Fed Finally Identifies Banks that Received $4.5T in Q4 2019 Repo Program
Even before the USD’s historic money supply increase during 2020, the U.S. Federal Reserve (Fed) set new records in the repo money market. Back in Q4 2019, the Fed took significant action to bolster the financial system – with many of the same banks that were bailed out in 2008.
2008 Financial Crisis Revisited
Those who have seen the movie The Big Short, starring Christian Bale as Michael Burry, know what led to the subprime mortgage crisis. Simply put, banks and hedge funds made a bet that credit seekers for homes (mortgages) would be able to pay them off even if they don’t meet all necessary criteria. This is where the subprime part comes in, as in sub-optimal credit score.
The form of that ill-fated bet came as mortgage-backed securities (MBS). These are types of bonds that bundle home loans made by banks and pool them together. In normal circumstances, MBS provide greater yields than Treasury bonds. Unfortunately, when the MBS backbone is fragile – through subprime mortgage loans – the entire investment chain tumbles.
This is exactly what led to the 2007 – 2008 Financial Crisis. The Federal Reserve puffed into that house of cards by raising interest rates (federal funds rate). Higher interest rates drain the pool of potential home buyers because they increase loan requirements. As a result of this diminished real estate demand, not only did the home prices drop, but the subprime mortgage holders defaulted on their debt.
With MBS trashed, the Federal Reserve had to step in and save the day. On October 3, 2008, then-President Bush signed the Troubled Asset Relief Program (TARP) bill, worth $90 billion.
Overall, the Emergency Economic Stabilization Act (EESA) ran up a $700 billion tab to restore financial stability. While this may seem like loose change in the wake of 2020/21’s money printing extravaganza, it has become relevant once more.
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The Fed’s Quiet Bank Repo Program in 2019
In November 2021, the world’s 10 largest banks matched the market cap of the entire crypto market. Case in point, JPMorgan Chase, as the largest bank, had a market cap of $465 billion. Why is this important to note? Because in 2009, JPMorgan’s market cap was around $60 billion, marking a 685% growth to today’s $471 billion.
What is even more important to note is that Lemon Brothers, the fourth largest investment bank in the US prior to the crisis, was the only institution demolished by the Financial Crisis, having filed for the largest US bankruptcy in September 2008, holding $600 billion AuM. With the scale of money – and the players involved – in focus, the NY Fed released an interesting data on repo and reverse repo transactions, on December 30th, 2021.
The fed uses its emergency repo loan program as a way for commercial banks to maintain overnight liquidity by exchanging guaranteed loans. Although the program was no secret, the names of the loan beneficiaries were indeed kept secret up until recently thanks to the Dodd-Frank bill.
Through the bill, the Fed is required to disclose the names of banks (along with the relevant loan totals), but not until eight calendar quarters after the transaction took place. This information was just released by the Fed on Thursday, December 30, 2021, on the second to last day of the Fed’s legal two year window.
On September 17th, 2019, two days before President Trump signed an executive order to fast-track flu vaccine development due to a ‘potential pandemic flu outbreak’, the Fed started issuing trillions to 24 financial institutions. More precisely, such funds were issued to the same banks previously bailed out in 2008. Out of the $4.5 trillion in loans for Q4 2019, the bulk of it went to Goldman Sachs (103 instances), JPMorgan Chase (197 instances), Deutsche Bank (200 instances), and Citigroup (143 instances).
Needless to say, $4.5 trillion is over 5x more than the $700 billion laid down in 2008. Furthermore, it is 3x higher compared to Q3 2019 (the previous quarter at that time).
What are your thoughts on the Fed’s emergency repo program in Q4 2019? Let us know in the comments below.