By Pam Martins and Ross Martins: December 21, 2021 ~
The New York Federal Reserve quietly announced, in one sentence, that last Friday, as public attention turned to the increase in COVID cases in Omicron in the United States, vacation travelers focused on the safety of air travel and family gatherings. statement, that it was adding the following three federally insured banks to its list of counterparties in order to facilitate a new $500 billion permanent buyback facility: Citibank, Goldman Sachs Bank USA, and New York Branch of Mizuho Bank.
If you were surprised that Goldman Sachs is allowed to own a bank that is federally insured under current US law, check out our previous report: Goldman Sachs’ Rich Man Backstopped by You and Me. If you were surprised that a branch of Mizuho Bank in New York, part of Japan’s Mizuho Financial Group, was able to obtain federal deposit insurance with the support of the US taxpayer, welcome to the world of global one-percent limitless banking.
These three banks have a number of things in common: (1) every financial institution already has a broker-dealer, which is actually one of the 24 primary dealers at the Federal Reserve that participate in the Fed’s buybacks; (2) The principal dealer of the three banks took out large, secret loans from the Federal Reserve’s repo facility when Wall Street credit collapsed on September 17, 2019; (3) All three institutions have trillions of dollars in derivative exposure according to data from the Office of the Comptroller of the Currency (OCC).
If all three banks already have broker-dealer subsidiaries involved in the Federal Reserve’s repo loan facility, why add another subsidiary? The first idea that comes to mind is the fact that the Federal Reserve sets a daily cap on the amount of dollars each party can borrow daily. By having two subsidiaries as counterparties, the amount that can be borrowed is doubled.
Why do these three banks need to have a sugar daddy at the Federal Reserve to lend them money in a financial crisis? Because the three banks have significant exposure to derivatives. According to the latest report from the OCC, as of September 30, 2021, Goldman Sachs USA had $387 billion in assets for $48 trillion (yes trillion) in theoretical derivatives (nominal quantity). Citibank had $1.7 trillion in assets versus $44 trillion in theoretical derivatives. Mizuho Bank Holdings Inc. has $48.8 billion in assets versus $6 trillion in derivatives.
Until July of this year, only the Fed’s primary dealers were eligible to participate in the Fed’s Repo Facility. That all changed in July, when the Fed announced that it would add depository banks as counterparties and make the repo facility a “permanent repo facility” with the ability to lend $500 billion per day in overnight loans, which of course can be extended for extended periods of time. See the July report: The Federal Reserve announces plans to support Wall Street permanently with the $500 billion permanent repo facility…starting tomorrow.
How did the secret loans from the Fed’s latest repo bailout to Wall Street that began in the fall of 2019 become public information? On October 13 Wall Street on Parade Spreading the news that the Federal Reserve Bank of New York has quietly released the names of Wall Street firms that took out tens of billions of dollars in repo loans under the Fed’s Emergency Repo Loan operations that began on September 17, 2019 – months before the onset of COVID-19. case in the United States or anywhere else in the world.
Repurchase agreements (repurchase agreements) are a form of short-term borrowing where companies, banks, stock companies and money market investment funds obtain loans from each other by providing safe forms of collateral such as Treasury bonds. The repo market is supposed to operate without the help of the Federal Reserve. But on September 17, 2019, the high demand for repo agreements and the lack of funds available to meet the demand drove the overnight interest rate on repo loans to an all-time high of 10 percent. The overnight repo rate typically trades in line with the fed funds rate, which at the time was targeted at 2 to 2.25% by the Fed.
On the first day of emergency repo loan operations on September 17, the Federal Reserve Bank of New York provided a total of $53.15 billion in one-day repo loans. JPMorgan Securities was the largest borrower, at $7.6 billion, or 14 percent of the total. At the time, JPMorgan Chase had $2.3 trillion in assets and $55 trillion in theoretical derivatives.
Also on the first day of repo loans on September 17: BNP Paribas Securities, part of the French investment bank, raised $5 billion from $53.15 billion, or 9 percent. Goldman Sachs also got $5 billion, or another 9 percent. Citigroup borrowed $3.5 billion; Nomura Securities borrowed $3.5 billion; The New York branch of Societe Generale, a French multinational investment bank, borrowed $3 billion; Bank of Nova Scotia’s New York unit borrowed $2.5 billion; Barclays Capital, part of the UK Bank, received $2.4 billion; Mizuho Securities borrowed $1 billion. (There have been many other borrowers. See the full list here.)
Under the 2010 Dodd-Frank financial reform legislation, the Fed is required to release its repo loan data after two years, unless it chooses to do so earlier. The Fed is now releasing data from 2019 quarter by quarter. So far, the public has only seen Wall Street’s borrowing bout for the period starting on September 17 through the end of that quarter, and ending on September 30, 2019.