4 ms·

What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m pe

What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. But more seriously, legit question is what do the banks know about each other that the financial press hasn't reported yet? Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other.

draw_down 7y ago
Reading between the lines, your theory is that WeWork is causing the Fed to do this?
o-__-o 7y ago
>Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because all the loans I'm looking at are 3-8% interest and requires me to sign over my personal assets as collateral in return for a paltry $250k. I'd rather use that loan to just buy more real assets for myself instead (which is what I am doing)
- motohagiography 7y ago
  https://www.bloomberg.com/news/articles/2019-09-19/neumann-s-lenders-seek-changes-to-his-500-million-credit-line https://www.bloomberg.com/news/articles/2019-09-19/neumann-s...
  - o-__-o 7y ago
    Are you telling me the assets that WeWork owns are not real assets? Well, then, if real estate is not an asset then what qualifies as assets?
- azernik 7y ago
  This is a reference to Elon Musk's financial strategy, specifically https://www.reuters.com/article/us-tesla-offering-banks/elon-musk-owes-507-million-to-banks-helping-tesla-raise-capital-idUSKCN1S901E https://www.reuters.com/article/us-tesla-offering-banks/elon... Essentially, he has almost nothing in cash, and instead of selling stock to raise cash he borrows money with his stock as collateral. This is why he's so monomaniacally focused on his stock value and public image. For a more professional, but login-walled, overview, see https://www.economist.com/business/2016/10/22/countdown https://www.economist.com/business/2016/10/22/countdown
  - one2zero 7y ago
    Ahh the paywall. Let me keep reloading and smash esc until i get it to load without the paywall.
    - azernik 7y ago
      It's only loginwalled; if you're okay with them having your e-mail, you can read several articles a month.
  - o-__-o 7y ago
    This isn’t just Elon, Oracles Founder did the same thing. Except they actually have a company with assets. So I don’t get what OP was rambling on about “non real assets”. A fucking manufacturing plant is an asset. My servers are not. Looks like the financial world is working as it should...
    - azernik 7y ago
      The specific $500M number was a reference to Elon, but yeah, given how successful this strategy is I'm not surprised the Oracle founder uses it too. I agree with you that these cases are where the companies have tangible, provable value, even if they're not profitable right now.
azernik 7y ago
Continuing seriously, those $500M for Musk are peanuts to the financial institutions involved.
haidut 7y ago
>Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other. And what might that massive geopolitical conflict be?
- omegaworks 7y ago
  Hong Kong
  - haidut 7y ago
    Thanks. There could be others. The bombing of Saudi Arabian oil fields and a war with Iran comes to mind. Let's see what the OP had in mind. Maybe it is something else entirely.
    - motohagiography 7y ago
      It's orthogonal and I'd rather not clutter or derail one of the most interesting threads I've seen on HN, wrt these details of repo operations. I'm still of the mind that liquidity in effect means, "no buyers or participants," because banks have doubt about the stability of their counterparties - with the possibility that liquidity just isn't available at a suppressed interest rate. Even though the Fed rate and the overnight rate are different beasts, I'm asking by assertion whether the Fed rate is affecting the overnight rate, which is causing the liquidity problem because of the underlying idea banks are worried about what's on their counterparties balance sheets and they aren't compensated for it in the overnight rate. I shouldn't have included the startup joke, as I think that clouded it. I'm suggesting the liquidity problem is an unexpected knock on effect of the fed rate suppression due to the geo issue that forced their hand on low rates. The geo issue I was thinking of has been deferred for the moment, but for this discussion, the real question is whether there is a domestic issue where the banks are worried about each others stability. If competent people are sure it's just Q3 taxes and an artifact of the business cycle, this thread is still really valuable. To say it's a play by Mnuchin to kick start another round of QE would be consistent with the geo issue, but we're well into wagging the dog conspiracy stuff at that point.
beezle 7y ago
This isn't about counterparty issues. That was Lehman in 2008. This is a systemic liquidity shortage.
- DebtDeflation 7y ago
  >This is a systemic liquidity shortage. That seems to be the consensus, but I'm not convinced. $75B is tiny compared to the amount of excess reserves in the banking system and compared to the size of the overall repo market. Yet the Fed is treating this as an urgent matter. My guess is that there is a single (or a small number) of banks that are having a liquidity problem and the Fed is trying to stop it from becoming a broader issue.
  - beezle 7y ago
    I think we would have other information (rumors, etc) if there were a large bank in trouble and, AFAIK, most repo is tri-party reducing risks further. Another reason I feel this is not a single name problem is that the spread of FF to IOER had been rock stead until 2018 when FF began to trend from -15bp to parity/+5bp. So this pressure has been around awhile now.

draw_down 7y ago

Reading between the lines, your theory is that WeWork is causing the Fed to do this?

o-__-o 7y ago

>Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because all the loans I'm looking at are 3-8% interest and requires me to sign over my personal assets as collateral in return for a paltry $250k. I'd rather use that loan to just buy more real assets for myself instead (which is what I am doing)

motohagiography 7y ago
https://www.bloomberg.com/news/articles/2019-09-19/neumann-s-lenders-seek-changes-to-his-500-million-credit-line https://www.bloomberg.com/news/articles/2019-09-19/neumann-s...
- o-__-o 7y ago
  Are you telling me the assets that WeWork owns are not real assets? Well, then, if real estate is not an asset then what qualifies as assets?
azernik 7y ago
This is a reference to Elon Musk's financial strategy, specifically https://www.reuters.com/article/us-tesla-offering-banks/elon-musk-owes-507-million-to-banks-helping-tesla-raise-capital-idUSKCN1S901E https://www.reuters.com/article/us-tesla-offering-banks/elon... Essentially, he has almost nothing in cash, and instead of selling stock to raise cash he borrows money with his stock as collateral. This is why he's so monomaniacally focused on his stock value and public image. For a more professional, but login-walled, overview, see https://www.economist.com/business/2016/10/22/countdown https://www.economist.com/business/2016/10/22/countdown
- one2zero 7y ago
  Ahh the paywall. Let me keep reloading and smash esc until i get it to load without the paywall.
  - azernik 7y ago
    It's only loginwalled; if you're okay with them having your e-mail, you can read several articles a month.
- o-__-o 7y ago
  This isn’t just Elon, Oracles Founder did the same thing. Except they actually have a company with assets. So I don’t get what OP was rambling on about “non real assets”. A fucking manufacturing plant is an asset. My servers are not. Looks like the financial world is working as it should...
  - azernik 7y ago
    The specific $500M number was a reference to Elon, but yeah, given how successful this strategy is I'm not surprised the Oracle founder uses it too. I agree with you that these cases are where the companies have tangible, provable value, even if they're not profitable right now.

azernik 7y ago

Continuing seriously, those $500M for Musk are peanuts to the financial institutions involved.

haidut 7y ago

>Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other. And what might that massive geopolitical conflict be?

omegaworks 7y ago
Hong Kong
- haidut 7y ago
  Thanks. There could be others. The bombing of Saudi Arabian oil fields and a war with Iran comes to mind. Let's see what the OP had in mind. Maybe it is something else entirely.
  - motohagiography 7y ago
    It's orthogonal and I'd rather not clutter or derail one of the most interesting threads I've seen on HN, wrt these details of repo operations. I'm still of the mind that liquidity in effect means, "no buyers or participants," because banks have doubt about the stability of their counterparties - with the possibility that liquidity just isn't available at a suppressed interest rate. Even though the Fed rate and the overnight rate are different beasts, I'm asking by assertion whether the Fed rate is affecting the overnight rate, which is causing the liquidity problem because of the underlying idea banks are worried about what's on their counterparties balance sheets and they aren't compensated for it in the overnight rate. I shouldn't have included the startup joke, as I think that clouded it. I'm suggesting the liquidity problem is an unexpected knock on effect of the fed rate suppression due to the geo issue that forced their hand on low rates. The geo issue I was thinking of has been deferred for the moment, but for this discussion, the real question is whether there is a domestic issue where the banks are worried about each others stability. If competent people are sure it's just Q3 taxes and an artifact of the business cycle, this thread is still really valuable. To say it's a play by Mnuchin to kick start another round of QE would be consistent with the geo issue, but we're well into wagging the dog conspiracy stuff at that point.

beezle 7y ago

This isn't about counterparty issues. That was Lehman in 2008. This is a systemic liquidity shortage.

DebtDeflation 7y ago
>This is a systemic liquidity shortage. That seems to be the consensus, but I'm not convinced. $75B is tiny compared to the amount of excess reserves in the banking system and compared to the size of the overall repo market. Yet the Fed is treating this as an urgent matter. My guess is that there is a single (or a small number) of banks that are having a liquidity problem and the Fed is trying to stop it from becoming a broader issue.
- beezle 7y ago
  I think we would have other information (rumors, etc) if there were a large bank in trouble and, AFAIK, most repo is tri-party reducing risks further. Another reason I feel this is not a single name problem is that the spread of FF to IOER had been rock stead until 2018 when FF began to trend from -15bp to parity/+5bp. So this pressure has been around awhile now.