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‘A Forced Pension Fund Bailout. Full Stop’: McElligott On BoE
"Why were they forced into this at a time where they're seemingly so keen on tightening monetary policy?" Nomura's Charlie McElligott asked, on Wednesday, following the Bank of England's announcement of unlimited long-end bond purchases to stem an existential crisis in gilts.
He had an answer. The meltdown was on the brink of becoming a "death spiral," as liability-driven investors and defined-benefit pension plans risked forced liquidations.
Gilts, stocks and corporate credit would be "ration
“Gilts, stocks and corporate credit would be ‘rationally’ sold ‘to meet ratcheted-up margin calls on derivatives and leveraged repo positions’….”
Fool me once, shame on you; fool me twice…
Why would pension funds face margin-call liquidation spiral? They are not leveraged, are they?
While the great Wall Street insurance companies, controlling in their reserves hundreds of billions of the accumulated savings held for “the widows and orphans,” are prohibited by law from investing in stocks, the law does not say that they cannot, to help out their stock-market masters, deposit billions of money in the banks and thus enable such banks during a great market manipulating campaign to loan to inside operators billions of dollars of additional credit to aid them in running the gamble against the public, the living fathers, husbands and brothers of such future “widows and orphans.” Whatever the amount, they certainly deposit many billions in the big banks.
Trading in futures markets is inherently leveraged, even in situations where you’re only <= 100% invested. You have a large number of counterparties, and have to post collateral with all of them. For the market to function at all, that collateral needs to be relatively small in proportion to potential position sizes, which can result in big margin calls in the event of sudden large market moves.
Another tool for central banks’ balance sheet tool box — QE, QT, and now, QE + QT. My grandfather used to say that sometimes having too many tools gets in the way of the job.