Wall Street’s Liquidity Crisis: It’s Not Getting Better

By Pam Martens and Russ Martens: November 7, 2019 ~

Deutsche Bank Headquarters in Frankfurt, Germany

Deutsche Bank Headquarters in Frankfurt, Germany

This morning, Wall Street’s money spigot arm of the Federal Reserve, the New York Fed, paid out $35 billion in 14-day term loans to Wall Street’s trading houses. The problem was, this morning the banks wanted $41.15 billion or $6.15 billion more than the Fed was offering. That’s a very clear sign that liquidity remains tight on Wall Street and we have yet to enter the pivotal year-end period when banks try to dress up their books by dumping or parking their most toxic positions. Between the term loan and the overnight loan, the New York Fed paid out $115 billion this morning to unnamed securities firms on Wall Street. (The Fed won’t say who is doing all of this borrowing and Congress can’t summon the willpower to hold a hearing.) 

According to the most recent schedule provided by the Federal Reserve, it is providing up to $120 billion per day in overnight, revolving loans to Wall Street’s securities firms (primary dealers) at an interest rate of approximately 1.55 percent as of this morning. In addition, it is also offering term loans of approximately 14 days twice a week in the amount of $35 billion, or an additional $70 billion flowing to unnamed trading firms on Wall Street each week. (The $70 billion has been scaled back from $90 billion that was offered for the last week of October.) The term loans are also being offered at a ridiculously low 1.59 percent interest rate as of this morning’s offering.

The interest rate that the free market wanted to charge some of these borrowers on September 17 was 10 percent. But just as the Federal Reserve did during the financial crisis of 2007 through 2010, it jumped into the fray and flooded the market with money it created out of thin air to bring the rate down below 2 percent.

This current mess reminds us of the statement made by Senator Bernie Sanders in 2011 when the Government Accountability Office (GAO) released its audit of the secret $16 trillion money spigot the New York Fed had hooked up to Wall Street during the financial crisis. Sanders said “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”

Think about that statement for a moment. The Wall Street securities firms getting these loans are owned by some of the biggest banks in America. Those mega banks are charging as much as 17 percent or higher to consumers on their credit cards. If you are an American citizen you can’t borrow from the Fed at 1.59 percent and pay off your credit card rate of 17 percent. So why are the free market principles only being applied to struggling consumers but not to the federally-insured banks that are backstopped by these same taxpayers? The simple answer is that there has been a complete corruption of the political process and the nexus between Washington and Wall Street. The one percent now rule every aspect of money and wealth accumulation in America.

When Senator Sanders made his statement in 2011, he thought the outrageous tab that had been funneled to Wall Street was $16 trillion because that’s what the number crunchers at the GAO told him. But the GAO report actually acknowledges that it did not include all of the programs offered by the Fed. When things like the dollar swap lines and the Single Tranche Open Market Operations were added up by academic researchers at the Levy Economics Institute, the tally came to $29 trillion – a noteworthy $13 trillion more than the GAO reported to the American people. This was nothing less than an institutionalized, secret wealth transfer operation from the pockets of the average American to the one percent.

And it’s being rolled out again in ever growing stages, just as occurred during the financial crisis. The $75 billion per day in overnight repo loans has been expanded by the Fed to $120 billion per day. On October 11, the Fed announced that it will also be buying back $60 billion in Treasury bills per month into the second quarter of next year. If the program lasts until June 30, 2020, that’s another $500 billion the Fed will have sluiced to Wall Street by taking Treasury bills off their hands and further lowering short-term borrowing rates in the process of shrinking the supply.

One of the 24 trading firms (primary dealers) that is eligible for these super cheap loans from the Fed is Deutsche Bank Securities Inc., a division of Germany’s largest bank, Deutsche Bank.

As the Fed was launching its new money spigot to Wall Street in September, Deutsche Bank’s headquarters office in Frankfurt, Germany was being raided by police for the second time in less than a year. The latest raid was related to the $220 billion money laundering probe of Danske Bank, Denmark’s largest lender. Deutsche Bank served as correspondent bank to Danske’s Estonia branch where the laundering is alleged to have occurred. 

On the day the police raid started at Deutsche Bank, Tuesday, September 24, the New York Fed offered $30 billion in 14-day emergency term loans but received demand for more than twice that amount. That led the New York Fed to increase its subsequent 14-day term loans from $30 billion to $60 billion later in the week. The amount has since been scaled back to the current $35 billion twice per week.

On July 7 of this year, Deutsche Bank confirmed its plan to fire 18,000 workers and reorganize into a good bank/bad bank. The bad bank will hold assets it plans to sell. (This is what Citigroup did during the financial crisis.) Deutsche Bank, as of this morning, has a market cap of $15.81 billion and a derivatives book of $49 trillion notional (face amount) according to its 2018 annual report.

We took a look at two large money market funds, Vanguard Prime Money Market Fund and Federated Prime Cash Obligations Fund, to see if they were holding any Deutsche Bank paper. They weren’t. Both money market funds had billions of dollars in the paper of Swiss, Canadian and Japanese banks but not one dime related to Deutsche Bank.

It’s not the job of the U.S. taxpayer or the central bank of the United States to provide a liquidity lifeline to Germany’s largest bank – even if Wall Street banks have tied a derivatives noose around their neck by using it as a derivatives counterparty. Which they have.

It’s long past the time for Congress and mainstream media to pull their heads out of the sand and start demanding answers from the Federal Reserve. 

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