Steve Mnuchin Has Exactly 9 Days To Tell Elizabeth Warren What Caused Repo Market Chaos

As you can probably imagine, Elizabeth Warren is not enamored with the prospect of JPMorgan and others seizing on September’s chaos in short-term funding markets to lobby (figuratively or literally) for the relaxation of post-crisis regulations.

“These rules were designed to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash”, Warren wrote, in a letter to Steve Mnuchin late last week. “Banks are reporting profits at record levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks”.

During JPMorgan’s Q3 call, Jamie Dimon made a series of remarks suggesting that some of the blame for last month’s repo debacle should be placed at the feet of regulators.

Read more: Jamie Dimon Could Have Stopped The Repo Squeeze. Here’s Why He Didn’t…

“We have a checking account at the Fed with a certain amount of cash in it. Last year, we had more cash than we needed for regulatory requirements”, Dimon said, responding to a question from Evercore’s Glenn Schorr, who asked why JPMorgan didn’t step in to ease the squeeze. Dimon continued:

That cash, we believe, is required under resolution and recovery and liquidity stress testing. And therefore, we could not redeploy it into repo market, which we would’ve been happy to do. And I think it’s up to the regulators to decide they want to recalibrate the kind of liquidity they expect us to keep in that account.

Late last month, former Minneapolis Fed chief Narayana Kocherlakota penned a Bloomberg Op-Ed that essentially blamed the post-crisis regulatory regime for the seizing up of funding markets. Regulations, he fretted, have “disrupted some of the system’s most basic functions”.

To be clear, Warren would rather be “dead in a ditch” (to quote Boris Johnson) before she would allow the Financial Stability Oversight Council – chaired by Mnuchin – to support any push by the big banks to roll back regulations on the excuse that doing so is the best way to ensure that more “anomalous” disruptions in funding markets don’t pop up.

For now, the Fed clearly prefers to use its own balance sheet and temporary open market operations to alleviate the stress, rather than go the regulations route. “To combat the issue of reserve scarcity the Fed needs to shift from temporary open market operations to permanent open market operations or ease liquidity regulations”, BofA’s Mark Cabana wrote earlier this month, adding that “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'”.


“While the Federal Reserve has taken the necessary action to ensure that markets continue to function, I am alarmed that it has been required to engage in money market interventions that have not been used since the 2008 financial crisis”, Warren went on to say, in her letter to Mnuchin.

Now, Steve will need to respond to a series of questions from Liz no later than November 1. Among other things, Warren wants to know if FSOC knows anything the rest of us don’t about why the Fed included in their announcement of organic balance sheet growth a commitment to rolling TOMOs into January.

More broadly, she wants Mnuchin to explain what happened in repo markets last month.

“Poor” Steve.

Full letter

2019.10.18 Letter to Mnuchin Re Repo Funding Turmoil

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5 thoughts on “Steve Mnuchin Has Exactly 9 Days To Tell Elizabeth Warren What Caused Repo Market Chaos

  1. The simple versions of what happened in repo madness is most likely related to several over-lapping issues, including post recession crisis regulations, FDIC surcharges, foreign mysteries from FBO’s, etc., but it doesn’t seem as-if that many people have provided detailed step-by-step forensic analysis of all the details — thus, Warren can rest assured that mnuchin will provide her with nothing of substance, resulting in a nothing burger.

    Looking back a few weeks ago, I suggested this was also related to the deficit and interactions between Treasury and the Fed – and that’s still an interesting perspective, which I’m 100% sure that mnuchin wont address, because it shines a light on the trump economic policies related to the MAGA failures … and the growing deficit, which trump said he would shrink — with tax cuts paying for themselves and the whole non-story of Ricardian Equivalence and deficit don’t matter (to the rich).

    So, once again, just as an FYI, a few tidbits on deficit. Unfortunately connecting the deficit and current congressional budget to the current repo issues isn’t exactly an easy rabbit hole to go down, as it involves excess treasury issuance, maturity matters and duration, yields, reserves, regulations and the complexities of crap-loads of inter-connected complex fragments that are probably way above mnuchin’s and Warren’s pay grade.

    ==> Chicago Fed Letter, No. 395, 2018

    “These reductions generally occur when the Treasury approaches the
    debt ceiling–a limit set by Congress on the amount of money the
    government can borrow. Similar to a household that wants to pay its
    bills without taking out a loan, the Treasury, when it faces a tight
    debt limit, must spend down its checking account until Congress allows
    it to borrow more.”

    ==> Something from the internet: “The payments from the Federal Reserve due to its large balance sheet partially obscure the federal deficit. For instance, the FY 2016 budget deficit was $585 billion. Without remittance payments from the Federal Reserve, the deficit would have been $700 billion, or about one-fifth larger. If remittances had been closer to their pre-recession level, deficits would still have been about 15 percent larger.

    The Federal Reserve’s profits are projected by the Congressional Budget Office to decline in the next several years as the Federal Reserve gradually reduces the size of its balance sheet. Later in the decade, profits will increase after the Federal Reserve finishes its balance sheet reductions and interest rates stabilize.

    The Federal Reserve’s actions in response to the Great Recession have generally helped federal finances in recent years by helping keep interest rates low and increasing the Federal Reserve’s remittances to the Treasury. But as the central bank plans to unwind its balance sheet, the temporary effects that have been keeping deficits and interest rates low will come to an end. Lawmakers should prepare for less help from the Federal Reserve and act sooner rather than later to put the country on a more sustainable fiscal path.”

    ==> General random background ideas:

    Between the 2018 tax cuts and the increase in spending for 2020 and 2021 it will push the accumulated deficits to be the largest ever over a four-year timeframe.

    The Bureau of Economic Analysis or BEA reported that the economy grew at a 2.1% rate in the June quarter, falling from 3.1% in the March quarter. The report also shows that the economy’s growth rate peaked a year ago at 3.2%, right in the middle of the tax cut impact.

    Comparing Trump’s deficits to Obama’s

    Similar to comparing Trump’s job growth during his 29 months in office to Obama’s last 29 months where Trump’s Presidency has generated almost one million fewer jobs, Trump’s federal deficits are projected to zoom past Obama’s when you combine the last four years of Obama’s Presidency to Trump’s first four years.

  2. Re: “Spoiler alert: Easing regulations is not an acceptable answer when it comes to fixes.”

    Just to belabor the obvious point (sorry for three posts) — it is worth noting that this inquiry from Warren, is to to mnuchin and thus Treasury Dept, versus an interaction with The Fed and Powell! That hint can be viewed as an inquiry related to treasury issuance and deficit budget stuff and thus the mechanics of how Treasury interacts with Fed operations. The inquiry at the very least does open a door for discussions related to the budget, deficit and overly optimistic growth rate that trump has plugged into all his fake budget projections — and this also can be seen as a way to hold CBO accountable for buying into budget projection bullshit and campaign hype for hillbillies … and obviously this is a nice way for Warren to attack trump’s MAGA failures and further her concerns related to economic stability.

    However, if Warren had just stopped there, i.e., working to regulate risk, rather than pounding on the doors of social inequality and a super liberal socialism slant that attempts to destroy the economy in a whole new way — why did the Democrats screw up their chance to win in 2020??????

  3. Maybe the repo mess was simply a function of banks having once again over-leveraged themselves. Not enough good collateral available to cover firms’ overnight exposure to long chains of derivative-driven debt. I don’t know about everyone else, but I want those reserves parked at the Fed because, I, Joe Taxpayer, do not want to bail out the banks (again) when the music stops, which it will. I mean, this is not rocket science: ten-to-one is a reasonable leverage ration. Stick to that and you shouldn’t have nay problems.

  4. My semi-final 2 cents regarding Warren, is that she already knows about what she wants to make a case for, so she’s setting up mnuchin for a public lynching, or grilling (by sending this letter). IMHO, the letter was sent to shine a light on Treasury issuance of debt and thus the role Treasury has in managing debt and deficits. What does any of this have to do with weird IOER and repo chaos — it’s complicated to say the least and obviously, many over-lapping puzzle pieces, including a new twist on regulation, or administration.

    Step way back from IOER and think about Primary Dealers and counterparties and collateral:

    “Treasury promulgates rules and provides guidelines for Treasury auctions that are applicable to primary dealers and other bidders. Primary dealers are expected to bid their pro-rata share of each auction, an amount that is determined as the total amount auctioned, divided by the number of primary dealers at the time of the auction.”

    The New York Fed expects a primary dealer to:

    "participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the FOMC;
    provide the New York Fed’s trading desk with market commentary and market information and analysis helpful in the formulation and implementation of monetary policy;
    participate in all auctions of U.S. government debt; and
    make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account holders."

    ==> Ok, Primary Dealers are required to make markets and bid for Treasury issuance, in this case, we have a tsunami of issuance and here’s a blurb from Market watch or someplace, as an example of recent issuance:

    “Last month the U.S. Treasury laid out its plans to borrow $814 billion between July and December, after the Trump administration and Congress agreed to a two-year postponement of the U.S. debt ceiling, ensuring no government shutdown or a federal default.

    Not only does the Treasury needs to borrow to cover the fiscal deficit created by Trump’s 2017 tax cuts and the inability of Congress to agree on spending cuts, but Treasury needs to rebuild its cash balance which was run down to pay the governments bills when the debt ceiling was hit in May.

    The coming deluge of Treasury issuance has stoked worries on Wall Street about whether there is enough liquidity in the system in the short term to meet the supply without pushing up short-term borrowing costs and inverting the yield curve even further. ”

    ==> Ok, so what about banks hoarding cash and all those HQLA assets required for Dodd-Frank — and what’s that have to do with banks being forced to buy more and more Treasuries that have less and less future value — and maybe that topic of Treasury Auction Settlement Fails?

    The Federal Reserve is
    not responsible for making debt issuance decisions–this responsibility rests solely within
    Treasury’s ODM to ensure the independence of the two institutions.
    In addition, the Fed is a holder of Treasury securities. It is involved in the purchase and resale of
    these securities to the secondary market through its open market operations.

    But, the Federal Open Market Committee does adjust IOER and rates.

    However, Legislative activity can affect Treasury’s ability to issue debt and can impact the budget process.
    The statutory limit on the debt can constrain debt operations, and, in the past, has hampered
    traditional practices when the limit was approached. The accounting of asset purchases in the
    federal budget has created differences between how much debt Treasury has to borrow to
    purchase assets and how much the same purchases will impact the budget deficit.

    Now back to the hint by the Fed:

    The expansion of the TGA has also made the account’s balance much more volatile, as illustrated by the weekly data in panel B of figure 2. The account now fluctuates between about $20 billion and nearly $450 billion. This volatility has two sources. First, the government’s income and outlays are naturally volatile, with large tax payments arriving in some weeks and large expenditures leaving the account in other weeks. Second, as the figure shows, the Treasury occasionally reduces the account balance below the $150 billion minimum that it ordinarily targets.

    These reductions generally occur when the Treasury approaches the debt ceiling–a limit set by Congress on the amount of money the government can borrow. Similar to a household that wants to pay its bills without taking out a loan, the Treasury, when it faces a tight debt limit, must spend down its checking account until Congress allows it to borrow more. These factors mean that if the Treasury maintains its current approach to cash management, the Federal Reserve’s liabilities to the Treasury in future years will be both larger and more volatile than they were before the financial crisis.

    Fast forward to10/2/2019: “Congress did not complete action on appropriations before the end of the fiscal year on Sept. 30, although lawmakers enacted legislation in August to raise the discretionary spending caps and have resumed appropriations work. The House passed a continuing resolution (CR) on Sept. 19 that funds the government through Nov. 21, which the Senate passed on Sept. 26 and President Trump signed on Sept. 27. The House and Senate, meanwhile, are continuing to negotiate full appropriations for the rest of FY 2020, including through a package of four appropriations bills that has currently stalled.”

    Prior February 2019 CBO Report: “What Is the Current Situation?
    P.L. 115-123 specifies that the amount of borrowing
    that occurs during the suspension of the debt limit will
    be added to the previous ceiling of $20.5 trillion. as of
    January 31, 2019, an additional $1.5 trillion had been
    borrowed, bringing the amount of outstanding debt
    subject to limit up to $21.9 trillion. The new debt limit,
    which will be established on March 2, 2019, will reflect
    additional borrowing through March 1.”

    Recall that Treasury’s prime responsibility is: to issue debt in a regular and predictable pattern, (2) to provide
    transparency in the decision making process.

    See: Periods of sustained debt increases bring debt levels near the debt
    limit. CBO’s August 2019 baseline projected that the debt
    subject to limit will be $28.5 trillion at the end of FY2024
    and $34.4 trillion by the end of FY2029; debt held by the
    public is forecasted to equal $22.5 trillion and $29.3 trillion
    in those respective years.

    Deficits: Invoking Treasury’s authority to use “extraordinary
    measures” to stay under the debt limit and temporarily
    suspending the debt limit both postpone when Congress
    must act on debt limit legislation. The authority for using
    such “extraordinary measures,” which include suspensions
    and delays of some debt sales and auctions,
    underinvestment and disinvestment of certain government
    funds, and exchange of debt securities for debt not subject
    to the debt limit, rests with the Treasury Secretary.

    ==> I’m sorry, I still don’t get it, but await the exchanges between Warren and mnuchin … bawhahahaw

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