Sheila Bair is worried about reverse repo

by on July 25, 2014 at 1:06 pm in Economics, Law, Uncategorized | Permalink

Like much of her commentary, I find this considerably overstated.  Still, it suggests a few points of interest and also concern:

The mere existence of this facility could exacerbate liquidity runs during times of market stress. Borrowers in the short-term debt markets will have to compete with it for investment dollars and all, to varying degrees, will be viewed as higher risk than lending to the Fed. Even a relatively minor market event could encourage a massive flow of funds to the Fed while contributing to a flow away from other short-term borrowers.

Nonfinancial companies could find themselves unable to find buyers for their commercial paper. Banks could confront a sudden outflow of deposits, particularly those which are uninsured. Even the U.S. Treasury—traditionally viewed as the safest harbor—could see its borrowing costs spike as investors decide that the Fed is even safer.

Ironically, faced with a more acute liquidity crisis, the Fed would likely have to use the funds it is borrowing through reverse repos to provide a lifeline to the very markets that suffered. For investors seeking safety, the Fed would become the borrower of first resort. For borrowers affected by the resulting diversion of funding, the Fed would become the backstop lender.

The reverse repurchase facility also seems to be at cross-purposes with Congress’s efforts to contain the government safety net. After many years of consideration, Congress in 2008 reluctantly gave the Fed authority to pay banks interest on the money they keep on deposit with it. The reverse repurchase facility essentially gives large nonbank financial institutions the routine ability to place money in the functional equivalent of an overnight deposit with the Fed and receive interest.

In December 2012 Congress allowed the Federal Deposit Insurance Corporation’s crisis-era program to provide unlimited guarantees for non-interest-bearing transaction accounts—such as those used by businesses and local governments to process payroll and other expenses—to lapse. So the Transaction Account Guarantee Program is dead—but the Fed’s reverse repurchase facility enables large nonbank financial institutions to obtain explicit government backing for billions placed with the Fed, but without the burdens of deposit insurance premiums and the kind of prudential supervision that applies to banks.

The full WSJ Op-Ed is here.

1 T. Shaw July 25, 2014 at 1:13 pm

Just saying,

“Sheila Bair and her colleagues at the FDIC are the only regulatory agency in Washington that is still trying to obey the law. The Fed and OCC, on the other hand, have bought into the Paulson/Geithner/Bernanke scheme to subsidize the large zombie banks — and do so without authority from the Congress.”

“The FDIC Chairman was doing her job while the rest of these spineless weasels, these duplicitous, traitorous villains were selling out the taxpayer to subsidize the bond holders of the large banks — the clients of PIMCO, BlackRock and the rest of the Buy Side. Following Paulson’s lead, Dugan and Geithner are simply representing their clients and future employers on the Sell Side.”

— Chris Whalen, Institutional Risk Analytics (6/14/09)

2 carlospln July 26, 2014 at 7:50 am

Sheila Bair: The Last Honest Regulator.

3 Max July 25, 2014 at 2:33 pm

“So the Transaction Account Guarantee Program is dead—but the Fed’s reverse repurchase facility enables large nonbank financial institutions to obtain explicit government backing for billions placed with the Fed, but without the burdens of deposit insurance premiums and the kind of prudential supervision that applies to banks.”

You know, treasury bonds also have explicit government backing (horror!) and the government doesn’t pay deposit insurance premiums on them (double horror!) and is not subject to prudential supervision (triple horror!)

This article isn’t even wrong. It’s a comedy piece.

4 T. Shaw July 25, 2014 at 3:48 pm


The point is the crisis ended and the Fed still does this stuff and a lot more.

Money quote: “We need less, not more, government intervention in the financial markets.”

Were you in diapers in September 2008?

5 Oakchair July 25, 2014 at 4:59 pm

Its always funny to see peoples mental gymnastics in explain that we need less government in financial markets. When before we had financial regulations we had a financial crisis almost every decade and during the period we had those regulations we didn’t have one for 60 years and then when we removed some in the 80’s we saw a financial crisis almost ten years later and then when we removed even more around 00’s we had the largest financial crisis ever.

6 Willitts July 25, 2014 at 5:07 pm

It’s always funny to see the mental gymnastics of people who think Glass Steagall prohibited anything that actually caused the crisis.

7 Oakchair July 25, 2014 at 6:26 pm

Oh you mean deregulation that allowed people to buy homes without putting money down didn’t cause people to buy homes without putting money down, regulations preventing banks from packaging loans and insuring them and selling them off as safe assets didn’t prevent them from doing those things, removing regulations that mandated stricker lending standards didn’t loosen lending standards etc etc. Do you have any more beach front property in Kansas to sell me?

8 Willitts July 25, 2014 at 9:00 pm

What deregulation that allowed people to buy houses with no money down? I don’t recall seeing that in Glass Steagall or any of the other laws amended and repealed.

Oh yeah, that was a change in regulations by Clinton’s HUD in 1995 as part of his National Homeownership Strategy, you know, with all those “affordable” housing initiatives.

And then there was Fannie Mae, run by Jim Johnson and Franklin Delano Raines that bought all the garbage mortgages from Countrywide and securitized them. Oh, but they werent covered by Glass Steagall either.

And then there were all those other countries that had housing and financial crises but no deregulation.

Oh, and how many CB/IB combinations in the US got into trouble? One.

All the people making your lame arguments had the good sense to run away from here years ago.

9 Ricardo July 25, 2014 at 5:08 pm

Post hoc ergo propter hoc.

10 8 July 25, 2014 at 9:24 pm

If it wasn’t for government, no one would shut the barn door after the horses are gone.

11 andrew' July 26, 2014 at 6:09 am

It is almost time to post the fed funds rate chart again.

Just for starters, there is no deregulation in finance when they control the unit if account.

12 andrew' July 26, 2014 at 6:21 am

Gov caused the incentives, created the implicit bailouts, approved the bank mergers, insulated and monetized housing, caused the panic with ad hoc panicked response, and regulation has been shown to play a minor if any role whatsoever.

We have more regulation than ever and worrse outcomes in this and all highly regulated sectors.

Bait was squeamish about the ad hoc response necessitated by the ad hoc prior governance.

Where is the living wills? And where is the methodical phase in of mark to market?

Here we are, still whistling past the zombie yard.

13 Abe Froman July 25, 2014 at 3:12 pm

Without reverse repo, how does the fed shrink it’s balance sheet?

14 Willitts July 25, 2014 at 5:14 pm

Sale to anyone who will buy.

15 B Cole July 25, 2014 at 7:47 pm

Why sell the Fed balance sheet? Right now it is a minor source of income for US government. Inflation is dead. The Fed can raise interest rates. A good question is why not enlarge the Fed balance sheet?

16 Abe Froman July 25, 2014 at 3:13 pm

I just typed “it’s” in lieu of “its.” For the record, I hate myself.

17 jmo July 25, 2014 at 4:24 pm

I expected more from the sausage king of Chicago.

18 Maitre D' July 25, 2014 at 4:43 pm

I’m suggesting that you leave before I have to get snooty.

19 Willitts July 25, 2014 at 5:13 pm

I weep for the future.

20 Jan July 25, 2014 at 5:48 pm

Understanding allows people like us to tolerate a person like yourself.

21 Yancey Ward July 25, 2014 at 6:29 pm

I bet he isn’t even devastatingly handsome.

22 Ricardo July 25, 2014 at 5:09 pm

Thanks a lot. Now we’re going to have another financial crisis, all because of your apostrophe. Also, Sheila Bair had nothing to do with it… for proof, read her Op Eds.

23 Tom July 25, 2014 at 9:12 pm

Bair seems to be assuming that reverse repo will be made available in unlimited volumes. There’s no indication anyone wants to do that.

24 Yancey Ward July 26, 2014 at 11:49 am

There was no indication anyone wanted to do a lot of the things that have happened in the last 6 years. I think it enough to point out that it can be done, and that there might be reasons the central bank will do it at some point in the future in response to a crisis.

25 Tom July 26, 2014 at 3:08 pm

Well, okay, but a warning about a remote future possibility doesn’t really rank among the things a serious person could be talking about. And just because it’s a remote possibility doesn’t excuse writing a scary warning that makes it sound as if the Fed has practically already done it.

It’s being done on a very small scale. She makes it sound as if the decision whether to increase their volume s with the customer, as if every non-bank can come to the Fed with cash and receive as much reverse repo as they want, whenever they want. That’s not how it works. The Fed decides how much to issue.

Yes, making reverse repo available in unlimited volumes could have in a crisis the effects she’s describing. But nobody has even suggested making reverse repo available on demand unlimited.

I usually like Bair but on this one she has pulled a Roseanne Rosannadanna.

26 andrew' July 26, 2014 at 6:30 am

She seems to be worrying about the route lightning will take on its way to the strike.

Her concern seems to echo my question of whether the government is right to provided unlisted flights to safety (I.e. low returns in exchange for guaranteed returns). Maybe having lots of exit doors prevents panic or maybe it facilitates panic.

27 andrew' July 26, 2014 at 6:33 am

Unrestricted flights to safety that is.

I wonder if it might be better to have misspelled words than crazy autocorrect than doesn’t work half the time, works 10%, and completely screw the pooch the rest of the time.

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