WEBVTT - Why The Repo Markets Went Crazy, And Why December Could Be Even Worse 0:00:12.200 --> 0:00:15.720 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:15.800 --> 0:00:20.640 I'm Tracy Allaway and I'm Joe. Wisn'tal so, Joe? I 0:00:20.720 --> 0:00:23.680 was in New York with you in early September, wasn't I? 0:00:23.720 --> 0:00:28.240 We did the Odd Thoughts Live show. That was early September. Yes, 0:00:28.320 --> 0:00:29.920 I think it was. That already seems like a really 0:00:29.920 --> 0:00:32.600 long time ago to me, but yeah, that was really 0:00:32.600 --> 0:00:35.320 fun and we had a great, a great lineup of 0:00:35.360 --> 0:00:38.279 guests and it was it was just it was absolutely perfect. 0:00:38.600 --> 0:00:41.519 I wouldn't have changed one thing about the lineup of 0:00:41.520 --> 0:00:45.480 guests that we had. Then. Uh, there was one thing 0:00:45.520 --> 0:00:48.120 that I would have changed, which is that we were 0:00:48.240 --> 0:00:51.400 due to have Sultan Posar on one of the panels 0:00:51.440 --> 0:00:54.640 and unfortunately get to drop out a couple of days 0:00:54.720 --> 0:00:58.760 before for a sort of last minute commitment. But the 0:00:58.840 --> 0:01:01.440 reason it would have been great to have him there 0:01:01.760 --> 0:01:06.759 was because something big happened in the market that same week, right, 0:01:06.800 --> 0:01:08.560 So I was just trolling a little bit. I agree 0:01:08.560 --> 0:01:10.480 with you. That would have been the one change that 0:01:10.480 --> 0:01:11.880 would have been the one thing that would have made 0:01:11.920 --> 0:01:15.160 it absolutely perfect. And of course what you're referring to 0:01:16.000 --> 0:01:18.520 was the tantrum or I'm not sure what we were, 0:01:18.520 --> 0:01:20.960 what word we're using to describe it, but the sort 0:01:21.000 --> 0:01:25.480 of craziness, the rebo madness of early September was right 0:01:25.560 --> 0:01:29.520 around that time, and of course Sulton is by many 0:01:29.520 --> 0:01:33.240 people considered to be the pre eminent expert on in 0:01:33.280 --> 0:01:36.640 this area. Right also a former Odd Thoughts guest, and 0:01:36.680 --> 0:01:38.840 I should just back into this a little bit. So 0:01:39.040 --> 0:01:42.600 Zoltan pos Our, former advisor to the U. S. Treasury Department, 0:01:42.840 --> 0:01:46.680 now a strategist at Credit Swiss, and he's been writing 0:01:46.920 --> 0:01:50.240 a lot about the repo market. In fact, you know, 0:01:50.360 --> 0:01:54.640 just four or so weeks before we had that rebo 0:01:54.760 --> 0:01:58.360 madness incident, and this was where short term borrowing rates 0:01:58.360 --> 0:02:02.200 in the money market suddenly surge. Four weeks before that 0:02:02.280 --> 0:02:08.359 actually happened, Zulton had been writing again some eerily prophetic things, 0:02:08.360 --> 0:02:11.200 like he actually wrote in a piece of August research 0:02:11.320 --> 0:02:15.440 that the funding pressures that Credit Swiss is forecasting include 0:02:15.520 --> 0:02:20.000 overnight general collateral repo rates drifting outside the FEDS target band. 0:02:20.280 --> 0:02:24.360 And that is exactly what happened. I remember, and I'm 0:02:24.400 --> 0:02:26.760 not just saying this because he's here in studio and 0:02:26.800 --> 0:02:29.680 we're about to talk to him, but I remember even 0:02:29.760 --> 0:02:33.239 before I noticed. I remember the day that the rates 0:02:33.639 --> 0:02:37.720 shot up. I didn't even notice it until some trader 0:02:37.880 --> 0:02:41.840 at a bank I beat me on my Bloomberg and said, 0:02:41.880 --> 0:02:44.760 are you watching what's going on in the repo market. 0:02:44.800 --> 0:02:48.400 It's exactly what Alton predicted. And that was the first 0:02:48.560 --> 0:02:51.440 Then I went and looked. That was my first, uh, 0:02:52.200 --> 0:02:54.959 my first indication that something was amiss. Someone alerting me 0:02:55.040 --> 0:02:58.040 in that way. That's how that's how closely his research 0:02:58.600 --> 0:03:03.280 is tied to we've seen in people's minds in the market. Yeah, 0:03:03.360 --> 0:03:06.560 Sultan is at one with the repo market and uh, 0:03:06.800 --> 0:03:10.080 money market crunches. Again, just to provide a bit of background, 0:03:10.120 --> 0:03:13.560 So what we actually saw on that day was rebo rates, uh, 0:03:14.120 --> 0:03:19.480 the cost basically of making secured overnight collateralized loans. Those 0:03:19.520 --> 0:03:22.400 repo rates jumped from I think it was about two 0:03:22.400 --> 0:03:27.360 percent to something like ten and lots of people had 0:03:27.440 --> 0:03:31.480 talked about the possibility of a funding squeeze, especially around 0:03:31.560 --> 0:03:33.840 quarter ends, which is where we get these sort of 0:03:33.880 --> 0:03:37.400 traditional crunch points in the financial systems because big banks 0:03:37.720 --> 0:03:40.320 have to pull back on their rebo financing ahead of 0:03:40.800 --> 0:03:45.560 quarterly liquidity requirements and other regulations. But far far fewer 0:03:45.600 --> 0:03:49.160 people had expected it to happen at this sort of 0:03:49.280 --> 0:03:54.000 random juncture in time, this slightly random week in September, 0:03:54.480 --> 0:03:57.960 so again it was really unusual. It spooked quite a 0:03:57.960 --> 0:04:01.760 few people and everyone immediately he said, we must speak. 0:04:01.800 --> 0:04:06.280 Resulting coodes are absolutely and it's important to remember too 0:04:06.320 --> 0:04:10.520 that when people see this stuff, everyone has sort of 0:04:10.560 --> 0:04:14.520 still after all these years post crisis PTSD, and you 0:04:14.560 --> 0:04:19.440 look at bank overnight funding costs and they're soaring from 0:04:20.080 --> 0:04:22.760 two to ten percent in a day, And of course 0:04:22.800 --> 0:04:26.520 a big debate immediately broke out. Is this something strictly 0:04:26.640 --> 0:04:30.520 about financial market plumbing or is there something deeper and 0:04:30.600 --> 0:04:33.839 more systemic at play that sort of speaks to some 0:04:33.920 --> 0:04:38.800 inherent frailty of the financial system. And obviously things have 0:04:38.960 --> 0:04:42.760 quieted down quite a bit since then, but nonetheless I 0:04:42.800 --> 0:04:46.200 think you know, they're still people are still unsettled, and 0:04:46.320 --> 0:04:49.440 no one really knows what the ultimate fix is going 0:04:49.480 --> 0:04:53.680 to be. The Fed is applied temporary fixes, greater expanding 0:04:53.760 --> 0:04:58.839 its a supply of reserves uh or overnight operations to 0:04:59.040 --> 0:05:04.160 satisfy the bank demand for this short term liquidity, but 0:05:04.200 --> 0:05:06.840 no one really knows where this is ultimately headed. It 0:05:06.920 --> 0:05:10.520 seems right, So I'd say it's actually debatable whether or 0:05:10.520 --> 0:05:12.880 not things have calmed down in the repo market. But 0:05:13.000 --> 0:05:16.960 why don't we just jump straight into the discussion with 0:05:17.120 --> 0:05:19.400 Zoltan and we'll be able to get into all of 0:05:19.440 --> 0:05:23.560 these really really interesting and fascinating questions. So, Sultan Postar, 0:05:23.800 --> 0:05:27.040 thank you so much for coming on yet again. Very 0:05:27.120 --> 0:05:30.920 nice to be here. So let's start off with that 0:05:30.960 --> 0:05:35.560 week in September. Presumably you're sat in Credit Swiss, maybe 0:05:36.040 --> 0:05:39.600 watching overnight market rates as you do. What are you 0:05:39.600 --> 0:05:42.320 thinking when you start to see the repo rate jump 0:05:42.480 --> 0:05:45.920 like it did. Well, Actually, I wasn't in Credit Swiss 0:05:46.200 --> 0:05:49.039 the day of this happening. I was actually traveling down 0:05:49.520 --> 0:05:51.359 to the See to see some clients with one of 0:05:51.360 --> 0:05:55.880 our sales guys. And you know, we saw the markets 0:05:55.920 --> 0:05:58.839 open up and you're chatting in the cafe cars and okay, 0:05:58.839 --> 0:06:02.159 well Monday wasn't good. Tuesday's shaping up to be worse. 0:06:03.200 --> 0:06:05.679 And I'm not kidding. Five minutes into that train ride, 0:06:06.320 --> 0:06:09.720 the train broke down and we were basically told to 0:06:09.800 --> 0:06:11.440 have to get off the train and there's going to 0:06:11.480 --> 0:06:13.599 be another train coming. You have to call the client. 0:06:13.680 --> 0:06:16.200 That's sort of but the train is running late. And 0:06:16.240 --> 0:06:19.760 then the FEDER announced the REPO operations. But then the 0:06:19.800 --> 0:06:22.880 FED was late with the first operation due to technical glitches. 0:06:23.560 --> 0:06:25.400 And I looked at Phil, the sales guy, and I 0:06:25.440 --> 0:06:28.320 told him, look, I'm in the country. Is funding itself 0:06:28.600 --> 0:06:33.000 overnight in the repo market the trains don't run and 0:06:33.080 --> 0:06:36.159 the fense do an operation on times it has to 0:06:36.200 --> 0:06:38.320 be has to be a joke or about some sorts. 0:06:38.360 --> 0:06:42.720 But the September blowout was, you know, it took many 0:06:42.720 --> 0:06:45.760 people by surprise. UM. I think a lot of people 0:06:45.839 --> 0:06:48.520 focus on what happened and they kind of look for 0:06:48.600 --> 0:06:51.960 the trigger that triggered it on that day, and I 0:06:51.960 --> 0:06:54.880 think that's actually the wrong question, on the wrong thing 0:06:54.920 --> 0:06:58.159 to focus on. The September blowout in the report market 0:06:58.240 --> 0:07:00.760 was a long time in the making. What it had 0:07:00.800 --> 0:07:04.919 to do with is basically taper, and taper was just 0:07:05.120 --> 0:07:08.240 very slow burning process where you know, the fat took 0:07:08.240 --> 0:07:11.840 more and more reserves out of the system, and when 0:07:12.160 --> 0:07:15.920 when the system ran out of liquidity, which in this 0:07:16.680 --> 0:07:20.280 specific case means you know, reserves that the system can 0:07:20.320 --> 0:07:22.840 settle with. You know, the moment you ran out of 0:07:23.040 --> 0:07:25.920 ran out of those reserves, the repal market seized up. 0:07:26.840 --> 0:07:31.080 So this was basically a six billion dollar process, which 0:07:31.120 --> 0:07:34.000 is how much the fat tapered. The one thing that 0:07:34.040 --> 0:07:37.920 was very important to watch is basically look at who 0:07:38.000 --> 0:07:41.880 are the most reserves rich banks, how much reserves they 0:07:41.920 --> 0:07:44.920 have lost as the FED was tapering the balance sheet 0:07:45.400 --> 0:07:48.920 and what is the body language of banks CEOs and 0:07:48.960 --> 0:07:52.080 banks CFOs and when you listen to them during earning 0:07:52.080 --> 0:07:55.160 scolls as to what is the minimum number of reserves 0:07:55.160 --> 0:07:58.320 that they need to hold from a business perspective, you know, 0:07:58.440 --> 0:08:01.080 the largest bank that held them most amount of reserves, 0:08:01.520 --> 0:08:04.840 JP Morgan during the stapor process has gone from having 0:08:04.880 --> 0:08:09.200 three dollars of reserves at the FED two hundred and 0:08:09.200 --> 0:08:11.960 spenty billion as of the end of the second quarter 0:08:12.400 --> 0:08:15.400 of this year. And so when you saw that number, 0:08:15.880 --> 0:08:18.280 you knew that the bank that was always the lender 0:08:18.320 --> 0:08:21.400 of next less resorts in the repo market basically ran 0:08:21.440 --> 0:08:25.200 out of money. So let's back up, just for people 0:08:25.400 --> 0:08:28.240 that maybe aren't as familiar with some of the terminology 0:08:28.360 --> 0:08:30.280 or even the structure of the banking system and the 0:08:30.360 --> 0:08:33.720 hopes that they can understand this topic. When you or 0:08:33.800 --> 0:08:36.000 I have our money held at a bank, we have 0:08:36.120 --> 0:08:40.559 a deposit. The reserves are essentially where banks deposit their 0:08:40.559 --> 0:08:45.200 money at the FED and the there's a fixed amount 0:08:45.240 --> 0:08:49.600 of reserves available, and that greatly expanded during the financial 0:08:49.600 --> 0:08:53.400 crisis thanks to quantitative easing. Essentially the FED going out 0:08:53.440 --> 0:08:56.920 and buying safe assets like treasuries or mortgage backed securities 0:08:57.160 --> 0:09:00.839 with reserves, and then it's starting to shrink them as 0:09:00.880 --> 0:09:05.680 part of the taper process. And essentially what happened or 0:09:05.720 --> 0:09:08.839 what's going on is the shrinking of the balance sheet 0:09:09.440 --> 0:09:14.680 collided with regulatory requirements on banks to hold a certain 0:09:15.040 --> 0:09:18.160 yes amount of reserves at the FED. To explain this 0:09:18.320 --> 0:09:22.520 sort of collision of arguably different arms of the government 0:09:22.800 --> 0:09:27.000 make imposing different demands on the Okay, so let's let's 0:09:27.040 --> 0:09:31.800 start with um two observations. Number one. You know, the 0:09:31.840 --> 0:09:35.480 payment system used to be used to be no longer 0:09:35.679 --> 0:09:39.160 is used to be a credit system, which basically means 0:09:39.160 --> 0:09:43.000 that pre crisis, you know, when banks make payments between 0:09:43.000 --> 0:09:46.120 each other and they transfer money from one bank's reserve 0:09:46.160 --> 0:09:49.040 account to another bank's reserve account, you know, it used 0:09:49.040 --> 0:09:50.840 to be the case that banks would go into a 0:09:50.880 --> 0:09:54.160 negative balance in their reserve accounts at the FED. So 0:09:54.200 --> 0:09:56.959 that's the whole intraday credit provision that the FED used 0:09:57.000 --> 0:10:00.880 to provide to the system, which basically ensured that payments 0:10:00.880 --> 0:10:04.440 between banks never bounce. Okay, if there's not enough money 0:10:04.440 --> 0:10:06.280 in your reserve account, the FED is going to put 0:10:06.320 --> 0:10:08.440 in the right amount of money so that payments can settle, 0:10:09.120 --> 0:10:13.000 and then that intraday credit provision by the FED gets 0:10:13.000 --> 0:10:15.440 pushed into the overnight markets used to be the overnight 0:10:15.480 --> 0:10:18.200 FED funds market, and that's the way the banks settled 0:10:18.800 --> 0:10:24.600 UH those claims at night. Post crisis and post Basil three, 0:10:25.160 --> 0:10:27.920 there is no bank that is ever going to use 0:10:27.960 --> 0:10:31.480 intraday credit from the FED, because if you were to 0:10:31.559 --> 0:10:33.920 use intraday credit, it means that you are in severe 0:10:34.000 --> 0:10:37.920 breach of your liquidity coverage ratio or your introdict liquidity 0:10:37.960 --> 0:10:42.640 requirements and all that stuff. So, quite literally, post Basil three, 0:10:43.080 --> 0:10:46.319 the system settles with the amount of reserves that are 0:10:46.480 --> 0:10:49.559 in the system, so there's nobody who's taking cash from 0:10:49.600 --> 0:10:53.040 the FED on the margin. Then you look at the 0:10:53.040 --> 0:10:55.400 amount of reserves that are in the system. The distribution 0:10:55.480 --> 0:10:58.920 of those reserves UH is not equal. Some banks hold more, 0:10:59.120 --> 0:11:02.920 some banks hold less, But basically the banks that have 0:11:03.840 --> 0:11:08.400 the abundance of reserves, the reserves rich banks, they are 0:11:08.440 --> 0:11:12.559 the ones that are lending into the system's settlement process 0:11:12.600 --> 0:11:16.320 on the margin. So in English, you bent from the 0:11:16.360 --> 0:11:18.640 Fed adding liquidity into the system on the margin so 0:11:18.679 --> 0:11:22.480 that payments can settle. Two and this is no secret 0:11:22.960 --> 0:11:26.320 um writing about this all the time, to JP Morgan 0:11:26.400 --> 0:11:30.640 basically using its hbo A portfolio to take their excess liquidity, 0:11:30.880 --> 0:11:34.640 high quality, high quality liquid assets. Again, most of US 0:11:34.679 --> 0:11:38.120 two years ago was reserves, taking that money and lending 0:11:38.160 --> 0:11:40.400 it into the report market or whichever corner of the 0:11:40.400 --> 0:11:45.760 funding markets such that payments can happen. Okay, So basically 0:11:45.760 --> 0:11:48.720 you went from the FED providing introduting liquidity in the 0:11:48.760 --> 0:11:53.280 system to JP Morgan and other reserved RISH banks. But 0:11:53.320 --> 0:11:57.080 again JP Morgan is the largest example providing introduce credit 0:11:57.960 --> 0:12:00.760 UH in the system on the margin. What has happened 0:12:00.840 --> 0:12:04.440 is that as you taper the balance sheet, you basically 0:12:04.440 --> 0:12:09.080 took reserves away from the system. Quite literally, you basically 0:12:09.120 --> 0:12:13.120 forced UH these large reserves rich banks to trade out 0:12:13.120 --> 0:12:16.680 of reserves, and there's collateral coming in cash being taken out. 0:12:17.200 --> 0:12:19.760 On top of it, the FED is basically cutting the 0:12:19.800 --> 0:12:23.520 interest on reserves rate trying to encourage all these reserves 0:12:23.600 --> 0:12:26.200 rich banks to let go of their reserves and reverse 0:12:26.240 --> 0:12:29.400 in more collateral by treasuries, and by by that process 0:12:29.400 --> 0:12:32.080 they are forcing a redistribution of reserves across the system. 0:12:32.600 --> 0:12:37.400 But as they were forcing that change, they basically uh 0:12:37.600 --> 0:12:43.559 flattened the distribution of reserves. They basically um forced the 0:12:43.640 --> 0:12:46.400 large bank to spend their reserves such that repo trades 0:12:46.840 --> 0:12:50.120 normal on any given day. But then basically the flip 0:12:50.160 --> 0:12:53.319 side of that was that they exposed the system two 0:12:53.559 --> 0:12:56.520 very bad days in the report market, on tough days 0:12:56.520 --> 0:12:58.640 when a lot of money has to move. We'll come 0:12:58.640 --> 0:13:01.120 back to that in a second, and quarter ends and 0:13:01.200 --> 0:13:04.720 on your ends. So a lot of people just on 0:13:04.800 --> 0:13:07.360 the reserve point. Then it's at a lot of people 0:13:07.440 --> 0:13:11.640 have been debating the language around this. Is it a 0:13:11.720 --> 0:13:16.360 scarcity of bank reserves or a shortage? And why does 0:13:16.400 --> 0:13:18.720 the difference between the two actually matter. I don't think 0:13:18.760 --> 0:13:21.120 there's a difference. I mean it's a shortage. Basically, what 0:13:21.120 --> 0:13:25.199 I'm saying is that the system ran out of tokens 0:13:25.640 --> 0:13:28.360 to settle this right, because again back to the earlier point, 0:13:29.400 --> 0:13:32.320 the FED was always ready in the past to add 0:13:33.000 --> 0:13:36.480 reserves into the system on the margin intraday as needed. Okay, 0:13:36.559 --> 0:13:39.599 So it was never possible to run out of reserves. 0:13:39.640 --> 0:13:42.120 But in this regime where the FED had x amount 0:13:42.160 --> 0:13:44.080 of reserves in the system and nobody is going to 0:13:44.080 --> 0:13:47.760 take credit from the FED, you literally the system literally 0:13:47.760 --> 0:13:51.000 settles with the amount of reserves that are in the system. 0:13:51.040 --> 0:13:54.040 So if the bank that has the access and is 0:13:54.160 --> 0:13:56.480 lending into into the system and the margin runs out 0:13:56.480 --> 0:13:59.840 of that money runs out of reserves, the system literally 0:14:00.200 --> 0:14:03.480 seizes up because you run out of tokens. What was 0:14:03.559 --> 0:14:08.239 the regulatory logic, as you mentioned the Botel three requirements, 0:14:08.240 --> 0:14:12.600 what is the regulatory logic of no longer wanting the 0:14:12.640 --> 0:14:16.160 banks to be able to essentially have overdraft capabilities or 0:14:16.280 --> 0:14:19.800 use overdraft capabilities at the FED. I don't think that 0:14:19.840 --> 0:14:22.760 there is a piece of regulation that says, you know, 0:14:22.920 --> 0:14:25.800 don't take it, or the FED never said that I 0:14:25.840 --> 0:14:29.920 will never give it. I think it's just, you know, 0:14:29.960 --> 0:14:33.040 if if every bank has to like the LCR for example, 0:14:33.160 --> 0:14:36.920 licuity coverage ratio tells that every bank has to pre 0:14:37.040 --> 0:14:41.000 fund thirty days worth of outflows, Okay, so every bank 0:14:41.080 --> 0:14:43.880 is going to be thirty days pre funded. Okay, So 0:14:43.920 --> 0:14:46.640 no one is going to be in the funding markets 0:14:47.640 --> 0:14:50.720 to kind of get the liquority to be able to settle, okay, 0:14:50.840 --> 0:14:53.680 And this is actually a very important question you're asking, right, 0:14:53.720 --> 0:14:57.200 So the banks don't have a liquality problem here, right, 0:14:58.040 --> 0:15:01.000 All that has happened is that, you know, the banks 0:15:01.000 --> 0:15:04.200 have been the marginal lenders into the report market. So 0:15:04.240 --> 0:15:06.600 the entities that ended up with a liquidity problem or 0:15:06.640 --> 0:15:10.800 the dealers, but basically for the past year it were 0:15:10.840 --> 0:15:13.360 the banks that were the marginal lenders in the report market. 0:15:13.400 --> 0:15:14.880 But the banks are only going to lend into the 0:15:14.920 --> 0:15:19.040 report market on the margin until they reach a limit 0:15:19.560 --> 0:15:21.600 in terms of how much reserves they have to hold 0:15:21.600 --> 0:15:24.000 at the FED and below which they are unwilling to 0:15:24.120 --> 0:15:26.840 go okay. So this was basically a liquidity problem for 0:15:26.880 --> 0:15:31.440 the dealer community. And the problem at a higher level 0:15:31.560 --> 0:15:34.800 was that the banks, despite having the liquidity, were unable 0:15:34.840 --> 0:15:37.000 to lend more into the report market because if they 0:15:37.000 --> 0:15:40.160 were to be lending more, they would breach their intra 0:15:40.240 --> 0:15:44.560 day liquidity requirements. It's just it's just one of those 0:15:44.640 --> 0:15:48.480 unintended consequences where it's just one of the unintended consequences 0:15:48.480 --> 0:15:51.280 of the rules where where everybody basically wants to show, 0:15:51.840 --> 0:15:54.040 you know, how much liquidity they have to the Fed, 0:15:54.200 --> 0:15:56.440 and they are unwilling to go below that because then 0:15:56.440 --> 0:16:00.160 there is regulatory scrutiny to pay. So just just up 0:16:00.200 --> 0:16:03.600 back for a second, because this question comes up quite 0:16:03.640 --> 0:16:07.280 a lot. But if you're not in the money markets, 0:16:07.320 --> 0:16:09.080 sort of in the weeds of a lot of this, 0:16:09.440 --> 0:16:13.560 why should you care about what happened to the repo 0:16:13.680 --> 0:16:17.280 market in September? And I mentioned, you know, for instance, 0:16:17.320 --> 0:16:20.920 the effective federal funds rate getting pulled up along with 0:16:21.040 --> 0:16:24.880 repo rates. Is that the big sort of takeaway from 0:16:24.880 --> 0:16:28.640 this that the Fed sort of briefly lost control of 0:16:28.960 --> 0:16:32.000 money market rates or monetary policy, or however you want 0:16:32.040 --> 0:16:33.600 to put it. I don't know. I think it's I 0:16:33.600 --> 0:16:36.480 think it's something far bigger. So why does this matter? 0:16:36.640 --> 0:16:39.080 You know, it's an overnight rate? I tweeted, By the way, 0:16:39.080 --> 0:16:41.120 I said, what should we ask? Assulton? That that was 0:16:41.200 --> 0:16:44.120 this was by far the most common question. It's like, 0:16:44.160 --> 0:16:47.600 it's interesting, but why should we care? So? Repo is 0:16:48.440 --> 0:16:51.600 how you get to live to fight another day. Okay, 0:16:51.840 --> 0:16:54.080 so that's not my meme, that's, you know, coming from 0:16:54.080 --> 0:16:58.080 Perry Merlin. Yeah, but again. Repo is how you get 0:16:58.120 --> 0:17:00.560 to live to fight another day. It's very What that 0:17:00.600 --> 0:17:05.040 means is you go to the overnight rebol market because 0:17:05.040 --> 0:17:08.760 you run out of money. You can't make payments today, 0:17:09.040 --> 0:17:11.879 payments that are due today. So on the margin, you 0:17:11.960 --> 0:17:14.920 go and try to get some money so that you 0:17:14.920 --> 0:17:17.000 can make a payment today and you pay that money 0:17:17.040 --> 0:17:20.560 back tomorrow to someone. If you can't borrow in the 0:17:20.600 --> 0:17:23.520 repo markets and you can't get the cash to make 0:17:23.560 --> 0:17:28.040 your payments today, you're not going to open up tomorrow, okay. 0:17:28.160 --> 0:17:31.000 So if you are an RV fund that needs to 0:17:31.119 --> 0:17:34.840 roll funding on its position, if you are a primary 0:17:34.880 --> 0:17:38.879 dealer and you can't fund to roll your positions and 0:17:39.000 --> 0:17:42.600 top up your clearing account that at your clearing bank. 0:17:43.119 --> 0:17:46.560 If you're a small dealer that can't fund, you're right 0:17:46.640 --> 0:17:51.200 of business tomorrow. So that is why you basically care 0:17:51.240 --> 0:17:52.920 about this stuff. You know, It's like when you look 0:17:52.920 --> 0:17:56.000 at on electric cardiogram and the heart ticks. You know, 0:17:56.040 --> 0:17:57.879 it takes ticks ticks, and it doesn't take and it 0:17:57.880 --> 0:18:00.679 starts to beep. So it's something like that either ticks 0:18:00.800 --> 0:18:03.439 or it doesn't tick. So it's existential. You know, when 0:18:03.480 --> 0:18:05.600 you see these rates at ten percent, it means that 0:18:05.640 --> 0:18:08.800 people are having a hard time getting the money to 0:18:08.880 --> 0:18:12.320 make payments. U S Treasury is having a hard time 0:18:12.800 --> 0:18:16.040 pumping treasuries into the system on settlement days, you know, 0:18:16.080 --> 0:18:18.600 the money is not moving to the Treasury general account 0:18:18.640 --> 0:18:21.320 because people are not bidding to part with their money. 0:18:21.359 --> 0:18:24.440 In this case, the large banks run out of reserves, 0:18:24.480 --> 0:18:27.320 so the money ain't going to the US Treasury. So 0:18:27.400 --> 0:18:29.919 quite frankly, you know, if you need to pay unemployment 0:18:29.960 --> 0:18:32.199 insurance benefits and food stems and all that stuff, the 0:18:32.240 --> 0:18:35.640 funding of that stuff process gets comed up. So this 0:18:35.680 --> 0:18:38.879 is this is this is serious stuff. And you know 0:18:38.920 --> 0:18:43.160 the reason why the FED response to these things quickly. 0:18:43.440 --> 0:18:46.000 I mean, they could have responded quicker, but the reason 0:18:46.040 --> 0:18:48.720 why they respond to it quickly is because, you know, 0:18:48.880 --> 0:18:51.600 they just recognize the nature of these overnight markets where 0:18:51.640 --> 0:18:55.480 the money doesn't flow, people can't pay, people can't pay, 0:18:55.680 --> 0:18:59.280 they go out of business. Headlines can happen, right, you know. 0:18:59.359 --> 0:19:02.480 The the good thing was that, you know, this dislocation 0:19:02.560 --> 0:19:04.920 didn't last for more than a day. If these these 0:19:04.960 --> 0:19:09.080 locations go on for two days, three days a week, 0:19:09.560 --> 0:19:12.080 it can turn into an existential problem for a lot 0:19:12.119 --> 0:19:34.760 of people. So another thing that I've been wondering just 0:19:34.840 --> 0:19:37.120 on the idea of the FED having to come in 0:19:37.320 --> 0:19:39.960 and sort of swoop in and fix this problem as 0:19:39.960 --> 0:19:42.200 soon as possible, although as you point out, it could 0:19:42.200 --> 0:19:44.920 have been faster and they did have technical difficulties when 0:19:44.960 --> 0:19:48.000 they first tried to do it. How much of the 0:19:48.040 --> 0:19:51.520 confusion or the fact that reboat rates actually got to 0:19:51.600 --> 0:19:53.760 ten percent, how much of that do you think had 0:19:53.800 --> 0:19:57.440 to do with Simon Potter having recently left the New 0:19:57.480 --> 0:20:02.159 York Fed? And also, actually I've always wondered this, but 0:20:02.200 --> 0:20:04.800 do you ever talked to the FED about these issues? 0:20:04.840 --> 0:20:07.360 Do do they, you know, talk to you about your 0:20:07.359 --> 0:20:11.160 thoughts on this? But for the record, in five years, 0:20:11.160 --> 0:20:15.560 I've seen them once two years ago it was any 0:20:15.600 --> 0:20:18.800 other question. I don't think so, I think. I think 0:20:18.840 --> 0:20:23.480 again it's you know, I guess the the the message 0:20:23.480 --> 0:20:27.200 would be that, you know, Taper, I guess was a mistake. 0:20:27.960 --> 0:20:33.520 So the difference between the report market printing normally like 0:20:33.600 --> 0:20:36.960 it has been for the past five years versus the 0:20:37.000 --> 0:20:40.200 report market falling apart on December thirty one of last 0:20:40.280 --> 0:20:45.320 year early September this year, it's basically those six billion 0:20:45.359 --> 0:20:48.560 dollars of reserves that were taken out of the system 0:20:48.600 --> 0:20:53.639 by Taper. So if you look at the usage of 0:20:53.680 --> 0:20:58.439 the reverse report facility the other report facility, right, you know, 0:20:58.480 --> 0:21:01.919 that's the facility where money go os when that money 0:21:01.960 --> 0:21:04.880 is not needed because there is not enough collateral. People 0:21:04.920 --> 0:21:07.640 don't have the balance sheet, there's not eno farbitrash opportunities, 0:21:07.680 --> 0:21:10.000 so nobody takes the money from the money funds and 0:21:10.000 --> 0:21:11.600 on the money funds put it at the FED, and 0:21:11.600 --> 0:21:15.160 then money goes there to die. It's very important to 0:21:15.160 --> 0:21:18.679 to kind of realize that Taper started when the usage 0:21:18.680 --> 0:21:22.280 of that facility was zero. That means that you know, 0:21:22.400 --> 0:21:26.040 lazy cash in the system was already gone when Taper started. 0:21:26.440 --> 0:21:29.680 So all these you know, Taper and increase in treasuries, 0:21:29.720 --> 0:21:32.520 cash penancies, the increase in the foreign report pool was 0:21:32.600 --> 0:21:37.119 basically taking money out of bank hql A portfolios is 0:21:37.119 --> 0:21:40.119 your liquidity portfolios of the banks, and it was taking 0:21:40.200 --> 0:21:45.480 reserves out of the portfolios of JPMorgan and all the 0:21:45.480 --> 0:21:49.640 other large American banks. So basically, you know in English, 0:21:49.680 --> 0:21:54.560 that means that Taper was taking the liquidity buffer away 0:21:54.560 --> 0:21:58.000 from the system. That basically ensured that these large banks 0:21:58.040 --> 0:22:00.800 have the extra cash to lend in to periodic these 0:22:00.840 --> 0:22:04.040 locations in the report market and in the FX market 0:22:04.080 --> 0:22:08.200 and all all sorts of other markets. So the fact 0:22:08.200 --> 0:22:12.320 that we engineered taper and we tapered as much as 0:22:12.400 --> 0:22:16.000 fast as we did without the safety valve built into 0:22:16.000 --> 0:22:18.960 the process where if God forbid to we take out 0:22:19.000 --> 0:22:21.600 too much reserves, we should have a facility to kind 0:22:21.600 --> 0:22:23.959 of put as much liqurity back into the system as 0:22:24.080 --> 0:22:26.560 as as needed, right and let that the usage of 0:22:26.560 --> 0:22:30.320 that facility speak loud that taper should stop. We didn't 0:22:30.359 --> 0:22:34.320 do that. So back to your other question, I think 0:22:34.320 --> 0:22:37.399 the problem is that we tapered this much, this fast, 0:22:38.200 --> 0:22:44.760 So it was kind of a architectural mistake. So personnel changes, 0:22:45.040 --> 0:22:48.520 I would say, have nothing to do with, you know, 0:22:49.240 --> 0:22:52.680 the blowout and the response to that blowout the day 0:22:52.720 --> 0:22:54.720 of I think it has to do more with why 0:22:54.760 --> 0:22:57.200 did we end up in this position in the first place. 0:22:58.160 --> 0:23:00.199 And by the way, when you when you listen to 0:23:00.000 --> 0:23:03.760 you to the FED throughout the whole taper episode, you know, 0:23:03.800 --> 0:23:07.160 when you read those speeches, the indicators that the FED 0:23:07.320 --> 0:23:10.240 was looking at to see if things are getting tight 0:23:10.800 --> 0:23:14.200 or if you should stop taper, we're the wrong things 0:23:14.240 --> 0:23:16.840 to look at the feed was looking for banks use 0:23:17.400 --> 0:23:21.280 of introday credit force for signs of stress to show up. 0:23:21.359 --> 0:23:23.600 You know, earlier in the conversation we said that there's 0:23:23.680 --> 0:23:26.760 no bank that is ever going to use introduce credit 0:23:26.800 --> 0:23:30.320 from the FED post Bossal tree because it's not worth 0:23:30.320 --> 0:23:33.000 the reputational risk. Nobody wants to be the first one 0:23:33.040 --> 0:23:35.560 to use it. Nobody wants to be the person to 0:23:35.640 --> 0:23:38.679 max out the the lines. And if people were to 0:23:38.760 --> 0:23:41.080