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To retry my earlier comment[1]: The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%. Over three we
by SilasX 7y ago
To retry my earlier comment[1]:
The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%.
Over three weeks.
That means banks are, at most, saved from having to pay an (extra) interest charge of $3.6 million per 1 billion (revolving) dollars borrowed. [2]
That ... still seems like a rounding error against their typical quarterly profits, considering it's a one-time anomalous event.
Is that really something that justifies extreme Fed measures?
[1] https://news.ycombinator.com/item?id=21000023 https://news.ycombinator.com/item?id=21000023
[2] computed from 1,000,000,000(1.09^(3/52) - 1.025^(3/52))
- toomuchtodo 7y agoIt’s to prevent a cascading failure due to a rapid loss in confidence requiring even greater action from the Fed (such would occur if interbank lending dries up because of counterparty risk [perceived or actual]). Disclaimer: I work in financial services, but am not involved in these operations.
- tracer4201 7y agoI vaguely remember my macroecon class in college so many moons ago. The point is to stop a “contagion” from spreading and causing panic, right?
- toomuchtodo 7y agoEssentially. Read about the 2007-2008 GFC [1] to understand how fast the system can break down (weeks). Personally, I find the story of how JP Morgan (the financier) first acted as this sort of national economic backstop in 1907 very interesting and a fun read [2]. [1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80... [2] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907
- disiplus 7y agoim in the middle of the book Crashed, that pretty good explains exactly this in the events of 2008 crash https://www.amazon.com/Crashed-Decade-Financial-Crises-Changed/dp/0670024937 https://www.amazon.com/Crashed-Decade-Financial-Crises-Chang...
- situational87 7y agoHow about all the series of cascading failures due to a rapid loss of housing and healthcare and jobs that are affecting people who aren't bank executives? Who is on top of that one again? All the homeless people who live near me have started using the nearby car wash as their toilet, which is making the whole neighborhood smell pretty awful as everyone refuses to deal with this problem. I'm so glad Wells Fargo does not have to worry about it's margins shrinking by less than a percentage point so that they can continue generating $250 million in profit per day.
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- toomuchtodo 7y agoThese are important issues to be solved, but outside of the Fed’s control.
- SilasX 7y agoSo, banks don't trust each other's collateral, but the Fed does, and that judgment is more correct?
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- JumpCrisscross 7y ago> banks don't trust each other's collateral, but the Fed does, and that judgment is more correct? The collateral is Treasuries. Nothing exotic.
- MichaelApproved 7y ago> $3.6 million per 1 billion How many of those billions are being borrowed? The Fed is putting up $165 billion to help the market. So we can assume the market is at least that large. If we use your 3.6 million per billion figure, that's $600 million. Of course, the fed isn't the entire market, so we're probably talking a rescue worth several billion dollars. Hardly a rounding error.
- SilasX 7y agoThe relevant figure to look at is borrowing costs per dollar borrowed against typical return on capital. 0.36% shouldn't make a big difference there.
- whatok 7y agoYour last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets. There is a lot of leverage in repo financed trades and 36bps absolutely does make a difference.
- SilasX 7y agoThen maybe you could use your superior understanding to convey the relevant insights, rather than just assert that they exist.
- whatok 7y agoThere's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic. ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and what has been observed in the markets, one of the common theories of what caused ON to spike is Treasury basis [2] trades. Given the magnitude and speed of the ON spike and current positioning [3], this theory makes a lot of sense. If this is one of the causes, a spike in ON absolutely matters and isn't just a rounding error. [1] https://www.investopedia.com/terms/f/ficc.asp https://www.investopedia.com/terms/f/ficc.asp [2] https://www.cmegroup.com/education/courses/introduction-to-treasuries/the-basics-of-treasuries-basis.html https://www.cmegroup.com/education/courses/introduction-to-t... [3] https://www.cftc.gov/dea/futures/financial_lf.htm https://www.cftc.gov/dea/futures/financial_lf.htm
- ww520 7y agoThe 2.25% overnight funding rate is the basis for a lot of other rates out there, like the loans the banks lending to the public. The Fed doesn't care about saving the banks a few millions. The Fed cares about setting the short term interest rate for the whole economy.
- beezle 7y agoThe target range is now 1.75-2.00 and the Fed also lowered the IOER (interest on excess reserves) 30bp to 1.80%, theoretically to keep the fed funds rate from moving out of the top of the range as happened earlier in the week (fed funds != repo) Personally, I think they need to return to the days when excess reserves were paid no interest at all. Unfortunately that would remove order 40B in free money money center banks have been booking the past few years.
- JumpCrisscross 7y ago> The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9% Lender of last resort is one of the most essential roles of the Federal Reserve. Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency.
- colechristensen 7y agoWhy can't I lend banks money overnight for 9% or 8 or 7 or 6. There wouldn't be a liquidity problem if the market for the overnight funds wasn't restricted in the layers and layers of abstraction of the financial systems.
- driverdan 7y agoIf you had billions to lend you could get access to the market too.
- JumpCrisscross 7y ago> Why can't I lend banks money overnight for 9% or 8 or 7 or 6 There are two kinds of money: central bank money and private money. Central bank money consists of accounts at the Federal Reserve and hard cash. (Your checking account contains private money.) The repo market concerns itself with borrowing and lending central bank money (a/k/a "reserves"). Given the only way you could do this is with hard cash, and given borrowing and lending hard cash is quite expensive to manage, particularly overnight, you aren't in a competitive position to participate in this market.
- jey 7y ago> Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency. Can you unpack/explain this claim further?
- whatok 7y agoSolvency = credit risk in this case. If my counterparty doesn't pay me back, I can just liquidate the collateral which in this case are Treasuries. Given that these are overnight transactions, I'm probably not exposed to too much price volatility if I had to. People aren't worried about getting their money back. There just isn't enough money floating around to lend out.
- qqqwerty 7y agoI think what you are missing is that the bank doesn't own the 1 billion, that is someone else's money (deposit, leverage, etc...). This is very rough estimate, but let's say they are making 1% on the spread in rates (I just made that up, but that feels right, if not high) then using your same calculation they are looking at ~$570k in revenue. If that $570k suddenly turns into a $3.6M loss, that could cause problems.