In a letter dated October 18, Elizabeth Warren asked Steve Mnuchin to explain what happened in short-term funding markets last month, when an acute squeeze forced the Fed to intervene in the interest of wresting back control of a situation that looked set to spiral in the 48 hours ahead of the September FOMC meeting.
“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 wrote to Mnuchin, referencing the overnight and term repos the Fed employed to calm markets.
Most alarming to Warren, though, was the prospect that banks might take the opportunity to blame the post-crisis regulatory regime on the way to dismantling it on the excuse it’s prone to precipitating the type of chaos witnessed during the week of September 16.
Warren’s concerns in that regard likely stemmed in part from comments Jamie Dimon made on JPMorgan’s Q3 conference call.
“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”, he said, adding that “it’s up to the regulators to decide they want to recalibrate the kind of liquidity they expect us to keep in that account”.
Hint, hint. Wink, wink.
Analysts have variously documented how and why regulations can exacerbate acute bouts of money market tightness.
If Mnuchin was worried about Warren, he didn’t show it on Tuesday, during an interview with Bloomberg from Tel Aviv.
Not surprisingly, Steve said he’s spoken to Dimon on the subject as well as other big bank CEOs. It sounds as though all of them suggested the administration take a look at regulations.
“The banks have raised an issue around intra-day liquidity, and that is something that makes sense for regulators to look at”, Mnuchin remarked, on the way to suggesting that it’s possible to find a way around the rules that boosts intraday liquidity without creating more risk.
Warren would doubtlessly challenge that assertion and readers probably will too, if not on the technicalities, then on common sense grounds. Sure, it’s conceivable to redesign the regulations so that they serve a dual purpose, but this administration ain’t up to that, and Warren ain’t interested.
Steve cited a familiar list of factors in explaining the repo squeeze, and you’d be remiss not to note that part of the problem is the flood of supply unleashed by Mnuchin to fund Trump’s exploding deficit which hit $984 billion in FY2019.
Analysts – including those at JPMorgan – have variously warned that no matter what the Fed does, funding strains are likely to show up again at year-end.
In a comment that’s sure to infuriate Warren, Mnuchin told Bloomberg that “It’s a reasonable question: Have we gone too far in the other direction in requiring the banks to maintain this excess liquidity for intra-day operations?”