This September, the overnight lending market began experiencing a liquidity crisis. Lending rates inexplicably skyrocketed. The New York Federal Reserve Bank responded by pumping money into a key funding market known as the repurchase agreement (repo) market to keep it from collapsing.
It was supposed to be a temporary measure, but now the Fed finds itself stuck having to continually pump money into repos at an increasingly higher rate—from $128 billion in the first two to three days to now over $120 billion per day.
Whats amazing about all of this is that neither the public nor Congress has addressed this event as a major issue symptomatic of big troubles ahead.
Typically, overnight lending rates stay around the 2 percent range. But on Sept. 17, lending rates jumped inexplicably to nearly 10 percent.
Apparently, there was a great demand from financial institutions for cash, and there wasnt enough supply to satisfy it.
The Fed hasnt injected liquidity into this market since 2007, the year leading up to the Great Recession. This alone should tell you something is greatly amiss.
This market typically operates like a well-oiled machine. But something is breaking down. The Fed initially dismissed it as a short-term problem that could be solved by short-term liquidity injections. They were wrong.
The week after the first round of emergency funding, the Fed scheduled daily liquidity injections of at least $75 billion into the repo markets.
Now, the Fed is pumping more than $120 billion a day to keep repo rates from getting out of hand (which, in essence, they already are).
Although this has been going on for three months now, strangely, nobody is asking questions—not the investing public, not Congress.
This is reminiscent of the years leading up to the 2008 financial crisis, in which both the public and the government were completely unaware that a catastrophic event was brewing.
Similar to 2008, we see a recognizable pattern.
Fed transactions are not allowed to go beyond the Feds primary group of 24 banks. Although many of these banks are based in the United States, some banks—such as Deutsche Bank, Credit Suisse, and SocGen—are not.
Heres the thing: These three foreign institutions are “troubled” banks, and its hard not to wonder whether the Fed is propping up their U.S. subsidiaries.
If the NY Fed is secretly funneling money into these banks, it wouldnt be the first time. They did it a decade ago—providing Deutsche Bank with a total of $354 billion (from the Term Auction, Primary Dealer Credit, and Term Securities Lending Facilities).
The NY Feds actions were discovered in 2011, when the Government Accountability Office released an audit in which such funding had been revealed and publicly disclosed.
But what should concern every investor is that institutions like Deutsche Bank are taking massive risks on derivatives—and at that level, such risks are systemic, meaning they can blow up not only their own institution but also every bank with which they are heavily connected, such as Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley, among others.
If a bank like Deutsche collapses, then well see another Lehman-style contagion.
Remember, oversized risks are what nearly collapsed the entire financial system in 2008.
The difference between 2008 and today is that banks are holding even greater risk exposure than they did in the years leading up to 2008.
Next to Deutsche Bank, Credit Suisse and SocGen—with their share values losing near 75 percent since 2007—are not that far behind.
But aside from these troubled foreign banks, lets take a look at whats wrong on the home front.
Five months ago, deposits held by the big four—JPMorgan, Bank of America, Wells Fargo, and Citi—collectively amounted to $5.45 trillion.
Thats 27 percent of the entire U.S. gross domestic product (GDP).
So if these banks held deposits equivalent to a considerable chunk of GDP, then why did they need liquidity injections of $120 billion per day just to participate in short-term repo transactions?
What happened to all of those banks depositor funds, and why did the Fed—the lender of last resort—have to step in and intervene?
In short, what happened to those trillions in depositor funds? How and where are they tied up?
The banking industry is a complex and labyrinthine system. Thats why the everyday person on the street relies on financial professionals to understand how money works and what to do with it.
But what weve discussed so far is simple math, and theres no sophisticated reasoning to explain how trillions in depositor funds—27 percent of the entire GDP—resulted in a lRead More – Source