"Anatomy of the Repo Rate Spikes in September 2019"

A topic of ongoing interest in light of recent events. HT up front to one of the authors, the Fed's R. Jay Kahn.

From The Office Of Financial Research, April 25, 2023:

Repurchase agreement (repo) markets represent one of the largest sources of funding and risk transformation in the U.S. financial system. Despite the large volume, repo rates can be quite volatile, and in the extreme, they have exhibited intraday spikes that are 5-10 times the rate on a typical day. This paper uses a unique combination of intraday timing data from the repo market to examine the potential causes of the dramatic spike in repo rates in mid-September 2019 (Working Paper no. 23-04).

Abstract
Repurchase agreement (repo) markets represent one of the largest sources of funding and risk transformation in the U.S. financial system. Despite the large volume, repo rates can be quite volatile, and in the extreme, they have exhibited intraday spikes that are 5-10 times the rate on a typical day. This paper uses a unique combination of intraday timing data from the repo market to examine the potential causes of the dramatic spike in repo rates in mid-September 2019. We conclude that the spike resulted from a confluence of factors that, when taken individually, would not have been nearly as disruptive. Our work highlights how a lack of information transmission across repo segments and internal frictions within banks most likely exacerbated the spike. These findings are instructive in the context of repo market liquidity, demonstrating how the segmented structure of the market can contribute to its fragility....

....MUCH MORE , (24 page PDF)

Also from Kahn et al via the OFR: "Why Is So Much Repo Not Centrally Cleared?" and via the Social Science Research Network: "Hedge Funds and the Treasury Cash-Futures Disconnect"

Previously on the 2019 repo spike:
"Economist Michael Hudson Says the Fed 'Broke the Law' with its Repo Loans to Wall Street Trading Houses"
At the time I remember thinking "Oh look, the Fed has a new lending facility" and moving on to something shiny, not realizing it was a very big deal. As the old-timers used to say: "Pay attention or pay the offer."....

"ANALYSIS-U.S. banks face trillion-dollar reverse repo headache"

A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019 

"A Closer Look at the U.S. Bacon Situation"

"The Day When Repo Rates Blew Out: Fed Recounts a Fiasco that Occurred as the FOMC Was Meeting, and How it Reacted

"The Federal Reserve's Explanation Of What Happened In The Money Markets In September 2019

For now this is just a personal bookmark but we may be referring back to it. What was going on in Q3 and Q4 2019 was a big enough deal that the Fed felt compelled to publish this little bit of narrative.

What seems to have happened was that somebody's derivative book got upside down to the tune of a few trillion dollars (notional, always say notional) and in addition the contagion through the counterparty daisy chain was also in the trillions and well, here's the Fed with their version.

From the Board of Governors of the Federal Reserve System....

....And more to come. We've been picking at this scab for quite a while and the picture puzzle  is only now coming together so dribs and drabs.

And how does this ancient history tie into what's going on in 2022?

Who knows? 

As noted in Saturday's "StockCats Asks For Clarification":

I have a feeling that lands somewhere in "the nebulous region between mere suspicion and probable cause"

 (LaFave & Israel on U.S. v. Ramsey, 431 U.S. 606 [1977])

that there is some sort of misdirection going on that I'm not understanding.

If so, any attempt at analysis of Fed policy and market moves by traditional means, global macro, central bank policy and practice, market internals such as options gamma etc., etc. is just so much blather.

And I keep coming back to the 3rd and 4th quarters of 2019 as the period when things were getting very weird.

More to come (maybe)

Trouble In Repo Land—The QE Endgame: A Big Problem Is Emerging For The Fed

"The Fed Is About to Ramp Up Balance-Sheet Shrinkage. It May Get Dicey".  

"Red Pill or Blue Pill? Variants, Inflation, and the Controlled Demolition of Society"

 Money, Money, Money: "A Self-Fulfilling Prophecy: Systemic Collapse and Pandemic Simulation"

....Follow the money

In pre-Covid times, the world economy was on the verge of another colossal meltdown. Here is a brief chronicle of how the pressure was building up:

June 2019: In its Annual Economic Report, the Swiss-based Bank of International Settlements (BIS), the ‘Central Bank of all central banks’, sets the international alarm bells ringing. The document highlights “overheating […] in the leveraged loan market”, where “credit standards have been deteriorating” and “collateralized loan obligations (CLOs) have surged – reminiscent of the steep rise in collateralized debt obligations [CDOs] that amplified the subprime crisis [in 2008].” Simply stated, the belly of the financial industry is once again full of junk.

9 August 2019: The BIS issues a working paper calling for “unconventional monetary policy measures” to “insulate the real economy from further deterioration in financial conditions”. The paper indicates that, by offering “direct credit to the economy” during a crisis, central bank lending “can replace commercial banks in providing loans to firms.”

15 August 2019: Blackrock Inc., the world’s most powerful investment fund (managing around $7 trillion in stock and bond funds), issues a white paper titled Dealing with the next downturn. Essentially, the paper instructs the US Federal Reserve to inject liquidity directly into the financial system to prevent “a dramatic downturn.” Again, the message is unequivocal: “An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough. That response will likely involve ‘going direct’”: “finding ways to get central bank money directly in the hands of public and private sector spenders” while avoiding “hyperinflation. Examples include the Weimar Republic in the 1920s as well as Argentina and Zimbabwe more recently.”

22-24 August 2019: G7 central bankers meet in Jackson Hole, Wyoming, to discuss BlackRock’s paper along with urgent measures to prevent the looming meltdown. In the prescient words of James Bullard, President of the St Louis Federal Reserve: “We just have to stop thinking that next year things are going to be normal.”

15-16 September 2019: The downturn is officially inaugurated by a sudden spike in the repo rates (from 2% to 10.5%). ‘Repo’ is shorthand for ‘repurchase agreement’, a contract where investment funds lend money against collateral assets (normally Treasury securities). At the time of the exchange, financial operators (banks) undertake to buy back the assets at a higher price, typically overnight. In brief, repos are short-term collateralized loans. They are the main source of funding for traders in most markets, especially the derivatives galaxy. A lack of liquidity in the repo market can have a devastating domino effect on all major financial sectors.

17 September 2019: The Fed begins the emergency monetary programme, pumping hundreds of billions of dollars per week into Wall Street, effectively executing BlackRock’s “going direct” plan. (Unsurprisingly, in March 2020 the Fed will hire BlackRock to manage the bailout package in response to the ‘COVID-19 crisis’).

19 September 2019: Donald Trump signs Executive Order 13887, establishing a National Influenza Vaccine Task Force whose aim is to develop a “5-year national plan (Plan) to promote the use of more agile and scalable vaccine manufacturing technologies and to accelerate development of vaccines that protect against many or all influenza viruses.” This is to counteract “an influenza pandemic”, which, “unlike seasonal influenza […] has the potential to spread rapidly around the globe, infect higher numbers of people, and cause high rates of illness and death in populations that lack prior immunity”. As someone guessed, the pandemic was imminent, while in Europe too preparations were underway (see here and here).

"Stock market valuations don’t ‘reflect the damage ahead,’ BlackRock warns"
In the carefree days of yore I probably wouldn't have taken much notice of this beyond thinking "ah, big money manager has thoughts."

But since "Flashback: That Time Just Weeks Before Covid That BlackRock Told The Fed Exactly What It Wanted The Fed To Do (BLK)" which links to ourselves and the 2019 BLK whitepaper where Mr. Fink's peeps gave the Fed its marching orders for the 2020 disaster; well, I'm paying a bit more attention. If interested the Philosophical Salon has more after the jump.....

*****

....A look at Chairman Powell's calendar for the period February through June 2020, when the market went from total collapse, including an intraday 3000 DJIA-point loss one day in March, actually in the middle of one of the covid press conferences, to one of the most amazing recoveries in the last 90 years:

TradingView, DJIA daily, December 2019 - June 2020

Some highlights from the Fed Chair's calendar:

 February 19, Wednesday

3:00 PM – 4:00 PM Meeting with Jamie Dimon, CEO and Jenn Peipszack, CFO, JPMorgan Chase
Location: Anteroom 

March 19, Thursday

4:30 PM – 5:00 PM Phone call with Larry Fink, CEO BlackRock  

 April 3, Friday

3:30 PM – 3:45 PM Phone call with Larry Fink, CEO, BlackRock

April 9, Thursday

5:15 PM – 5:30 PM Phone call with Larry Fink, CEO, BlackRock

May 13, Wednesday

1:30 PM – 2:00 PM Phone call with Larry Fink, CEO, BlackRock

Of course there is much much more but discerning reader gets the point: Powell forgot to call me!

 It appears I may have become a bit obsessed with the events of September 2019 - March 2020.