Fed Hikes Revolving Loans to Risky Banks

Sept. 26, 2019 (EIRNS)—The Federal Reserve has now increased its nightly overnight “repo” lending to banks from $75 to $100 billion, after finding still more unsatisfied demand for such loans, and doubled its two-week lending program from $30 billion to $60 billion for the same reason.

The financial press is trying to maintain the idiotic fiction that “no one knows” what is happening, beginning with the Fed.

Some have suggested that the reason for the lack of willing private bank lenders is risky collateral, but EIR’s Paul Gallagher and other sources report that the collateral for these overnight and 14-day loans between banks is overwhelmingly Treasuries, while the balance is mostly Fannie Mae and Freddie Mac securities, which are also effectively guaranteed by the Federal government. These are not risky.  Private securities comprise only a small part of this collateral.

The true explanation must be as in 2008 before the fall of Lehman Brothers and Bear Stearns—namely, that some banks are seen as credit risks by the other banks, that refuse to lend to them. These at-risk banks are the ones that are going to the Fed window to borrow, when no one else will lend to them.  As in 2008, the Fed knows who they are, but sedulously keeps their names secret, because it would be the kiss of death for them if they were known to be going to the Fed window.  (But this is not to imply that other circumstances are necessarily the same as in 2008.)

Deutsche Bank is one obvious candidate.  There are probably others which are known to be exposed to highly-leveraged corporate debt. Shale-oil debt is piling up to the rafters, for example.  As are highly-leveraged retail chains, auto dealerships and many other categories.

The $100 billion the Fed is pumping into the repo market is only the tip of the iceberg of the rotten financial system. There is a whole range of toxic paper out there, from corporate bonds to consumer credits. An estimation published last February said that the corporate bonds bubble was at $7.5 trillion: $1.3 trillion in leveraged loans, $1.2 trillion in junk bonds and $3 trillion of investment grade corporate debt just one notch above junk.