriting capital
because they can have specific characteristics that make them preferable to
cash. But in fact the actual desirable characteristic is that their usefulness
as a hedge against systemic risk has been sold off, leaving something that is
legal as risk capital but ineffective against systemic risk.

Hence, the financial system has an incentive to create complex, entangled,
webs of risk capital, none of which is cash, and all of which looks fantastic
if you just look at its core (non systemic) risk characteristics.

When there has not been a systemic risk event in a while, such systems appear
to be ingenious and clever. Regulators "understand" them well enough to deem
them suitable as risk capital in good times (due to their non-systemic risk
characteristics) and in bad (due to their lower cost).

The issue in 2008 was that the derivatives had baked in resilience to _some_
systemic risk. If you design it with resilience to any systemic risk, it
ceases to be useful.

So the game is simply baking in enough resilience to comply with regulations,
collect quarterly bonuses, and repeat.

When you think about it there is really no regulatory framework for minimizing
systemic risk exposure except for a handful of limits on firm size and some
nuances of underwriting capital, created after the great depression.

~~~
deusofnull
fascinating, thanks for this post.

------
noneeeed
What's the obsession with the NYT specifically, in contrast to other news
outlets? It made the post rather irritating to read.

I'm not American, so I feel like I'm missing the significance that might be
obvious to everyone else.

~~~
davidw
They're considered one of, if not the, premier newspaper in the US, but have
been falling down a lot lately.

"One one side, we have geophysicist Dr. Alicia Gomez to talk about the history
of learning about the shape of the earth and its place in the cosmos. On the
other side, we have Bob from the internet, who claims it's flat".

 _Edit_ BTW, good follow if you're interested in this sort of asymmetry and
how it's playing out in many ways:
[https://twitter.com/jayrosen_nyu](https://twitter.com/jayrosen_nyu)

------
BubRoss
Why is it that the fed has to do overnight loans? I would think if interest
rates rise, anyone would want those short term gains and would sell assets to
have enough cash to get at the easy fast money of the repo market.

------
yeahigotgoats
if all you virtual signaling assholes bitching about climate and your self
driving cars would focus on this bullshit, the world could actually change,
until you do, nothing will.

------
INTPenis
I'm a foreigner so maybe someone can answer me; is this money earmarked? Will
it be traced? Are the books open and available to everyone?

In short; can we see exactly what this money is used for?

Otherwise it's just a big robbery.

~~~
JumpCrisscross
> _is this money earmarked? Will it be traced? Are the books open and
> available to everyone?_

Yes, it's earmarked. Yes, it's traced.

No, the Fed's books are not "open to everybody". They are, however, open on a
delay to a ridiculous level as you can find from their website. (As in, if you
want to know how much each institution has borrowed on what terms, you can do
that.)

------
jessaustin
Maybe this is where some of the missing Pentagon money has gone?

~~~
charwalker
Unlikely, the Fed is fairly independent from the rest of the government and
holds reserves or other assets as needed.

