Are the Fed’s Repo Loans Being Repaid by Wall Street’s Trading Houses or Just Rolled Over and Over?
Are the Fed’s Repo Loans Being Repaid by Wall Street’s Trading Houses or Just Rolled Over and Over? By Pam Martens and Russ Martens for Wall Street on Parade
Last Friday, the usually reliable and fact-intensive financial website, Wolf Street, threw a hissy fit over how the Wall Street Journal (and by extension, Wall Street On Parade) is reporting the tallies for the repo loans that the New York Fed has been pumping out every business day since September 17, 2019 to the trading houses on Wall Street.
The inflammatory headline blared: “The Wall Street Journal (and Other Media) Should Stop Lying About Repos.” The author of the piece, Wolf Richter, explained his criticism as follows:
“Here is the ‘in’ of a repurchase agreement [repo loan]: The Fed buys securities (mostly Treasury securities and some agency mortgage-backed securities) in exchange for cash. This adds liquidity to the market.
“Here is the ‘out’ of a repurchase agreement: Every repo matures on a set date when the counterparties are obligated to buy the securities back from the Fed at a set price. At this point, the repo unwinds, and it drains liquidity from the market.”
The key flaw in Richter’s analysis is that last sentence: “At this point, the repo unwinds, and it drains liquidity from the market.”
Neither the public nor Congress have any proof that these repo loans are being unwound. One or more of the 24 trading houses on Wall Street (primary dealers), that are authorized by the New York Fed to borrow from its money spigot at super cheap interest rates, could simply be rolling over the same loans or using term money to pay off one loan while taking out another loan.
There is a mountain of evidence to suggest that this is exactly what is going on. The first piece of evidence is that this is exactly what went on the last time the New York Fed turned on its $29 trillion money spigot to Wall Street from December 2007 to July 21, 2010. When the Government Accountability Office (GAO) was forced under legislation to look at the alphabet soup of lending programs the New York Fed had set up to disguise the astronomical sums it was spewing out to Wall Street’s trading houses (including their trading desks in London) it found that $16.1 trillion cumulatively had been pumped out – also at super cheap interest rates. It provided data for the peak amounts outstanding and also a cumulative total.
Why is a cumulative total essential and relevant? Because one institution, Citigroup, was insolvent for much of the time the Fed was flooding it with cheap loans. (Under law, the Fed is not allowed to make loans to an insolvent institution.) And when an insolvent institution is getting loans at interest rates below one percent when the market doesn’t want to loan it money at even double-digit interest rates, it’s highly relevant to know the cumulative tally of just how much Citigroup got from its sugar daddy, the New York Fed. According to the GAO, that tally came to $2.5 trillion for just some of these Fed loan programs. (See page 131 of the GAO study here.)