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.
Read more: Steve Mnuchin Has Exactly 9 Days To Tell Elizabeth Warren What Caused Repo Market Chaos
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?”
Read more: Analyst Who Called The Repo Squeeze Warns On ‘Combustible Cocktail’ Into Year-End
6 thoughts on “Steve Mnuchin Wants All Of The Smoke From Elizabeth Warren In Repo Debate”
Someone should ask Mnuchin whether, in the event of another bank-driven financial crisis, he will insist that Jaime and the other bank CEOs and VPs pay for the bailout. Joe Taxpayer is tired of that sh*t.
This is the first time I’ve actually seen a reference to my delusional thinking on the debt ceiling and repo crap … whew, I almost had to increase my meds! The bottom line seems to be that regulations, liquidity and the deficit all matter.
SCOTIABANK’S GLOBAL OUTLOOK
October 10, 2019
Despite the brave face the Fed presents regarding the matter, it’s highly likely that the deterioration in short-term funding markets over September into October caught the central bank flat-footed. Inadequate market liquidity struggled to deal with demand for cash in order to meet corporate tax payments and large Treasury auction settlements, given rising
deficits and Treasury issuance after the debt ceiling was lifted following a half-year binding freeze on net issuance. The result was that the Fed was losing control over rising short-term market rates that were rippling through other markets and impacting confidence.
Also see: Recent developments
in the US repo market:
a cause for concern?
Fourth Quarter 2019
Further pressure on reserves appears to have come from $54 billion
of new Treasury issuance also settling on 16 September. It is
estimated that at the same time money funds saw outflows of
around $30-35 billion (due to corporate drawdowns to meet
tax liabilities). All of this seems to have culminated to catch the
market, and the Federal Reserve, off guard.
Excess reserves have been declining in line with the post-
QE contraction of the Fed’s balance sheet. However, at $1.4
trillion going into the week of 16 September (see chart), the
expectation may have been that banks were still holding a
healthy buffer of cash that could easily absorb the outflows
from the system. Based on survey data, it would seem that
the estimated tipping point at which reserves become “sticky”
(known as the “steep part of the curve”) was around $1.2
trillion, comfortably below the current levels. But what is more
difficult to estimate is the capacity for banks to recycle reserves
through the repo market due to regulatory constraints (such
as leverage ratio and G-SIB buffers). Separating out these two
considerations is fiendishly tricky.
While perhaps the press has made too much of the episode, it
nonetheless highlights two serious concerns for central bankers,
both in the US and elsewhere. First, while executing QE has its
challenges, unwinding QE is a far more difficult balancing act.
Second, estimating the impact of regulation on banks’ capacity to
intermediate in the repo market is a guessing game. We should
expect a lot more repo market volatility ahead.
It is contained now, so never mind…
Banks shouldn’t be allowed to do repo or lend vs financial assets in the first place.
So, is it that Dimon had no idea what was really going on during 2018 at his own bank, and has therefore come around to thinking some version of the SLR is to blame for getting 2019 all wrong? Or, is it because he had and has no real idea of the liquidity system that after being caught totally off-guard by pretty much everything he is cynically seeking to settle a longstanding score about the one thing he does know well?
When I came up with the zoo analogy to try to describe what’s going on, I didn’t realize just how well it would fit the times. What’s worse, the financial media will now be filled with stories about how it must be that Dimon is right! A real zoo.
Great post….tough to really grasp ..A gut feeling is Warren may know a little more about this stuff than she is credited for knowing.. It is a battle for determining the direction for American culture and a commentary on the last 50 years in disguise.. H.. ..has touched on this some…More please!!!!