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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn'tal so, Joe? I

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Speaker 1: was in New York with you in early September, wasn't I?

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Speaker 1: We did the Odd Thoughts Live show. That was early September. Yes,

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Speaker 1: I think it was. That already seems like a really

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Speaker 1: long time ago to me, but yeah, that was really

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Speaker 1: fun and we had a great, a great lineup of

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Speaker 1: guests and it was it was just it was absolutely perfect.

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Speaker 1: I wouldn't have changed one thing about the lineup of

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Speaker 1: guests that we had. Then. Uh, there was one thing

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Speaker 1: that I would have changed, which is that we were

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Speaker 1: due to have Sultan Posar on one of the panels

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Speaker 1: and unfortunately get to drop out a couple of days

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Speaker 1: before for a sort of last minute commitment. But the

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Speaker 1: reason it would have been great to have him there

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Speaker 1: was because something big happened in the market that same week, right,

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Speaker 1: So I was just trolling a little bit. I agree

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Speaker 1: with you. That would have been the one change that

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Speaker 1: would have been the one thing that would have made

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Speaker 1: it absolutely perfect. And of course what you're referring to

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Speaker 1: was the tantrum or I'm not sure what we were,

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Speaker 1: what word we're using to describe it, but the sort

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Speaker 1: of craziness, the rebo madness of early September was right

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Speaker 1: around that time, and of course Sulton is by many

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Speaker 1: people considered to be the pre eminent expert on in

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Speaker 1: this area. Right also a former Odd Thoughts guest, and

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Speaker 1: I should just back into this a little bit. So

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Speaker 1: Zoltan pos Our, former advisor to the U. S. Treasury Department,

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Speaker 1: now a strategist at Credit Swiss, and he's been writing

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Speaker 1: a lot about the repo market. In fact, you know,

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Speaker 1: just four or so weeks before we had that rebo

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Speaker 1: madness incident, and this was where short term borrowing rates

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Speaker 1: in the money market suddenly surge. Four weeks before that

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Speaker 1: actually happened, Zulton had been writing again some eerily prophetic things,

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Speaker 1: like he actually wrote in a piece of August research

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Speaker 1: that the funding pressures that Credit Swiss is forecasting include

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Speaker 1: overnight general collateral repo rates drifting outside the FEDS target band.

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Speaker 1: And that is exactly what happened. I remember, and I'm

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Speaker 1: not just saying this because he's here in studio and

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Speaker 1: we're about to talk to him, but I remember even

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Speaker 1: before I noticed. I remember the day that the rates

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Speaker 1: shot up. I didn't even notice it until some trader

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Speaker 1: at a bank I beat me on my Bloomberg and said,

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Speaker 1: are you watching what's going on in the repo market.

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Speaker 1: It's exactly what Alton predicted. And that was the first

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Speaker 1: Then I went and looked. That was my first, uh,

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Speaker 1: my first indication that something was amiss. Someone alerting me

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Speaker 1: in that way. That's how that's how closely his research

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Speaker 1: is tied to we've seen in people's minds in the market. Yeah,

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Speaker 1: Sultan is at one with the repo market and uh,

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Speaker 1: money market crunches. Again, just to provide a bit of background,

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Speaker 1: So what we actually saw on that day was rebo rates, uh,

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Speaker 1: the cost basically of making secured overnight collateralized loans. Those

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Speaker 1: repo rates jumped from I think it was about two

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Speaker 1: percent to something like ten and lots of people had

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Speaker 1: talked about the possibility of a funding squeeze, especially around

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Speaker 1: quarter ends, which is where we get these sort of

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Speaker 1: traditional crunch points in the financial systems because big banks

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Speaker 1: have to pull back on their rebo financing ahead of

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Speaker 1: quarterly liquidity requirements and other regulations. But far far fewer

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Speaker 1: people had expected it to happen at this sort of

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Speaker 1: random juncture in time, this slightly random week in September,

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Speaker 1: so again it was really unusual. It spooked quite a

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Speaker 1: few people and everyone immediately he said, we must speak.

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Speaker 1: Resulting coodes are absolutely and it's important to remember too

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Speaker 1: that when people see this stuff, everyone has sort of

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Speaker 1: still after all these years post crisis PTSD, and you

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Speaker 1: look at bank overnight funding costs and they're soaring from

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Speaker 1: two to ten percent in a day, And of course

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Speaker 1: a big debate immediately broke out. Is this something strictly

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Speaker 1: about financial market plumbing or is there something deeper and

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Speaker 1: more systemic at play that sort of speaks to some

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Speaker 1: inherent frailty of the financial system. And obviously things have

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Speaker 1: quieted down quite a bit since then, but nonetheless I

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Speaker 1: think you know, they're still people are still unsettled, and

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Speaker 1: no one really knows what the ultimate fix is going

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Speaker 1: to be. The Fed is applied temporary fixes, greater expanding

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Speaker 1: its a supply of reserves uh or overnight operations to

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Speaker 1: satisfy the bank demand for this short term liquidity, but

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Speaker 1: no one really knows where this is ultimately headed. It

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Speaker 1: seems right, So I'd say it's actually debatable whether or

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Speaker 1: not things have calmed down in the repo market. But

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Speaker 1: why don't we just jump straight into the discussion with

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Speaker 1: Zoltan and we'll be able to get into all of

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Speaker 1: these really really interesting and fascinating questions. So, Sultan Postar,

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Speaker 1: thank you so much for coming on yet again. Very

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Speaker 1: nice to be here. So let's start off with that

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Speaker 1: week in September. Presumably you're sat in Credit Swiss, maybe

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Speaker 1: watching overnight market rates as you do. What are you

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Speaker 1: thinking when you start to see the repo rate jump

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Speaker 1: like it did. Well, Actually, I wasn't in Credit Swiss

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Speaker 1: the day of this happening. I was actually traveling down

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Speaker 1: to the See to see some clients with one of

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Speaker 1: our sales guys. And you know, we saw the markets

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Speaker 1: open up and you're chatting in the cafe cars and okay,

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Speaker 1: well Monday wasn't good. Tuesday's shaping up to be worse.

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Speaker 1: And I'm not kidding. Five minutes into that train ride,

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Speaker 1: the train broke down and we were basically told to

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Speaker 1: have to get off the train and there's going to

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Speaker 1: be another train coming. You have to call the client.

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Speaker 1: That's sort of but the train is running late. And

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Speaker 1: then the FEDER announced the REPO operations. But then the

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Speaker 1: FED was late with the first operation due to technical glitches.

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Speaker 1: And I looked at Phil, the sales guy, and I

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Speaker 1: told him, look, I'm in the country. Is funding itself

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Speaker 1: overnight in the repo market the trains don't run and

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Speaker 1: the fense do an operation on times it has to

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Speaker 1: be has to be a joke or about some sorts.

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Speaker 1: But the September blowout was, you know, it took many

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Speaker 1: people by surprise. UM. I think a lot of people

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Speaker 1: focus on what happened and they kind of look for

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Speaker 1: the trigger that triggered it on that day, and I

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Speaker 1: think that's actually the wrong question, on the wrong thing

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Speaker 1: to focus on. The September blowout in the report market

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Speaker 1: was a long time in the making. What it had

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Speaker 1: to do with is basically taper, and taper was just

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Speaker 1: very slow burning process where you know, the fat took

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Speaker 1: more and more reserves out of the system, and when

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Speaker 1: when the system ran out of liquidity, which in this

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Speaker 1: specific case means you know, reserves that the system can

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Speaker 1: settle with. You know, the moment you ran out of

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Speaker 1: ran out of those reserves, the repal market seized up.

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Speaker 1: So this was basically a six billion dollar process, which

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Speaker 1: is how much the fat tapered. The one thing that

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Speaker 1: was very important to watch is basically look at who

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Speaker 1: are the most reserves rich banks, how much reserves they

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Speaker 1: have lost as the FED was tapering the balance sheet

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Speaker 1: and what is the body language of banks CEOs and

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Speaker 1: banks CFOs and when you listen to them during earning

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Speaker 1: scolls as to what is the minimum number of reserves

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Speaker 1: that they need to hold from a business perspective, you know,

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Speaker 1: the largest bank that held them most amount of reserves,

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Speaker 1: JP Morgan during the stapor process has gone from having

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Speaker 1: three dollars of reserves at the FED two hundred and

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Speaker 1: spenty billion as of the end of the second quarter

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Speaker 1: of this year. And so when you saw that number,

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Speaker 1: you knew that the bank that was always the lender

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Speaker 1: of next less resorts in the repo market basically ran

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Speaker 1: out of money. So let's back up, just for people

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Speaker 1: that maybe aren't as familiar with some of the terminology

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Speaker 1: or even the structure of the banking system and the

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Speaker 1: hopes that they can understand this topic. When you or

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Speaker 1: I have our money held at a bank, we have

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Speaker 1: a deposit. The reserves are essentially where banks deposit their

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Speaker 1: money at the FED and the there's a fixed amount

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Speaker 1: of reserves available, and that greatly expanded during the financial

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Speaker 1: crisis thanks to quantitative easing. Essentially the FED going out

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Speaker 1: and buying safe assets like treasuries or mortgage backed securities

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Speaker 1: with reserves, and then it's starting to shrink them as

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Speaker 1: part of the taper process. And essentially what happened or

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Speaker 1: what's going on is the shrinking of the balance sheet

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Speaker 1: collided with regulatory requirements on banks to hold a certain

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Speaker 1: yes amount of reserves at the FED. To explain this

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Speaker 1: sort of collision of arguably different arms of the government

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Speaker 1: make imposing different demands on the Okay, so let's let's

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Speaker 1: start with um two observations. Number one. You know, the

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Speaker 1: payment system used to be used to be no longer

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Speaker 1: is used to be a credit system, which basically means

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Speaker 1: that pre crisis, you know, when banks make payments between

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Speaker 1: each other and they transfer money from one bank's reserve

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Speaker 1: account to another bank's reserve account, you know, it used

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Speaker 1: to be the case that banks would go into a

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Speaker 1: negative balance in their reserve accounts at the FED. So

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Speaker 1: that's the whole intraday credit provision that the FED used

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Speaker 1: to provide to the system, which basically ensured that payments

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Speaker 1: between banks never bounce. Okay, if there's not enough money

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Speaker 1: in your reserve account, the FED is going to put

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Speaker 1: in the right amount of money so that payments can settle,

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Speaker 1: and then that intraday credit provision by the FED gets

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Speaker 1: pushed into the overnight markets used to be the overnight

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Speaker 1: FED funds market, and that's the way the banks settled

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Speaker 1: UH those claims at night. Post crisis and post Basil three,

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Speaker 1: there is no bank that is ever going to use

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Speaker 1: intraday credit from the FED, because if you were to

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Speaker 1: use intraday credit, it means that you are in severe

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Speaker 1: breach of your liquidity coverage ratio or your introdict liquidity

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Speaker 1: requirements and all that stuff. So, quite literally, post Basil three,

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Speaker 1: the system settles with the amount of reserves that are

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Speaker 1: in the system, so there's nobody who's taking cash from

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Speaker 1: the FED on the margin. Then you look at the

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Speaker 1: amount of reserves that are in the system. The distribution

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Speaker 1: of those reserves UH is not equal. Some banks hold more,

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Speaker 1: some banks hold less, But basically the banks that have

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Speaker 1: the abundance of reserves, the reserves rich banks, they are

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Speaker 1: the ones that are lending into the system's settlement process

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Speaker 1: on the margin. So in English, you bent from the

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Speaker 1: Fed adding liquidity into the system on the margin so

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Speaker 1: that payments can settle. Two and this is no secret

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Speaker 1: um writing about this all the time, to JP Morgan

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Speaker 1: basically using its hbo A portfolio to take their excess liquidity,

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Speaker 1: high quality, high quality liquid assets. Again, most of US

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Speaker 1: two years ago was reserves, taking that money and lending

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Speaker 1: it into the report market or whichever corner of the

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Speaker 1: funding markets such that payments can happen. Okay, So basically

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Speaker 1: you went from the FED providing introduting liquidity in the

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Speaker 1: system to JP Morgan and other reserved RISH banks. But

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Speaker 1: again JP Morgan is the largest example providing introduce credit

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Speaker 1: UH in the system on the margin. What has happened

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Speaker 1: is that as you taper the balance sheet, you basically

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Speaker 1: took reserves away from the system. Quite literally, you basically

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Speaker 1: forced UH these large reserves rich banks to trade out

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Speaker 1: of reserves, and there's collateral coming in cash being taken out.

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Speaker 1: On top of it, the FED is basically cutting the

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Speaker 1: interest on reserves rate trying to encourage all these reserves

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Speaker 1: rich banks to let go of their reserves and reverse

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Speaker 1: in more collateral by treasuries, and by by that process

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Speaker 1: they are forcing a redistribution of reserves across the system.

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Speaker 1: But as they were forcing that change, they basically uh

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Speaker 1: flattened the distribution of reserves. They basically um forced the

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Speaker 1: large bank to spend their reserves such that repo trades

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Speaker 1: normal on any given day. But then basically the flip

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Speaker 1: side of that was that they exposed the system two

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Speaker 1: very bad days in the report market, on tough days

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Speaker 1: when a lot of money has to move. We'll come

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Speaker 1: back to that in a second, and quarter ends and

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Speaker 1: on your ends. So a lot of people just on

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Speaker 1: the reserve point. Then it's at a lot of people

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Speaker 1: have been debating the language around this. Is it a

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Speaker 1: scarcity of bank reserves or a shortage? And why does

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Speaker 1: the difference between the two actually matter. I don't think

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Speaker 1: there's a difference. I mean it's a shortage. Basically, what

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Speaker 1: I'm saying is that the system ran out of tokens

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Speaker 1: to settle this right, because again back to the earlier point,

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Speaker 1: the FED was always ready in the past to add

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Speaker 1: reserves into the system on the margin intraday as needed. Okay,

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Speaker 1: So it was never possible to run out of reserves.

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Speaker 1: But in this regime where the FED had x amount

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Speaker 1: of reserves in the system and nobody is going to

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Speaker 1: take credit from the FED, you literally the system literally

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Speaker 1: settles with the amount of reserves that are in the system.

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Speaker 1: So if the bank that has the access and is

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Speaker 1: lending into into the system and the margin runs out

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Speaker 1: of that money runs out of reserves, the system literally

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Speaker 1: seizes up because you run out of tokens. What was

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Speaker 1: the regulatory logic, as you mentioned the Botel three requirements,

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Speaker 1: what is the regulatory logic of no longer wanting the

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Speaker 1: banks to be able to essentially have overdraft capabilities or

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Speaker 1: use overdraft capabilities at the FED. I don't think that

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Speaker 1: there is a piece of regulation that says, you know,

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Speaker 1: don't take it, or the FED never said that I

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Speaker 1: will never give it. I think it's just, you know,

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Speaker 1: if if every bank has to like the LCR for example,

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Speaker 1: licuity coverage ratio tells that every bank has to pre

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Speaker 1: fund thirty days worth of outflows, Okay, so every bank

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Speaker 1: is going to be thirty days pre funded. Okay, So

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Speaker 1: no one is going to be in the funding markets

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Speaker 1: to kind of get the liquority to be able to settle, okay,

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Speaker 1: And this is actually a very important question you're asking, right,

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Speaker 1: So the banks don't have a liquality problem here, right,

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Speaker 1: All that has happened is that, you know, the banks

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Speaker 1: have been the marginal lenders into the report market. So

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Speaker 1: the entities that ended up with a liquidity problem or

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Speaker 1: the dealers, but basically for the past year it were

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Speaker 1: the banks that were the marginal lenders in the report market.

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Speaker 1: But the banks are only going to lend into the

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Speaker 1: report market on the margin until they reach a limit

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Speaker 1: in terms of how much reserves they have to hold

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Speaker 1: at the FED and below which they are unwilling to

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Speaker 1: go okay. So this was basically a liquidity problem for

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Speaker 1: the dealer community. And the problem at a higher level

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Speaker 1: was that the banks, despite having the liquidity, were unable

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Speaker 1: to lend more into the report market because if they

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Speaker 1: were to be lending more, they would breach their intra

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Speaker 1: day liquidity requirements. It's just it's just one of those

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Speaker 1: unintended consequences where it's just one of the unintended consequences

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Speaker 1: of the rules where where everybody basically wants to show,

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Speaker 1: you know, how much liquidity they have to the Fed,

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Speaker 1: and they are unwilling to go below that because then

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Speaker 1: there is regulatory scrutiny to pay. So just just up

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Speaker 1: back for a second, because this question comes up quite

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Speaker 1: a lot. But if you're not in the money markets,

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Speaker 1: sort of in the weeds of a lot of this,

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Speaker 1: why should you care about what happened to the repo

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Speaker 1: market in September? And I mentioned, you know, for instance,

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Speaker 1: the effective federal funds rate getting pulled up along with

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Speaker 1: repo rates. Is that the big sort of takeaway from

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Speaker 1: this that the Fed sort of briefly lost control of

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Speaker 1: money market rates or monetary policy, or however you want

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Speaker 1: to put it. I don't know. I think it's I

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Speaker 1: think it's something far bigger. So why does this matter?

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Speaker 1: You know, it's an overnight rate? I tweeted, By the way,

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Speaker 1: I said, what should we ask? Assulton? That that was

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Speaker 1: this was by far the most common question. It's like,

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Speaker 1: it's interesting, but why should we care? So? Repo is

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Speaker 1: how you get to live to fight another day. Okay,

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Speaker 1: so that's not my meme, that's, you know, coming from

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Speaker 1: Perry Merlin. Yeah, but again. Repo is how you get

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Speaker 1: to live to fight another day. It's very What that

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Speaker 1: means is you go to the overnight rebol market because

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Speaker 1: you run out of money. You can't make payments today,

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Speaker 1: payments that are due today. So on the margin, you

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Speaker 1: go and try to get some money so that you

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Speaker 1: can make a payment today and you pay that money

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Speaker 1: back tomorrow to someone. If you can't borrow in the

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Speaker 1: repo markets and you can't get the cash to make

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Speaker 1: your payments today, you're not going to open up tomorrow, okay.

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Speaker 1: So if you are an RV fund that needs to

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Speaker 1: roll funding on its position, if you are a primary

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Speaker 1: dealer and you can't fund to roll your positions and

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Speaker 1: top up your clearing account that at your clearing bank.

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Speaker 1: If you're a small dealer that can't fund, you're right

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Speaker 1: of business tomorrow. So that is why you basically care

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Speaker 1: about this stuff. You know, It's like when you look

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Speaker 1: at on electric cardiogram and the heart ticks. You know,

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Speaker 1: it takes ticks ticks, and it doesn't take and it

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Speaker 1: starts to beep. So it's something like that either ticks

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Speaker 1: or it doesn't tick. So it's existential. You know, when

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Speaker 1: you see these rates at ten percent, it means that

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Speaker 1: people are having a hard time getting the money to

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Speaker 1: make payments. U S Treasury is having a hard time

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Speaker 1: pumping treasuries into the system on settlement days, you know,

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Speaker 1: the money is not moving to the Treasury general account

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Speaker 1: because people are not bidding to part with their money.

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Speaker 1: In this case, the large banks run out of reserves,

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Speaker 1: so the money ain't going to the US Treasury. So

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Speaker 1: quite frankly, you know, if you need to pay unemployment

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Speaker 1: insurance benefits and food stems and all that stuff, the

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Speaker 1: funding of that stuff process gets comed up. So this

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Speaker 1: is this is this is serious stuff. And you know

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Speaker 1: the reason why the FED response to these things quickly.

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Speaker 1: I mean, they could have responded quicker, but the reason

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Speaker 1: why they respond to it quickly is because, you know,

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Speaker 1: they just recognize the nature of these overnight markets where

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Speaker 1: the money doesn't flow, people can't pay, people can't pay,

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Speaker 1: they go out of business. Headlines can happen, right, you know.

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Speaker 1: The the good thing was that, you know, this dislocation

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Speaker 1: didn't last for more than a day. If these these

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Speaker 1: locations go on for two days, three days a week,

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Speaker 1: it can turn into an existential problem for a lot

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Speaker 1: of people. So another thing that I've been wondering just

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Speaker 1: on the idea of the FED having to come in

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Speaker 1: and sort of swoop in and fix this problem as

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Speaker 1: soon as possible, although as you point out, it could

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Speaker 1: have been faster and they did have technical difficulties when

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Speaker 1: they first tried to do it. How much of the

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Speaker 1: confusion or the fact that reboat rates actually got to

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Speaker 1: ten percent, how much of that do you think had

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Speaker 1: to do with Simon Potter having recently left the New

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Speaker 1: York Fed? And also, actually I've always wondered this, but

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Speaker 1: do you ever talked to the FED about these issues?

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Speaker 1: Do do they, you know, talk to you about your

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Speaker 1: thoughts on this? But for the record, in five years,

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Speaker 1: I've seen them once two years ago it was any

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Speaker 1: other question. I don't think so, I think. I think

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Speaker 1: again it's you know, I guess the the the message

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Speaker 1: would be that, you know, Taper, I guess was a mistake.

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Speaker 1: So the difference between the report market printing normally like

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Speaker 1: it has been for the past five years versus the

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Speaker 1: report market falling apart on December thirty one of last

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Speaker 1: year early September this year, it's basically those six billion

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Speaker 1: dollars of reserves that were taken out of the system

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Speaker 1: by Taper. So if you look at the usage of

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Speaker 1: the reverse report facility the other report facility, right, you know,

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Speaker 1: that's the facility where money go os when that money

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Speaker 1: is not needed because there is not enough collateral. People

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Speaker 1: don't have the balance sheet, there's not eno farbitrash opportunities,

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Speaker 1: so nobody takes the money from the money funds and

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Speaker 1: on the money funds put it at the FED, and

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Speaker 1: then money goes there to die. It's very important to

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Speaker 1: to kind of realize that Taper started when the usage

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Speaker 1: of that facility was zero. That means that you know,

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Speaker 1: lazy cash in the system was already gone when Taper started.

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Speaker 1: So all these you know, Taper and increase in treasuries,

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Speaker 1: cash penancies, the increase in the foreign report pool was

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Speaker 1: basically taking money out of bank hql A portfolios is

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Speaker 1: your liquidity portfolios of the banks, and it was taking

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Speaker 1: reserves out of the portfolios of JPMorgan and all the

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Speaker 1: other large American banks. So basically, you know in English,

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Speaker 1: that means that Taper was taking the liquidity buffer away

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Speaker 1: from the system. That basically ensured that these large banks

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Speaker 1: have the extra cash to lend in to periodic these

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Speaker 1: locations in the report market and in the FX market

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Speaker 1: and all all sorts of other markets. So the fact

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Speaker 1: that we engineered taper and we tapered as much as

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Speaker 1: fast as we did without the safety valve built into

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Speaker 1: the process where if God forbid to we take out

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Speaker 1: too much reserves, we should have a facility to kind

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Speaker 1: of put as much liqurity back into the system as

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Speaker 1: as as needed, right and let that the usage of

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Speaker 1: that facility speak loud that taper should stop. We didn't

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Speaker 1: do that. So back to your other question, I think

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Speaker 1: the problem is that we tapered this much, this fast,

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Speaker 1: So it was kind of a architectural mistake. So personnel changes,

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Speaker 1: I would say, have nothing to do with, you know,

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Speaker 1: the blowout and the response to that blowout the day

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Speaker 1: of I think it has to do more with why

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Speaker 1: did we end up in this position in the first place.

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Speaker 1: And by the way, when you when you listen to

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Speaker 1: you to the FED throughout the whole taper episode, you know,

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Speaker 1: when you read those speeches, the indicators that the FED

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00:23:07,320 --> 00:23:10,240
Speaker 1: was looking at to see if things are getting tight

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Speaker 1: or if you should stop taper, we're the wrong things

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Speaker 1: to look at the feed was looking for banks use

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Speaker 1: of introday credit force for signs of stress to show up.

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Speaker 1: You know, earlier in the conversation we said that there's

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Speaker 1: no bank that is ever going to use introduce credit

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Speaker 1: from the FED post Bossal tree because it's not worth

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Speaker 1: the reputational risk. Nobody wants to be the first one

399
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Speaker 1: to use it. Nobody wants to be the person to

400
00:23:35,640 --> 00:23:38,679
Speaker 1: max out the the lines. And if people were to

401
00:23:38,760 --> 00:23:41,080
Speaker 1: use it, you know, no one's going to be willing

402
00:23:41,119 --> 00:23:43,520
Speaker 1: to kind of let those things faster and be rolled

403
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Speaker 1: into the UH the risk can been though, So basically

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Speaker 1: I think I think you had the wrong things they

405
00:23:49,480 --> 00:23:53,680
Speaker 1: were looking at, and and they they tapered way too much,

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Speaker 1: pay too fast, and they put the system into a

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Speaker 1: precarious position. And again the conditions for what happened in

408
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Speaker 1: the ripple market in September. We're building over time as

409
00:24:02,480 --> 00:24:05,359
Speaker 1: they were shrinking the balance sheet. It's almost like a

410
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Speaker 1: wildfire where you have all these dry leaves accumulate and

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Speaker 1: then something that happens, and then a wildfire gets really

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Speaker 1: bad because because the dry leaves accumulated over over the time.

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Speaker 1: You mentioned something there that speaks to the last time

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Speaker 1: you appeared on our show, and that relates to the

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Speaker 1: role of a foreign participants in the market. We just

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Speaker 1: did an episode actually with Brad Setser and which we

417
00:24:31,520 --> 00:24:35,399
Speaker 1: talked about Taiwanese life insurers and their thirst for dollar

418
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Speaker 1: denominated assets. I think it was what we talked about.

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Speaker 1: I think it was back in April or May, was

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Speaker 1: the last time we talked to you, and it was

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Speaker 1: kind of about this topic and that as rates on

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Speaker 1: dollar denominated assets, particularly treasuries, were coming down, there was

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Speaker 1: less appeal to hold US government debt and that it

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Speaker 1: made more sense for foreign buyers to essentially just have

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Speaker 1: money at the federal reserve, leaving all these treasuries on

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Speaker 1: the dealer balance sheets. Talk to us about this aspect

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Speaker 1: of the repo crunch. How much of it is essentially

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Speaker 1: a result of what you were talking about when we

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Speaker 1: talked to you in the spring, about the fact that

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Speaker 1: normally these foreign buyers would be in the government bond market,

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00:25:19,000 --> 00:25:20,919
Speaker 1: but when raids got too low, it just didn't make

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Speaker 1: any sense. So on I just hold the money right

433
00:25:23,320 --> 00:25:28,480
Speaker 1: at the Fed, exacerbating the reserve shortage. Yeah, so you know,

434
00:25:28,560 --> 00:25:30,760
Speaker 1: rave gets too low, and the other important thing is

435
00:25:30,760 --> 00:25:32,680
Speaker 1: that the curve inverted. Right, So that's what we talked

436
00:25:32,680 --> 00:25:35,000
Speaker 1: about last time. It has a lot to do with it,

437
00:25:35,119 --> 00:25:38,000
Speaker 1: right because if you think about what the world used

438
00:25:38,040 --> 00:25:40,840
Speaker 1: to look like too three years ago, when Japan and

439
00:25:40,880 --> 00:25:44,399
Speaker 1: Taiwan and all those Asian accounts are buying more, I

440
00:25:44,400 --> 00:25:46,760
Speaker 1: mean they're still buying, but not as much and definitely

441
00:25:46,800 --> 00:25:49,720
Speaker 1: not enough preductive to supply. The theme in the money

442
00:25:49,760 --> 00:25:52,919
Speaker 1: markets back then was that, you know, Asia, Asia is buying,

443
00:25:53,160 --> 00:25:55,720
Speaker 1: they have to hedge it back to yen, you know,

444
00:25:55,800 --> 00:25:59,320
Speaker 1: to euros and other currencies, and they typically do the

445
00:25:59,359 --> 00:26:02,960
Speaker 1: three month points. So you buy, attend your treasury, you

446
00:26:03,240 --> 00:26:06,080
Speaker 1: hedge it back and roll those hedges every three months.

447
00:26:06,080 --> 00:26:09,439
Speaker 1: So that's a pressure on three month funding costs. Now,

448
00:26:09,960 --> 00:26:15,000
Speaker 1: libor widened sixty basis points around money funder form, which

449
00:26:15,040 --> 00:26:19,479
Speaker 1: also coincided with that with the time in markets, cross

450
00:26:19,480 --> 00:26:23,399
Speaker 1: currency bases between yen and dollars widened as much as

451
00:26:23,400 --> 00:26:28,880
Speaker 1: a hundred basis points. Very interestingly, the Fed didn't care

452
00:26:29,240 --> 00:26:33,679
Speaker 1: one bit about the so called oys oys basis blowing

453
00:26:33,680 --> 00:26:37,680
Speaker 1: out to a hundred basis points between yen and dollars

454
00:26:38,280 --> 00:26:42,560
Speaker 1: I mean English, but that means basically that parity between

455
00:26:43,600 --> 00:26:47,720
Speaker 1: term funding on shore and term dollar funding in Tokyo

456
00:26:48,000 --> 00:26:51,679
Speaker 1: completely broke down, you know. So people in Tokyo were

457
00:26:51,680 --> 00:26:54,240
Speaker 1: paying a hundred basis points over for dollars at the

458
00:26:54,280 --> 00:26:57,120
Speaker 1: three month point, then people on shore here in New York.

459
00:26:57,800 --> 00:26:59,760
Speaker 1: That was kind of a big deal, but you had

460
00:26:59,800 --> 00:27:03,800
Speaker 1: no speeches about it, no blogs, no papers, no nothing.

461
00:27:04,520 --> 00:27:07,480
Speaker 1: You know, when three month funding costers are stressed in

462
00:27:07,520 --> 00:27:10,359
Speaker 1: the fex S pop market, right as a dealer, you

463
00:27:10,400 --> 00:27:15,480
Speaker 1: can lend into that demand by borrowing in UH at

464
00:27:15,480 --> 00:27:17,160
Speaker 1: the three month point. Also in the fex S pop

465
00:27:17,200 --> 00:27:21,280
Speaker 1: market in its unsecured markets, secured markets, or you can

466
00:27:21,560 --> 00:27:23,240
Speaker 1: borrow not at the three month point, but at the

467
00:27:23,240 --> 00:27:26,000
Speaker 1: one month point, the one week point, the overnight point.

468
00:27:26,119 --> 00:27:29,200
Speaker 1: So the point here is that you know, the dominant

469
00:27:29,240 --> 00:27:31,440
Speaker 1: bid for funding is at the three month point. The

470
00:27:31,480 --> 00:27:35,440
Speaker 1: funding of that of that borrowing need can be distributed

471
00:27:35,520 --> 00:27:39,280
Speaker 1: along a three month stretch in money markets going from

472
00:27:39,320 --> 00:27:43,320
Speaker 1: overnight to three months. So overnight markets are going to

473
00:27:43,440 --> 00:27:46,240
Speaker 1: kind of feel this stuff, but only a part of it,

474
00:27:46,480 --> 00:27:50,520
Speaker 1: a little part of it. When a curve gets inverted, okay,

475
00:27:50,680 --> 00:27:53,240
Speaker 1: And as we discussed last time, all the carry traders

476
00:27:53,280 --> 00:27:55,400
Speaker 1: get knocked away on the margin. So the foreign hedge

477
00:27:55,440 --> 00:27:57,399
Speaker 1: buyer is not buying as much as the foreign banks

478
00:27:57,400 --> 00:27:59,399
Speaker 1: are not buying as much. The r V hedge funds

479
00:27:59,400 --> 00:28:02,320
Speaker 1: can buy as there's one group of entities that has

480
00:28:02,400 --> 00:28:05,919
Speaker 1: to buy by law. Those are the primary dealers. So

481
00:28:06,000 --> 00:28:08,679
Speaker 1: the dealers started to back up with inventory. But the

482
00:28:08,720 --> 00:28:10,760
Speaker 1: dealers are in the moving business, they are not in

483
00:28:10,760 --> 00:28:12,960
Speaker 1: the carey business. So dealer is never going to term

484
00:28:13,000 --> 00:28:16,600
Speaker 1: fund its inventory. Uh, they tend to fund it overnight

485
00:28:16,680 --> 00:28:20,480
Speaker 1: and roll it overnight. And here's the important point. When

486
00:28:20,480 --> 00:28:23,320
Speaker 1: the dealer is the marginal buyer of treasuries and they

487
00:28:23,359 --> 00:28:26,840
Speaker 1: fund things overnight, the only way you can fund it

488
00:28:26,920 --> 00:28:30,960
Speaker 1: overnight funding demand is overnight. You can't you can't go anywhere.

489
00:28:31,040 --> 00:28:33,200
Speaker 1: I mean, you're not gonna, you know, fund an overnight

490
00:28:33,320 --> 00:28:35,840
Speaker 1: funding demand with like the three month point because you know,

491
00:28:35,880 --> 00:28:37,640
Speaker 1: if the fat cuts and you're in a bad position.

492
00:28:37,680 --> 00:28:42,000
Speaker 1: So everything over the past year in fixed income markets,

493
00:28:42,000 --> 00:28:45,920
Speaker 1: in money markets was funded at the overnight point. And

494
00:28:46,000 --> 00:28:49,400
Speaker 1: that's a dangerous situation because if the money doesn't come in,

495
00:28:49,480 --> 00:28:52,440
Speaker 1: but it goes out maybe because there's a large settlement day,

496
00:28:52,440 --> 00:28:55,240
Speaker 1: maybe because there's a tax payment day. Now, once the

497
00:28:55,240 --> 00:28:59,360
Speaker 1: money goes away, you literally hit an air pocket, okay,

498
00:28:59,360 --> 00:29:01,320
Speaker 1: and if there's no want to lend into that air pocket,

499
00:29:01,320 --> 00:29:04,960
Speaker 1: you have a problem. And the Fed cares deeply about

500
00:29:05,000 --> 00:29:08,680
Speaker 1: our overnight rate sprint. So the overnight rates breaking down

501
00:29:08,880 --> 00:29:11,960
Speaker 1: and those spreads widening out massively is a far bigger

502
00:29:12,000 --> 00:29:15,840
Speaker 1: deal than three months cross currentcy basis blowing out to

503
00:29:15,840 --> 00:29:19,720
Speaker 1: a hundred basis points. You know, the inversion dealers becoming

504
00:29:20,000 --> 00:29:24,400
Speaker 1: the last bid for treasuries. Everything happening overnight, which is

505
00:29:24,400 --> 00:29:28,640
Speaker 1: the FEDS sensitive points UM has a lot to do

506
00:29:28,840 --> 00:29:31,600
Speaker 1: with with everything that happened. There's quite a lot of

507
00:29:31,640 --> 00:29:34,040
Speaker 1: irony in this when you think about a lot of

508
00:29:34,080 --> 00:29:38,760
Speaker 1: those UM post crisis liquidity rules were basically aimed at

509
00:29:38,880 --> 00:29:43,239
Speaker 1: taking at improving fragilities in the repo market, right and

510
00:29:43,320 --> 00:29:46,480
Speaker 1: like strengthening the overnight plunding market, and instead you seem

511
00:29:46,480 --> 00:29:50,320
Speaker 1: to have ended up with a slightly opposite situation. Well

512
00:29:50,480 --> 00:29:52,640
Speaker 1: you you know, you ended up in a slightly opposite

513
00:29:52,640 --> 00:29:55,080
Speaker 1: situation because I think the other the other important thing

514
00:29:55,120 --> 00:29:58,640
Speaker 1: that people tend to overlook is that the report market

515
00:29:58,640 --> 00:30:02,880
Speaker 1: has grown tremendously this year. Is that because of treasury

516
00:30:02,920 --> 00:30:06,440
Speaker 1: issuance or something else. Well, partly treasury issuance, but also

517
00:30:06,520 --> 00:30:11,400
Speaker 1: the growth of sponsored dripo. Sponsored dripo for those who

518
00:30:11,440 --> 00:30:14,280
Speaker 1: don't live in the front end, is basically a new

519
00:30:15,000 --> 00:30:17,560
Speaker 1: I don't know, okay, so let's educate Joe a little

520
00:30:17,600 --> 00:30:21,120
Speaker 1: bit here. So sponsored dripo is is a new way

521
00:30:21,200 --> 00:30:24,600
Speaker 1: of of doing ripo in net Okay. So there's basically

522
00:30:24,600 --> 00:30:28,160
Speaker 1: three banks for now UH that have the ability to

523
00:30:28,200 --> 00:30:31,360
Speaker 1: do sponsored dripo. These are State Street, Bony and JP

524
00:30:31,520 --> 00:30:35,480
Speaker 1: Morgan sponsored dripo. The the idea is basically to let

525
00:30:35,840 --> 00:30:40,840
Speaker 1: well capitalized member banks there's not dealers from now banks

526
00:30:41,360 --> 00:30:45,040
Speaker 1: of f I c C to sponsor in money funds

527
00:30:45,560 --> 00:30:49,080
Speaker 1: and sponsoring hetge funds into the repo markets such that

528
00:30:49,520 --> 00:30:52,800
Speaker 1: when you sponsor these entities in and you let them

529
00:30:52,800 --> 00:30:55,280
Speaker 1: face off against each other through a matched book that

530
00:30:55,400 --> 00:30:59,720
Speaker 1: you provide UM, you can net these positions so they

531
00:30:59,720 --> 00:31:05,400
Speaker 1: don't use balance sheet okay. So this is basically a

532
00:31:05,520 --> 00:31:08,840
Speaker 1: way for UH, for the system to provide more balance

533
00:31:08,840 --> 00:31:10,800
Speaker 1: sheet and more liquid it into the report market that

534
00:31:10,840 --> 00:31:13,120
Speaker 1: are using balance because balance sheet constraints is one of

535
00:31:13,160 --> 00:31:18,520
Speaker 1: those things that that basil trees is constraining. So all

536
00:31:18,560 --> 00:31:22,320
Speaker 1: these treasury collateral coming into the system um has for

537
00:31:22,360 --> 00:31:25,000
Speaker 1: the most part being funded in the sponsored repo market.

538
00:31:26,200 --> 00:31:29,440
Speaker 1: Sponsored reaper at the moment is only available on an

539
00:31:29,440 --> 00:31:34,160
Speaker 1: overnight basis. So if you were an RV fund or

540
00:31:34,200 --> 00:31:36,880
Speaker 1: if you were whoever and you needed balance sheet in

541
00:31:36,920 --> 00:31:40,160
Speaker 1: the report market, it's a relative value fund right well,

542
00:31:40,720 --> 00:31:42,840
Speaker 1: and if you needed balance sheet in the report market,

543
00:31:42,960 --> 00:31:46,440
Speaker 1: it was only available to you overnight because term term

544
00:31:46,480 --> 00:31:49,800
Speaker 1: trades are not available, not available in the sponsored report

545
00:31:49,840 --> 00:31:53,560
Speaker 1: space just yet. You know, in addition to the things

546
00:31:53,560 --> 00:31:56,400
Speaker 1: we discussed before that dealers got backed up with the paper,

547
00:31:56,480 --> 00:31:58,880
Speaker 1: they had to fund it overnight. It was also the

548
00:31:58,920 --> 00:32:01,400
Speaker 1: case that the ReLit, the value hedge funds and whoever

549
00:32:01,680 --> 00:32:05,440
Speaker 1: you know, uses report to fund treasuries could only do

550
00:32:05,560 --> 00:32:10,280
Speaker 1: that overnight. So this this kind of new new piece

551
00:32:10,320 --> 00:32:13,040
Speaker 1: of the market sponsored report, which has grown to something

552
00:32:13,080 --> 00:32:16,960
Speaker 1: like three billion dollars in size, also was a part

553
00:32:17,120 --> 00:32:24,000
Speaker 1: of priming the system for a accident, because again, if

554
00:32:24,040 --> 00:32:26,080
Speaker 1: the money doesn't come in because it has to go

555
00:32:26,160 --> 00:32:28,800
Speaker 1: someplace sells, then basically a lot of long positions that

556
00:32:28,800 --> 00:32:32,960
Speaker 1: are funded overnight I can't get rolled. And that's precisely

557
00:32:32,960 --> 00:32:35,800
Speaker 1: how you can end up with report. It's going from

558
00:32:36,080 --> 00:32:38,360
Speaker 1: normal to ten percent the next day. But I want

559
00:32:38,360 --> 00:32:41,480
Speaker 1: to get soon to the sort of how ultimately the

560
00:32:41,520 --> 00:32:46,560
Speaker 1: FED fixes this structural plumbing. What have you issued? But

561
00:32:46,600 --> 00:32:48,240
Speaker 1: before we do, I just want to go back to

562
00:32:48,360 --> 00:32:51,360
Speaker 1: one key question that I recalled coming up in the

563
00:32:51,400 --> 00:32:55,720
Speaker 1: immediate wake of the repub madness. The bank, the big

564
00:32:55,760 --> 00:33:00,880
Speaker 1: banks like JP Morgan, did they still have tech quicly speaking,

565
00:33:00,960 --> 00:33:06,800
Speaker 1: excess reserves beyond their liquidity requirements? The banks had reserves,

566
00:33:06,840 --> 00:33:10,640
Speaker 1: but those reserves were by no means excess. And this

567
00:33:10,680 --> 00:33:14,360
Speaker 1: is and this is what people tend to get lost on. Right,

568
00:33:14,400 --> 00:33:18,400
Speaker 1: So it is perfectly possible for the largest US banks

569
00:33:18,600 --> 00:33:22,240
Speaker 1: to sit on a hundred plus billion dollars of reserves

570
00:33:22,280 --> 00:33:26,960
Speaker 1: in their reserve accounts. And it's perfectly understandable why they

571
00:33:27,000 --> 00:33:30,960
Speaker 1: don't lend those reserves, right because they need those reserves

572
00:33:31,000 --> 00:33:35,520
Speaker 1: to satisfy their intra day aliquidity requirements. They need those

573
00:33:35,520 --> 00:33:39,240
Speaker 1: reserves to be able to pass their resolution stress tests

574
00:33:39,560 --> 00:33:42,760
Speaker 1: things like that. Okay, so again, when you when you

575
00:33:42,800 --> 00:33:44,960
Speaker 1: go to a bank that had three hundred billion two

576
00:33:45,040 --> 00:33:47,560
Speaker 1: years ago down to a hundred and it wouldn't lend

577
00:33:47,560 --> 00:33:50,400
Speaker 1: more in the report market. The two hundred billion was

578
00:33:50,520 --> 00:33:54,000
Speaker 1: the access and all of that was spent and whatever

579
00:33:54,120 --> 00:33:57,440
Speaker 1: is left is not there to be played with. You know,

580
00:33:57,440 --> 00:33:59,760
Speaker 1: if you think about these reserves as high powered money,

581
00:34:00,080 --> 00:34:03,160
Speaker 1: that hundred billion that's there, that ain't high powered money.

582
00:34:03,200 --> 00:34:06,080
Speaker 1: That's dry powder that has to sit there and you

583
00:34:06,120 --> 00:34:08,520
Speaker 1: can't use it. You know. The two weeks before the

584
00:34:08,560 --> 00:34:12,800
Speaker 1: REPO blowout, I've seen um they are all clients of

585
00:34:12,840 --> 00:34:16,600
Speaker 1: credits with the bank portfolios. I've seen four of the

586
00:34:16,680 --> 00:34:19,400
Speaker 1: largest bank portfolios. And you talk to the c i

587
00:34:19,480 --> 00:34:22,640
Speaker 1: os that run these portfolios, they will tell you that

588
00:34:22,880 --> 00:34:26,560
Speaker 1: I would like to earn more with my cash. I

589
00:34:26,600 --> 00:34:30,520
Speaker 1: would like to harvest yields in treasury markets. I would

590
00:34:30,560 --> 00:34:33,400
Speaker 1: like to harvest you know, yields in the g C market,

591
00:34:34,040 --> 00:34:37,600
Speaker 1: but I can't. And currently I'm making uneconomic decisions with

592
00:34:37,680 --> 00:34:41,040
Speaker 1: my reserves because I need to hold those for regulatory purposes.

593
00:34:41,640 --> 00:34:45,000
Speaker 1: So that is basically the environment in which we are

594
00:34:45,000 --> 00:34:48,200
Speaker 1: getting closer to this, to this REPO blow out. A

595
00:34:48,239 --> 00:34:51,120
Speaker 1: lot of people, you know, point their fingers at the

596
00:34:51,160 --> 00:34:53,359
Speaker 1: bank saying, you know, they were the ones who caused it,

597
00:34:53,440 --> 00:34:55,960
Speaker 1: because they have so much at the FED, why didn't

598
00:34:56,000 --> 00:34:59,000
Speaker 1: they land more. There's nothing that a bank would like

599
00:34:59,080 --> 00:35:02,280
Speaker 1: to do more than to earn a ten percent yield

600
00:35:02,600 --> 00:35:05,600
Speaker 1: by moving all their cash into an overnight market and

601
00:35:05,640 --> 00:35:08,600
Speaker 1: get that money back tomorrow and make ten percent. So

602
00:35:08,680 --> 00:35:11,000
Speaker 1: the fact that you have these yields has to do

603
00:35:11,360 --> 00:35:15,759
Speaker 1: with just banks inability to land, not their building investiment. Right.

604
00:35:15,840 --> 00:35:17,359
Speaker 1: So this is sort of what I was getting at

605
00:35:17,360 --> 00:35:21,160
Speaker 1: with these scarcity versus shortage of reserves earlier. There's this

606
00:35:21,200 --> 00:35:25,120
Speaker 1: big arbitrage available in the market, free money basically, but

607
00:35:25,239 --> 00:35:28,440
Speaker 1: the banks can't come in and do it. So just

608
00:35:28,480 --> 00:35:32,720
Speaker 1: getting to solutions to this problem. We've seen the Fed

609
00:35:33,120 --> 00:35:37,799
Speaker 1: uh increased overnight liquidity operations and also announced that um

610
00:35:37,800 --> 00:35:40,640
Speaker 1: I think it's going to buy up to six was

611
00:35:40,680 --> 00:35:43,160
Speaker 1: it sixty billion of TEA bills or did they increase

612
00:35:43,200 --> 00:35:47,040
Speaker 1: it recently? Sixty billion a month? Sixty billion a month

613
00:35:47,120 --> 00:35:50,760
Speaker 1: of te bills? And yet there have been a couple

614
00:35:50,800 --> 00:35:53,640
Speaker 1: of times this month where we have seen repo rates

615
00:35:53,880 --> 00:35:57,440
Speaker 1: start to creep up again, and we've seen some analysts

616
00:35:57,480 --> 00:36:01,040
Speaker 1: at the cell side, JP Morgan, Goldman, SAX and Bank

617
00:36:01,080 --> 00:36:04,040
Speaker 1: of America Mary Lynch also saying that they think the

618
00:36:04,040 --> 00:36:07,200
Speaker 1: FED hasn't done enough to solve the market problem. So

619
00:36:07,680 --> 00:36:10,719
Speaker 1: what exactly is it that the FED needs to do

620
00:36:11,360 --> 00:36:13,759
Speaker 1: and how big of a sort of problem in the

621
00:36:13,800 --> 00:36:19,080
Speaker 1: repo market remains. So I agree with the strategists at

622
00:36:19,640 --> 00:36:23,879
Speaker 1: JP Morgan and Bank of America. I I think as

623
00:36:23,920 --> 00:36:27,040
Speaker 1: well that the FED has not done enough. What we

624
00:36:27,080 --> 00:36:30,760
Speaker 1: have is good for now, but it's not a structural fix.

625
00:36:31,400 --> 00:36:34,359
Speaker 1: You know, there's a big difference between you know, a

626
00:36:34,400 --> 00:36:39,320
Speaker 1: liquidity problem and a liquidity problem and a balance sheet problem. Okay,

627
00:36:39,400 --> 00:36:41,960
Speaker 1: So you know, in September we had a liquidity problem

628
00:36:41,960 --> 00:36:44,640
Speaker 1: because the system ran out of reserves, you know, the

629
00:36:44,680 --> 00:36:47,040
Speaker 1: tokens you settled it. So the only thing the FED

630
00:36:47,040 --> 00:36:50,080
Speaker 1: had to do is just pump in reserves on a margin.

631
00:36:52,440 --> 00:36:55,840
Speaker 1: You know. The big event that's coming up is the

632
00:36:55,920 --> 00:36:59,600
Speaker 1: year end turn and during year and no one is

633
00:36:59,640 --> 00:37:03,880
Speaker 1: going to have the balance sheet two move money around.

634
00:37:03,920 --> 00:37:06,120
Speaker 1: So you know what what I'm trying to say with

635
00:37:06,280 --> 00:37:08,759
Speaker 1: that is, you know, it's okay that the FED has

636
00:37:08,920 --> 00:37:12,279
Speaker 1: a report facility. Uh And for as long as there

637
00:37:12,280 --> 00:37:15,520
Speaker 1: are primary dealers that are willing to take liquidity from

638
00:37:15,520 --> 00:37:18,400
Speaker 1: that facility and broadcast that liquidity to the rest of

639
00:37:18,400 --> 00:37:21,359
Speaker 1: the system, to the hedge funds and little dealers and

640
00:37:21,360 --> 00:37:26,000
Speaker 1: and whoever needs that money, the facility works. But once

641
00:37:26,040 --> 00:37:29,279
Speaker 1: the primary dealers have a balance sheet constraints, and they

642
00:37:29,280 --> 00:37:32,040
Speaker 1: won't be the intermediary between the FED and the rest

643
00:37:32,080 --> 00:37:34,640
Speaker 1: of the system. It doesn't matter how much the FED

644
00:37:34,719 --> 00:37:38,080
Speaker 1: wants to put liquidity into the system with that report facility,

645
00:37:38,080 --> 00:37:41,560
Speaker 1: there's not going to be a mechanism through which they

646
00:37:41,560 --> 00:37:46,319
Speaker 1: can inject that that liquidity into the system. So like

647
00:37:46,360 --> 00:37:49,680
Speaker 1: a very weird analogy here would be that, you know,

648
00:37:49,719 --> 00:37:51,640
Speaker 1: if I'd like to play tennis, but I don't have

649
00:37:51,719 --> 00:37:55,719
Speaker 1: membership at the country club. You do, Joe, Um, you know,

650
00:37:55,760 --> 00:37:57,239
Speaker 1: I can go in with you. It would be the

651
00:37:57,239 --> 00:38:00,520
Speaker 1: exact opposite in real life. But well, right, but if

652
00:38:00,560 --> 00:38:03,200
Speaker 1: you're out taking a hike, there's no tenants for me

653
00:38:03,239 --> 00:38:06,040
Speaker 1: because my friend who's got membership to the country club,

654
00:38:07,160 --> 00:38:09,640
Speaker 1: you know, cannot get me in. So you basically need

655
00:38:09,760 --> 00:38:13,239
Speaker 1: someone to hold your hand to get that liquidity. And

656
00:38:13,360 --> 00:38:16,480
Speaker 1: during year end, no one has the balance sheet and

657
00:38:16,520 --> 00:38:19,080
Speaker 1: no one has the ability to be, you know, to

658
00:38:19,160 --> 00:38:21,480
Speaker 1: be the good Samaritan is going to take to the

659
00:38:21,560 --> 00:38:24,680
Speaker 1: compurity from the FED and give it to you. So again,

660
00:38:24,680 --> 00:38:27,040
Speaker 1: and we we've hit on this, but just to make

661
00:38:27,080 --> 00:38:30,480
Speaker 1: it clear, you know, quarter end r end are important

662
00:38:30,520 --> 00:38:34,280
Speaker 1: because regulator there's a snapshot taken of the bank's financials,

663
00:38:34,360 --> 00:38:37,799
Speaker 1: and it's literally on that day that the regulators take

664
00:38:37,800 --> 00:38:39,640
Speaker 1: a look at the books and everyone. It's like kind

665
00:38:39,640 --> 00:38:42,960
Speaker 1: of cleaning your room before your parents get home and

666
00:38:43,320 --> 00:38:47,319
Speaker 1: something like something like that. So what is the solution then,

667
00:38:47,880 --> 00:38:52,839
Speaker 1: such that we can avoid having these problems pop up

668
00:38:52,880 --> 00:38:56,520
Speaker 1: every time that the parents come home to check out

669
00:38:56,560 --> 00:38:59,520
Speaker 1: the check out whether the room is cleaned. And do

670
00:38:59,560 --> 00:39:01,719
Speaker 1: you expect that in the absence of something new, we

671
00:39:01,800 --> 00:39:04,799
Speaker 1: are going to see something dramatic again reappear on the

672
00:39:04,840 --> 00:39:06,680
Speaker 1: market over the next you know, as we get close

673
00:39:06,719 --> 00:39:10,279
Speaker 1: to your end. Yeah, so there's there's a couple of things.

674
00:39:10,360 --> 00:39:12,239
Speaker 1: Let's talk about reple first, and I'm make to the

675
00:39:12,280 --> 00:39:16,400
Speaker 1: bill purchases. You know, fundamentally, the issue is that the

676
00:39:16,480 --> 00:39:19,640
Speaker 1: repo operations that the FED is doing, in technical lingo,

677
00:39:19,680 --> 00:39:21,760
Speaker 1: it's done on a tri party basis, so it cannot

678
00:39:21,760 --> 00:39:24,239
Speaker 1: be netted. So that's how you get to the sort

679
00:39:24,239 --> 00:39:28,040
Speaker 1: of balance problems. People say that the fetch to turn

680
00:39:28,080 --> 00:39:30,960
Speaker 1: this threeple facility into a I mean, it's a standing

681
00:39:31,000 --> 00:39:33,560
Speaker 1: reple facility effectively anyway, But I think what they really

682
00:39:33,600 --> 00:39:36,480
Speaker 1: mean is that they need to make the FED needs

683
00:39:36,520 --> 00:39:39,080
Speaker 1: to make this reple facility nettable. I think that that

684
00:39:39,160 --> 00:39:43,440
Speaker 1: will never happen. It will never happen because the FED,

685
00:39:44,160 --> 00:39:46,080
Speaker 1: just by its d n A, they like, they like

686
00:39:46,200 --> 00:39:49,239
Speaker 1: to be super senior in their dealings. And there is

687
00:39:49,280 --> 00:39:51,480
Speaker 1: no way that the FED is ever going to lend

688
00:39:51,520 --> 00:39:54,520
Speaker 1: into f I c C, the Fix Them Clearing Corporation,

689
00:39:55,080 --> 00:39:56,640
Speaker 1: you know, A. They are not going to lend into

690
00:39:56,680 --> 00:39:59,560
Speaker 1: the clearing corporate, into the clearinghouse and be a peri

691
00:39:59,640 --> 00:40:02,880
Speaker 1: passu lender alongside everyone else. It's just not the way

692
00:40:02,960 --> 00:40:06,719
Speaker 1: they do things. Two, if they were to do things,

693
00:40:07,360 --> 00:40:11,600
Speaker 1: uh in a super senior way, they would basically upset

694
00:40:11,680 --> 00:40:15,680
Speaker 1: everyone in the clearing house because everybody just got subordinated

695
00:40:15,719 --> 00:40:17,880
Speaker 1: to the largest lander in in the clearing house. So

696
00:40:17,920 --> 00:40:19,759
Speaker 1: I think it's either the FET who's not going to

697
00:40:19,800 --> 00:40:21,719
Speaker 1: do it because they're not comfortable with it, or they

698
00:40:21,760 --> 00:40:23,600
Speaker 1: will do it in a way which is just going

699
00:40:23,640 --> 00:40:26,279
Speaker 1: to set the stage for them for a massive coordination

700
00:40:26,320 --> 00:40:29,040
Speaker 1: problem and you know, just upsetting the governance of the

701
00:40:29,080 --> 00:40:31,920
Speaker 1: Fixing Com Clearing Corporation, which again is the is the

702
00:40:31,960 --> 00:40:36,040
Speaker 1: central clearing house for for report transactions, uh, not to

703
00:40:36,080 --> 00:40:38,120
Speaker 1: mention other things like you know, with the With this

704
00:40:38,160 --> 00:40:41,240
Speaker 1: growth of sponsored repot, there is now as we speak

705
00:40:41,239 --> 00:40:45,480
Speaker 1: about hedge funds that now have access to f I

706
00:40:45,520 --> 00:40:47,520
Speaker 1: c C. So are we really going to go into

707
00:40:47,560 --> 00:40:50,880
Speaker 1: a regime where hedge funds can put collateral into the

708
00:40:50,880 --> 00:40:53,279
Speaker 1: clearing house and and and the FETE effectively on the

709
00:40:53,280 --> 00:40:56,160
Speaker 1: margin is going to fundle That's probably not. I don't

710
00:40:56,200 --> 00:40:58,120
Speaker 1: think that we should go down that path. So that's

711
00:40:58,160 --> 00:41:00,839
Speaker 1: the thing that one thing they do, but they will

712
00:41:00,840 --> 00:41:03,520
Speaker 1: never do really. Um. The second thing they could do

713
00:41:05,440 --> 00:41:10,319
Speaker 1: is to open up this facility for banks as well

714
00:41:10,360 --> 00:41:13,279
Speaker 1: as dealers. So this is a very important distinction at

715
00:41:13,320 --> 00:41:19,880
Speaker 1: the moment non primary dealers. Well no, so at the moment,

716
00:41:19,920 --> 00:41:25,239
Speaker 1: it's the primary dealers that have access to this facility,

717
00:41:25,239 --> 00:41:29,000
Speaker 1: but the banks do not. Okay, So just to just

718
00:41:29,040 --> 00:41:32,320
Speaker 1: to give you a concrete example, let's say JP Morgan

719
00:41:32,400 --> 00:41:35,160
Speaker 1: Securities as a primary dealer has access to the report

720
00:41:35,160 --> 00:41:39,480
Speaker 1: facility JP Morgan Chase Bank and A the depository does not. So,

721
00:41:39,640 --> 00:41:41,839
Speaker 1: if you go back to the earlier conversation, we had

722
00:41:42,160 --> 00:41:45,399
Speaker 1: dealers got backed up with treasuries they needed to get

723
00:41:45,440 --> 00:41:48,719
Speaker 1: that funding in the report market, and the banks, the

724
00:41:48,719 --> 00:41:52,759
Speaker 1: bank portfolios were the marginal landers in the report market. Okay. So,

725
00:41:53,840 --> 00:41:56,360
Speaker 1: and the reason why the money dried up in the

726
00:41:56,360 --> 00:41:59,399
Speaker 1: report market on the margin is because the banks hit

727
00:41:59,440 --> 00:42:01,920
Speaker 1: their logos level of reserves and need ald so they

728
00:42:01,960 --> 00:42:04,560
Speaker 1: stopped landing. Despite the fact that they have all those reserves,

729
00:42:04,600 --> 00:42:06,920
Speaker 1: just can't go below it because you would be reaching

730
00:42:06,960 --> 00:42:10,759
Speaker 1: your regulations. So what you could do is you could

731
00:42:10,760 --> 00:42:15,400
Speaker 1: open up this facility for banks and uh, the chief

732
00:42:15,440 --> 00:42:20,319
Speaker 1: regulator who's random quarrels in the FED would have to

733
00:42:20,320 --> 00:42:25,160
Speaker 1: give a speech saying, we are fine with large banks

734
00:42:25,160 --> 00:42:29,600
Speaker 1: to have all bonds h A portfolios. This you know,

735
00:42:29,719 --> 00:42:33,040
Speaker 1: hundred odd billion dollars that is sitting at each of

736
00:42:33,040 --> 00:42:36,640
Speaker 1: the large banks hl A portfolio can be spent to

737
00:42:36,760 --> 00:42:40,239
Speaker 1: the last penny. It's okay for these largest banks to

738
00:42:40,320 --> 00:42:44,000
Speaker 1: have bonds only in their h A portfolio because the

739
00:42:44,040 --> 00:42:48,359
Speaker 1: FED stands ready with a report facility to turn those

740
00:42:48,360 --> 00:42:52,160
Speaker 1: bonds into cash when introdated liquidity needs a rise. And

741
00:42:52,239 --> 00:42:54,879
Speaker 1: if there is a resolution scenario where the bank has

742
00:42:54,880 --> 00:42:58,120
Speaker 1: to be one down and um, you know, we will

743
00:42:58,160 --> 00:43:00,880
Speaker 1: take those treasuries, give money in turn and let that

744
00:43:00,960 --> 00:43:03,560
Speaker 1: money pay out its creditors and wind down in an

745
00:43:03,680 --> 00:43:08,279
Speaker 1: orderly fashion. If that speech were to happen. And if

746
00:43:08,320 --> 00:43:11,600
Speaker 1: that change to the philosophy with which the regulator would

747
00:43:11,640 --> 00:43:14,480
Speaker 1: like to see the banks run their liquidity portfolio happens,

748
00:43:15,040 --> 00:43:17,759
Speaker 1: and the banks get access to the report facility, then

749
00:43:17,800 --> 00:43:21,240
Speaker 1: you basically free up easily five to six billion dollars

750
00:43:21,280 --> 00:43:25,160
Speaker 1: of reserves. And that's five to six billion dollars of

751
00:43:25,239 --> 00:43:27,560
Speaker 1: extra money that can go into the treasury market, and

752
00:43:27,640 --> 00:43:29,919
Speaker 1: it can go into the report market. Is that going

753
00:43:29,960 --> 00:43:33,200
Speaker 1: to happen? Probably not, because you are not going to

754
00:43:33,320 --> 00:43:36,480
Speaker 1: change the philosophy with which you run these security portfolio

755
00:43:36,520 --> 00:43:40,680
Speaker 1: is just to get through this year end turn that's

756
00:43:40,680 --> 00:43:43,600
Speaker 1: coming up. A third thing you could do is you

757
00:43:43,640 --> 00:43:46,600
Speaker 1: can put a footnote on the on the Repo facility

758
00:43:46,680 --> 00:43:50,400
Speaker 1: page of the New York Fed's website saying here and

759
00:43:50,480 --> 00:43:53,399
Speaker 1: is shaping up to be a very bad event. Let's

760
00:43:53,400 --> 00:43:56,399
Speaker 1: just be clear that whatever money you will take from

761
00:43:56,400 --> 00:43:59,640
Speaker 1: this facility going into that turn is going to be nettable.

762
00:44:01,080 --> 00:44:03,840
Speaker 1: So from a regulatory perspective, you're just not going to

763
00:44:03,920 --> 00:44:06,759
Speaker 1: have to count that in your leverage ratio and all

764
00:44:06,800 --> 00:44:09,000
Speaker 1: these things. So you know, if I'm a dealer and

765
00:44:09,000 --> 00:44:11,160
Speaker 1: I go to this facility, I take fifty billion and

766
00:44:11,200 --> 00:44:13,160
Speaker 1: I pass it on. I mean, the FED knows exactly

767
00:44:13,160 --> 00:44:15,920
Speaker 1: how much I took, and it knows exactly how much

768
00:44:16,000 --> 00:44:19,399
Speaker 1: balance sheet to ignore from my calculation. Is that going

769
00:44:19,440 --> 00:44:22,400
Speaker 1: to happen? I don't know. I mean, a couple of

770
00:44:22,400 --> 00:44:25,600
Speaker 1: the dealers that are primary dealers run their report books

771
00:44:25,600 --> 00:44:29,000
Speaker 1: out of branches. Those branches roll up to the holding

772
00:44:29,000 --> 00:44:32,719
Speaker 1: company in their respective countries for reporting purposes. So can

773
00:44:32,760 --> 00:44:35,480
Speaker 1: the FED guarantee that the French regulator and the Japanese

774
00:44:35,480 --> 00:44:38,040
Speaker 1: regulator is going to have the same view on what's

775
00:44:38,080 --> 00:44:40,239
Speaker 1: notable and what's notable? I don't know, So I think

776
00:44:40,239 --> 00:44:43,799
Speaker 1: it's kind of a coordination problem. So I don't think

777
00:44:43,840 --> 00:44:46,080
Speaker 1: that any of those things will happen. And if none

778
00:44:46,080 --> 00:44:48,920
Speaker 1: of these things happen, you basically set the stage for

779
00:44:49,040 --> 00:44:53,560
Speaker 1: something quite ugly happening around the year and turn. Because

780
00:44:54,040 --> 00:44:56,319
Speaker 1: it's not going to be just a liquity problem, right.

781
00:44:56,360 --> 00:44:58,160
Speaker 1: The people are not going to have the balance sheet

782
00:44:58,280 --> 00:44:59,960
Speaker 1: to take the liquility that the FED is trying to

783
00:45:00,000 --> 00:45:02,759
Speaker 1: put into the system, and the market can really get

784
00:45:02,760 --> 00:45:06,600
Speaker 1: seized up. So if you thought September was bad, December

785
00:45:06,600 --> 00:45:09,040
Speaker 1: can get universe. But then again, you know, you see

786
00:45:09,040 --> 00:45:13,839
Speaker 1: headlines Treasury secretaries looking into ways of dealings, you know,

787
00:45:13,840 --> 00:45:17,640
Speaker 1: with some of the REGs and maybe some changes coming

788
00:45:17,719 --> 00:45:21,799
Speaker 1: from the regulatory side, you just don't know, you know.

789
00:45:21,920 --> 00:45:25,160
Speaker 1: So if something big is going to come then here

790
00:45:25,200 --> 00:45:26,799
Speaker 1: and there's less of an issue. If if none of

791
00:45:26,800 --> 00:45:30,000
Speaker 1: those things will come here and is an issue. Right,

792
00:45:30,040 --> 00:45:34,320
Speaker 1: so you can imagine that any tweaking of the existing regulation,

793
00:45:34,440 --> 00:45:37,080
Speaker 1: like there's an optics problem there, which is like a

794
00:45:37,080 --> 00:45:40,040
Speaker 1: bunch of people will say that you're basically rolling back

795
00:45:40,280 --> 00:45:43,600
Speaker 1: bank regulation. Um. And in fact, we've seen, you know,

796
00:45:43,640 --> 00:45:47,600
Speaker 1: people like Elizabeth Woren actually start talking about repo markets

797
00:45:47,680 --> 00:45:50,320
Speaker 1: and what Jamie Diamond over at JP Morgan was saying,

798
00:45:50,560 --> 00:45:52,560
Speaker 1: I have one more question, and you sort of alluded

799
00:45:52,600 --> 00:45:55,880
Speaker 1: to it just then. But um, we've been talking about

800
00:45:56,080 --> 00:46:01,520
Speaker 1: the repo market sort of in isolation, although as you say,

801
00:46:01,560 --> 00:46:03,720
Speaker 1: it is a very very big deal for markets overall.

802
00:46:04,000 --> 00:46:08,840
Speaker 1: But is there a specific scenario in which a coming

803
00:46:09,080 --> 00:46:12,560
Speaker 1: up in repo another bout of repo madness, maybe one

804
00:46:12,640 --> 00:46:15,680
Speaker 1: that's worse at the year end. Is there a scenario

805
00:46:15,800 --> 00:46:21,080
Speaker 1: in which that impacts risk asset exposure at the primary

806
00:46:21,080 --> 00:46:25,840
Speaker 1: dealers or the banks or big market participants as well. Oh, definitely, definitely,

807
00:46:25,880 --> 00:46:29,360
Speaker 1: In fact, in fact, you've seen a micro tremor and

808
00:46:29,960 --> 00:46:33,120
Speaker 1: in September. You know, it's hard to see it, but

809
00:46:33,440 --> 00:46:36,360
Speaker 1: you know, if you if you talk to h to

810
00:46:36,520 --> 00:46:39,480
Speaker 1: the equity desk at a dealer, they will tell you

811
00:46:39,480 --> 00:46:43,280
Speaker 1: that this happened. So what happened in um in September

812
00:46:43,320 --> 00:46:46,640
Speaker 1: and REPO blew out the equities that the street was

813
00:46:46,680 --> 00:46:51,200
Speaker 1: the most long in sold off and the equities that

814
00:46:51,400 --> 00:46:55,719
Speaker 1: the street was most short in rallied. So what that

815
00:46:55,760 --> 00:46:59,200
Speaker 1: tells you is that the balance sheet that the equity

816
00:46:59,200 --> 00:47:02,920
Speaker 1: derivatives desks and you know cash equity desks are providing

817
00:47:02,920 --> 00:47:06,480
Speaker 1: to the streets, the lungs were trimmed because there was

818
00:47:06,520 --> 00:47:09,520
Speaker 1: no balance sheet for them, and the shorts were trimmed

819
00:47:09,960 --> 00:47:11,799
Speaker 1: and because there was no balance sheet for them, right,

820
00:47:11,840 --> 00:47:14,919
Speaker 1: So that's what caused those moves. And what happened was that,

821
00:47:15,000 --> 00:47:16,920
Speaker 1: you know, it's some dealers and it's not all dealers

822
00:47:16,920 --> 00:47:19,840
Speaker 1: worked like this, but there are some dealers where equity

823
00:47:19,840 --> 00:47:23,000
Speaker 1: derivatives and FFEX forwards and REPO basically rolls up to

824
00:47:23,000 --> 00:47:28,840
Speaker 1: a single person. So you shift equity across these businesses

825
00:47:28,880 --> 00:47:32,160
Speaker 1: based on where the spreads are the richest. So in September,

826
00:47:32,200 --> 00:47:35,920
Speaker 1: when ripo blew out. There were some dealers that to

827
00:47:36,239 --> 00:47:39,759
Speaker 1: balance it away from equity derivatives and the flex desk

828
00:47:39,840 --> 00:47:41,839
Speaker 1: and moved it to the repo desk because you wanted

829
00:47:41,880 --> 00:47:45,040
Speaker 1: to harvest those widespreads to the extent possible. And as

830
00:47:45,080 --> 00:47:47,360
Speaker 1: you move that equity, as you moved to equity and

831
00:47:47,400 --> 00:47:49,960
Speaker 1: you took balance sheet from equities away, there was an

832
00:47:49,960 --> 00:47:53,200
Speaker 1: impact on equity market. The reason why this didn't get

833
00:47:53,239 --> 00:47:55,520
Speaker 1: out of hand and it didn't start to impact more

834
00:47:55,640 --> 00:47:58,680
Speaker 1: names and didn't last for longer is because the fat

835
00:47:58,719 --> 00:48:01,520
Speaker 1: step then started to and in the report market, and

836
00:48:01,560 --> 00:48:04,280
Speaker 1: the report market calm down, So whatever equity you shifted

837
00:48:04,280 --> 00:48:09,080
Speaker 1: there went back to to the equity desk. So again,

838
00:48:09,280 --> 00:48:12,400
Speaker 1: if this thing persists, and you know this is just

839
00:48:12,480 --> 00:48:16,400
Speaker 1: a spill over into risk assets. But if this thing persists,

840
00:48:16,680 --> 00:48:18,600
Speaker 1: remember that repo is how you get to live to

841
00:48:18,640 --> 00:48:21,040
Speaker 1: fight another day. If you have to fund at ten

842
00:48:21,080 --> 00:48:24,200
Speaker 1: percent for a day, another day, and a third day,

843
00:48:24,360 --> 00:48:28,480
Speaker 1: it can become existential to the point where you end

844
00:48:28,520 --> 00:48:32,479
Speaker 1: up with headlines and newspapers front page, you know, so

845
00:48:32,680 --> 00:48:34,840
Speaker 1: that can also spill over into risk assets. So I

846
00:48:34,920 --> 00:48:38,080
Speaker 1: think I think there is a very real chance uh

847
00:48:38,120 --> 00:48:42,400
Speaker 1: that if we don't have a better set of pipes

848
00:48:43,000 --> 00:48:46,799
Speaker 1: from the FED and a more aggressive QUEI um than

849
00:48:46,920 --> 00:48:49,279
Speaker 1: you have a very very problematic here. In turn, you

850
00:48:49,440 --> 00:48:52,160
Speaker 1: just opened up the if we we don't have time

851
00:48:52,200 --> 00:48:54,080
Speaker 1: to go there because you just opened up the most

852
00:48:54,200 --> 00:48:57,920
Speaker 1: controversial Pandora's box of whether they should even count is

853
00:48:58,200 --> 00:49:00,960
Speaker 1: whether this is QUEI or not. And I feel like

854
00:49:01,239 --> 00:49:04,560
Speaker 1: we could do a whole separate discussion on that. Unfortunately,

855
00:49:04,600 --> 00:49:06,680
Speaker 1: I don't think we have the time. But I think

856
00:49:06,719 --> 00:49:09,840
Speaker 1: that was a great leaving us with that potentially gloomy

857
00:49:09,920 --> 00:49:13,880
Speaker 1: note of maybe a bigger repo madness coming in December,

858
00:49:13,920 --> 00:49:18,000
Speaker 1: and one that potentially spills over into a risk assets

859
00:49:18,400 --> 00:49:21,040
Speaker 1: something to uh, I wouldn't exactly say look forward to,

860
00:49:21,160 --> 00:49:24,239
Speaker 1: but something for everyone to pay attention. And I think

861
00:49:24,280 --> 00:49:28,719
Speaker 1: after this discussion, hopefully people have a much deeper understanding

862
00:49:28,760 --> 00:49:31,239
Speaker 1: of what's really going on. So Sulton is so great

863
00:49:31,280 --> 00:49:32,680
Speaker 1: to talk to you. Thanks for coming out, Thank you

864
00:49:32,760 --> 00:49:46,279
Speaker 1: very mu sure, thanks Alton, that's so good, Joe. You

865
00:49:46,360 --> 00:49:49,040
Speaker 1: know what I love about that conversation is that Bolton

866
00:49:49,120 --> 00:49:53,800
Speaker 1: sort of brings these big picture theoretical approaches to everything

867
00:49:53,840 --> 00:49:55,520
Speaker 1: that we've just seen in the repo market. But he

868
00:49:55,640 --> 00:49:58,560
Speaker 1: also gives you the sort of technical, behind the scenes

869
00:49:58,640 --> 00:50:01,319
Speaker 1: look with what is actually happening at some of these

870
00:50:01,400 --> 00:50:04,160
Speaker 1: desks and the primary dealers. So I really like that. No,

871
00:50:04,320 --> 00:50:07,000
Speaker 1: I think this is incredibly important and it's kind of

872
00:50:07,080 --> 00:50:09,160
Speaker 1: touched on what we talked about last time, but in

873
00:50:09,239 --> 00:50:13,759
Speaker 1: a more specific way that it's easy to say, look

874
00:50:13,840 --> 00:50:16,080
Speaker 1: at some charts and say, oh, this bank should have

875
00:50:16,320 --> 00:50:18,680
Speaker 1: access reserves and this is just a plumbing issue and

876
00:50:18,840 --> 00:50:21,960
Speaker 1: so forth. But then you get into these very specific

877
00:50:22,640 --> 00:50:26,719
Speaker 1: scenarios in which people who are running portfolios or people

878
00:50:26,800 --> 00:50:28,960
Speaker 1: who have to figure out how they're going to provision

879
00:50:29,000 --> 00:50:32,120
Speaker 1: their own liquidity, may move money or may decide to

880
00:50:32,200 --> 00:50:36,400
Speaker 1: move money from one activity to another, and it's, uh,

881
00:50:36,520 --> 00:50:39,680
Speaker 1: it's very real world. It's not just a series of

882
00:50:40,040 --> 00:50:43,920
Speaker 1: cells on a spreadsheet that should, uh should behave in

883
00:50:44,000 --> 00:50:46,840
Speaker 1: some predictable pattern. Right. Well, I also think you know

884
00:50:46,960 --> 00:50:50,279
Speaker 1: people here money markets and rebot badness, and they think

885
00:50:50,480 --> 00:50:53,320
Speaker 1: this was a really technical issue in the plumbing of

886
00:50:53,440 --> 00:50:56,240
Speaker 1: the financial system, as people always put it, but actually

887
00:50:56,280 --> 00:50:59,440
Speaker 1: a lot of it is behavioral, sort of on both sides.

888
00:50:59,480 --> 00:51:02,800
Speaker 1: So you have people who, for instance, don't want to

889
00:51:02,880 --> 00:51:06,040
Speaker 1: access the discount window because it seemed to be a

890
00:51:06,120 --> 00:51:09,320
Speaker 1: bad thing post crisis. And then on the regulatory and

891
00:51:09,440 --> 00:51:13,759
Speaker 1: political side, you have people who probably are unwilling to

892
00:51:13,960 --> 00:51:18,040
Speaker 1: really tackle this issue because of the optics involved. Right,

893
00:51:18,120 --> 00:51:20,560
Speaker 1: you don't want to be seen to be bailing out

894
00:51:20,719 --> 00:51:25,239
Speaker 1: banks or rolling back financial regulation, even though you know

895
00:51:25,400 --> 00:51:29,040
Speaker 1: logically there seems to be something slightly off with the system,

896
00:51:29,480 --> 00:51:33,040
Speaker 1: or even as he described the fed's own posture of

897
00:51:33,640 --> 00:51:37,359
Speaker 1: not wanting to be subordinate, or other entities that want

898
00:51:37,400 --> 00:51:40,520
Speaker 1: to lend into this market not wanting to compete with

899
00:51:40,600 --> 00:51:43,840
Speaker 1: the Federal Reserve. All kinds of questions that again on

900
00:51:44,040 --> 00:51:47,360
Speaker 1: paper or on Twitter, someone might be able to The

901
00:51:47,440 --> 00:51:49,400
Speaker 1: FED just needs to do X, set up a standing

902
00:51:49,440 --> 00:51:52,680
Speaker 1: repo facility. Why haven't they done that already? I thought.

903
00:51:52,760 --> 00:51:55,920
Speaker 1: I learned a lot from that conversation about why it's

904
00:51:56,000 --> 00:51:59,080
Speaker 1: not not quite so simple as just setting up a

905
00:51:59,520 --> 00:52:03,680
Speaker 1: new death square. Anyone can swap treasuries for reserves and

906
00:52:03,840 --> 00:52:07,520
Speaker 1: have the liquidity they need for regulators, Yes, indeed, and

907
00:52:07,800 --> 00:52:10,200
Speaker 1: now of course, uh, we'll all be watching out for

908
00:52:10,280 --> 00:52:12,759
Speaker 1: what happens at the year end if we weren't doing

909
00:52:12,880 --> 00:52:15,399
Speaker 1: so already, So we'll have to have a sultan back

910
00:52:15,480 --> 00:52:17,919
Speaker 1: on in the new year to Yeah, I actually thought

911
00:52:17,960 --> 00:52:19,840
Speaker 1: that wasn't I thought. I was like, Okay, they're never

912
00:52:19,920 --> 00:52:22,680
Speaker 1: gonna let this happen again, because we saw this, and

913
00:52:22,760 --> 00:52:25,160
Speaker 1: we know that the urine is already stressful. So I'm

914
00:52:25,520 --> 00:52:28,520
Speaker 1: I'm a little disconcerted about how concerned a sultan is

915
00:52:28,640 --> 00:52:31,600
Speaker 1: for the year. And one other point that I really liked,

916
00:52:31,719 --> 00:52:33,960
Speaker 1: and I think it's to get the language of a

917
00:52:33,960 --> 00:52:36,680
Speaker 1: cross here and this idea, and he used the term

918
00:52:36,719 --> 00:52:40,200
Speaker 1: several times tokens to describe reserves, and it's a good

919
00:52:40,320 --> 00:52:45,200
Speaker 1: reminder that money, while they may you know, there are

920
00:52:45,200 --> 00:52:47,759
Speaker 1: many different forms of the dollar, and they basically trade

921
00:52:47,760 --> 00:52:51,120
Speaker 1: it one to one all the time, they're not completely fungible.

922
00:52:51,200 --> 00:52:53,840
Speaker 1: And so you think about a casino, uh, and you

923
00:52:54,000 --> 00:52:56,720
Speaker 1: have a dollar, and you have a one dollar token

924
00:52:57,160 --> 00:53:00,320
Speaker 1: or token worth one dollar, and in theory you know

925
00:53:00,480 --> 00:53:03,920
Speaker 1: that they're pegged perfectly and they always trade. But it

926
00:53:04,040 --> 00:53:06,640
Speaker 1: doesn't mean you can't have an issue, or that the

927
00:53:06,680 --> 00:53:09,640
Speaker 1: poker players who want to leave wouldn't be really upset

928
00:53:09,760 --> 00:53:11,960
Speaker 1: if there was some issue with just the mechanics of

929
00:53:12,040 --> 00:53:15,560
Speaker 1: the conversion. Even if say the casino owner had plenty

930
00:53:15,600 --> 00:53:17,800
Speaker 1: of money and they could make good for everyone, you

931
00:53:17,920 --> 00:53:21,280
Speaker 1: could get these sort of very technical, angry situations, stressful

932
00:53:21,360 --> 00:53:24,040
Speaker 1: moments if they were a token shortage or something else.

933
00:53:24,320 --> 00:53:26,320
Speaker 1: And that really sort of speaks to the issue that

934
00:53:26,400 --> 00:53:29,920
Speaker 1: there are all these different forms of the dollar, but

935
00:53:30,040 --> 00:53:32,239
Speaker 1: if there's a shortage of one, you could still have

936
00:53:32,800 --> 00:53:35,640
Speaker 1: or if there's a temporary shortage in the provision of one,

937
00:53:36,040 --> 00:53:38,560
Speaker 1: you could still have these issues. So I think the

938
00:53:39,360 --> 00:53:43,439
Speaker 1: language he used there is extremely helpful in that understanding. Yeah,

939
00:53:43,600 --> 00:53:47,279
Speaker 1: it's sort of like, um, I guess liquidity, liquidity everywhere,

940
00:53:47,360 --> 00:53:49,400
Speaker 1: but not a drop to drink kind of thing, right,

941
00:53:49,480 --> 00:53:52,840
Speaker 1: the systems awashing liquidity, But that doesn't necessarily mean that

942
00:53:52,920 --> 00:53:55,480
Speaker 1: you can move it from one end to the other.

943
00:53:55,600 --> 00:53:57,840
Speaker 1: So if you have if your regulator wants you to

944
00:53:57,920 --> 00:54:01,800
Speaker 1: have one, very specific types of type of liquidity, because again,

945
00:54:02,239 --> 00:54:06,840
Speaker 1: treasury bills three months are among the most liquid, safest,

946
00:54:06,880 --> 00:54:09,479
Speaker 1: most valuable assets in the world, and if even they're

947
00:54:09,520 --> 00:54:13,680
Speaker 1: not good enough under certain sort of regulatory demands, you

948
00:54:13,800 --> 00:54:17,799
Speaker 1: get these bizarre situations in which highly liquid, well capitalized

949
00:54:17,840 --> 00:54:23,320
Speaker 1: banks could still find themselves uh with some sort of shortfall. Yes, indeed,

950
00:54:23,400 --> 00:54:26,520
Speaker 1: all right, again, something for us to watch out for

951
00:54:26,719 --> 00:54:30,480
Speaker 1: going into the year end. This has been another episode

952
00:54:30,600 --> 00:54:33,560
Speaker 1: of the All Thoughts podcast. I'm Tracy Alloway. You can

953
00:54:33,600 --> 00:54:37,160
Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe

954
00:54:37,239 --> 00:54:39,799
Speaker 1: wi Isn't Though. You can follow me on Twitter at

955
00:54:39,880 --> 00:54:42,920
Speaker 1: the Stalwart and be sure to follow our producer on

956
00:54:43,080 --> 00:54:47,440
Speaker 1: Twitter at Laura M. Carlson. And all the Bloomberg podcast

957
00:54:47,520 --> 00:54:50,520
Speaker 1: check them out at the handle at podcasts. Thanks for

958
00:54:50,600 --> 00:55:00,399
Speaker 1: listening one