A Liquidity Crisis Hit The Banking System In September

Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market.   Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate.   However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008:


You can also see from this graph that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.

Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets.  We know that in 2008 there was a derivatives counter-party default melt-down.  This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).

What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008.   This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008.

What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period.  You’ll note that this is around the same time that a crash in Glencore stock and bonds began.   It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.

The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates.  However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.

Without a doubt, the graphs above are telling us that something “broke” in the banking system which necessitated the biggest injection of Treasury collateral in history into the global banking system by the Fed.

34 thoughts on “A Liquidity Crisis Hit The Banking System In September

  1. Dave,

    Is there a simple explanation you could provide, or a link, that would help a layman like myself to better comprehend the reverse repo market and it’s role ? I think I’m getting it ( which is scary ) but I need something that confirms my thoughts.

      1. On the link provided, mouse over the spikes! There occur every quarter (90 days) like clock work! Especially since the large Dec 31, 2014 spike!

  2. this could also be to cover JPM and others for the CDS fines of $1.8 billion. Oops, the Fed just created $400 billion. Chump change.

  3. Thanx Dave for bringing this to our attention.Another nail in the coffin of the
    scum who engineered this sick demented state
    of affairs. No wonder they are shitting on AU and AG bigtime.

  4. Jim Willie in recent interviews said the reverse repos are used to bail out the banks for their derivative bets gone bad and are much higher than reported with no actual treasuries being deposited, as in a “failure to deliver.”

    1. I was thinking the same thing. He made it sound like this is the “new normal” state of affairs. Is this a trillion dollars per month being printed? If so, what is M1, M2, M3 now?

      1. So the Fed buys “securities” (lets say TBonds) back from the banks, those imaginary made up govt IOUs, that it bought from the US govt using “money” it printed out of thin air, that it then sold to the banks (primary dealers?) at a discount who the banks sell at profit?

        What a circus of a financial system….what a fraud. There’s nowhere near enough, not even close real collateral in the world to legitimize these bullsh*t paper assests.

        1. Psychopaths instinctively know how to lie their way out of trouble. It comes natural to them and over time they become experts at it. Skilled in logic and debate, they can readily rattle off an explanatory excuse using double talk for virtually anything. Many end up utilizing their innate skills as lawyers who in turn end up as politicians. In fact most of the politicians in the US Senate are attorneys. Just as effective as they are at absolving themselves of any and all responsibility and culpability of being completely blameless, they are equally skilled at pointing the finger at others and throwing them under the bus. In order to get elected and stay elected, psychopathic politicians must be extremely convincing in their powers of persuasion. And of course using their cunning charm and capacity to fabricate seamlessly at will, their power to manipulate and persuade is among their chief assets. They are experts in bullshitting and playing the fake pretense game.
          Another strength is their capacity to keep their cool under fire. While the rest of us are reacting to normally stressful and dangerous situations with fear and anxiety, they manage to not sweat it and operate with relative calm. This skill of course places them at a distinct advantage in professions where constraint and self-control are required under pressure. Thus typically they fare well in the fast paced world of politics, the military and finances.
          The Other One Percent: Corporate Psychopaths and the Global Financial Crisis
          Anyone who has ever worked in a large corporation has seen the empty suits that seem to inexplicably rise to positions of power. They talk a great game, possessing extraordinary verbal acuity, and often with an amazing ability to rise quickly without significant accomplishments to positions of great personal power, and often using it ruthlessly once it is achieved.
          Their ruthless obsession with power and its visible rewards rises above the general level of narcissism and sycophancy that often plagues large organizations, espeically those with an established franchise where performance is not as much of an issue as collecting their rents.
          And anyone who has been on the inside of the national political process knows this is certainly nothing exclusive to the corporate world…
          … This is nothing new, but a lesson from history that has been unlearned. The entire system of checks and balances, of rule of law, of transparency in government, of accountability and personal honor, is based on the premise that one cannot always count on people to be naturally good and self-effacing. And further, that at times it seems that a relatively small group of corrupt people can rise to power, and harm the very fabric of a society.
          ‘When bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle.” -Edmund Burke
          “And remember, where you have a concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that.” -Lord Acton


          Central banks are printing money all over the world. New names have been given to what is really an age old phenomenon. Desperate governments have traditionally debased their currencies when they have no other way of financing their deficits. Quantitative easing, LTRO, Fed/ECB swaps, whatever. A new technocratic lexicon has been invented to cover what is really a time honored expedient of debasement and paper money printing…(“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” – Upton Sinclair) Power attracts certain personality types, and organizations that value power, or ruthless determination to achieve results at any cost, often end up being run by people with the mentality of predators. And the predatory environment can become self-reinforcing and self-sustaining given time.

          Read more: http://3.boards.net/thread/25/hey-dare-read?page=1#ixzz3nsredCvB

  5. As you said, Dave, the increasing frequency and amount of the reverse repos is telling. There are MAJOR fires raging behinds the scenes. The smooth facade of the financial system is getting harder and harder to maintain. It’s the ever increasing rupture events paired with that ever increasing severity you point out that makes it clear that they are losing (have already lost?) control. One of these days, the market simply won’t open. I wonder what their contrived excuse will be?

    Excellent work as always, sir.

  6. Everybody waiting on “market crash” but what if we are witnessing currency collapse? I mean did not the Zimbabwean stock market go to the moon during that currency collapse? I mean with stocks rising , isn’t that just indicating the location of new “credit flow” or Paper money? Great work here Dave…notice others starting to take credit for your ..work on Indian silver purchasing..thats’ OK we know who the real deal is out here……

  7. Great article Dave again – connecting the dots for people. According to the interpretation of the front page cover of the January 2015 “Economist Magazine” by a man named Marshall Swing at silverdoctors – The interpretation is that the Elite plan on collapsing this present broken fiat global financial system on or around 10-23-2015.

  8. Another “tell” about the search for “safe” liquidity is the Treasuries auctions.

    Six month bills $21 Billion sold for a miniscule yield of 0.065%

    Three month T bills had a blistering sale with $4.14 bid to $1.00
    for a yield of 0.00% first time in history!

    One month bills have sold at zero yield in 5 of the 6 most recent auctions.
    In the secondary market, some of these bills have traded at negative yields.

  9. Another “tell” about the search for “safe” liquidity is the Treasuries auctions.

    Six month bills $21 Billion sold for a miniscule yield of 0.065%

    Three month T bills had a blistering sale with $4.14 bid to $1.00
    for a yield of 0.00% first time in history!

    One month bills have sold at zero yield in 5 of the 6 most recent auctions.
    In the secondary market, some of these bills have traded at negative yields.

      1. Robert Reich has always been part of the problem. Not invoking his name is one requirement to having others respect your opinions.

  10. There are a few things going on here:

    1. The spikes actually correspond to ends of quarter, which is more visible in the daily data available on the New York Fed’s open market operations page. I created the same graph as the author and don’t see a spike on Sep 16. Rather, the $641 billion spike is as of Sep 30.

    2. The Fed opened up a new fixed rate overnight reverse repo facility two years ago and it is still in “test” mode, with it expected to be full allotment when the Fed eventually raises rates. The facility is open to money market mutual funds. In the past, only primary dealers could get treasury collateral from the Fed. This opens up huge piles of cash that can now access the Fed window. And they are doing so going into every quarter end.

    3. Why quarter end? Regulatory changes since the financial crisis (such as risk weighted asset reform, liquidity ratio, leverage ratio, etc.), are now largely implemented. The Fed is a riskless counterparty, so money market funds (and PDs) are simply gaming new regulations (win win!).

    None of this is to diminish the possibility that something is strange. $641 billion is by far the largest quarter end spike to date, and it does follow major market turmoil. Money market funds could only have accounted for $200 billion of it (according to the daily data on the NY Fed website). Another $191 billion is from foreign accounts (according to the weekly H.4.1 report that your graph uses). Which leaves about $250 billion that would (I think) have to be allocated to primary dealers (Goldman, JPM, etc.)

    That’s a lot of window dressing, even for the big guys.

        1. It is easy to see how a reverse repo arrangement affects overnight or short rates. However, when a CB sells treasuries and receives cash, how is it “injecting collateral” or “liquidity” into the system when it has just received the cash? Cash IS liquidity and is it not eligible collateral as well?

          1. No. The global financial system uses sovereign-issue debt and some mortgage paper as collateral. In a reverse repo, which is what I discuss, the banks get Treasuries in exchange for cash. The banks can then take those Treasuries and hypothecate them to counterparty entities who need collateral to put up against losing derivatives trades. That’s what’s going on here. The point is that the reverse repo’s are many multiples greater than what was done historically per the graph in my article, including during the 2008 crisis.

            I’m done explaining this, as I’ve done so several times. Anyone who requires more explanation can listen either to my latest podcast on Silver Doctors or on Financial Survival Network. Both are posted on my blog.

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