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Jamie Dimon Could Have Stopped The Repo Squeeze. Here’s Why He Didn’t…
Jamie Dimon knows whose fault it is that he couldn't step in to prevent (or otherwise ameliorate) the acute funding squeeze that rippled across money markets in the 48 hours ahead of the September Fed meeting.
Spoiler alert: Blame regulations.
"Curious your take on everything that went on in the repo markets during the quarter, and I would love it if you could put it in the context of maybe the fourth quarter of last year", Evercore's Glenn Schorr implored, on JPMorgan's Q3 call Tuesday.
Strict (high) regulatory bank reserve requirements presumably lower the risk of bank stress.
Now it seems they increase the risk of repo stress, because certain of those banks choose to run their cash reserves close to the lower prudent limit in order to own more higher-yielding assets.
The Fed can address the risk of repo stress, by injecting more cash (buying TBL aka not-QE) or by standing up a permanent repo facility. That seems preferable to relaxing the regulatory bank reserve requirements and increasing the risk of bank stress.
Now, after the Fed buys $200BN of TBL from JPM and other banks, I’m not sure what stops JPM from simply using that cash to buy higher-yielding assets and thus bringing their cash reserves back down close to the lower prudent limit again. So they make money on both ends – in selling their TBL to the Fed at a prrofit, and in re-investing the cash – and ultimately the risk of repo risk returns,
So I’d like to see the Fed stand up the permanent repo facility.
its not clear to me if the $60billion is the red line floor Dimon mentioned. in the past they could go below 0….and now ?
i dont believe anything ceo’s esp bank ceo’s say, so Im wondering what really is dimon angling at? or is he giving us advance notice of where ‘fault’ will lay in the future. b/c surely we have all learned lessons about subprime debt (auto defaults) and CLOs and cov-lite lending..THOSE have no risks to the system at all! /s
Re: “We are less optimistic on regulatory relief since Chair Powell’s comments at the September FOMC meeting stated that “we’d probably raise the level of reserves rather than lower the LCR.” ”
This all gets down to political lobbying, with banks pushing to allow themselves to take greater risks and then not be accountable, as in Too Big To Fail, as is the case with the Failed JPM, who was bailed out by taxpayers after they screwed up before during and after the Great Recession. It’s very easy to blame the Fed, or Dodd-Frank Basel lll for placing strict rules in place, to keep these monsters from being destructive. The banks have always been able to front run regulations and rules and in this case, the Fed is being made out to be the bad guy, because of well-intended regulations that have allowed banks and lobby groups to launch an assault on regulations — specifically, Randal Quarles a trump appointee is tasked with destroying regulations that hinder banking risk taking. Thus, you have the administration causing chaos within the Fed and the banks in an all-out lobby campaign to play the victim — when in fact, the reality is the Too Big Too Fail banks want taxpayers to be in their proper place, when they screw up in the next year or 2, which in my mind is criminal and highly premeditated — and it’s just a great reason to vote for Warren. This would not be an issue if these criminal banks had been broken up, instead of being fed and nurtured to become what they are today!
Let’s be super realistic here, this is specifically about FDIC surcharges and the fact that banks like JPM end up having operating costs attached to fees that they don’t want to pay and instead, JPM wants to use more of its reserves to play poker — and JPM wants taxpayers to pay when they screw up.