Courtesy of Pam Martens
Federal Reserve Chairman Jerome Powell Gives Testimony Before the House Financial Services Committee on February 27, 2018
Yesterday felt a little like that scene from the 1946 movie “It’s a Wonderful Life” starring Jimmy Stewart. There’s a run on Stewart’s bank because his absent-minded Uncle Billy loses the cash he was sent off to deposit on behalf of the bank. The bank examiners discover there’s money missing and rumors spread.
The rumors that spread yesterday were not that money was missing at a Wall Street bank but that liquidity was missing. It had dried up to the point that the major Wall Street banks could not, or would not, handle the demand for loans called overnight repurchase agreements (repos) that were coming their way. (Repos are a short-term form of borrowing where corporations, banks, brokerage firms and hedge funds secure loans by providing safe forms of collateral such as Treasury notes.)
The oversized demand for the repos and the lack of available funds drove the overnight repo rate to an unprecedented high of 10 percent at one point. Typically, the overnight repo rate trades in line with the Federal Funds rate, which is currently targeted at 2 to 2.25 percent by the Fed.
The Federal Reserve Bank of New York (always there to rescue Wall Street from its hubris; see “Related Articles” below) had to jump in and infuse $53 billion into the repo market. It has promised to make another $75 billion available this morning.
Here’s what should concern every engaged American: As of June 30 of this year, the four largest banks on Wall Street (which are allowed to own Federally insured commercial banks as well as stock, bond and derivative gambling casinos known as investment banks) held more than $5.45 trillion in deposits. The breakdown is as follows: JPMorgan Chase holds $1.6 trillion; Bank of America has $1.44 trillion; Wells Fargo has $1.35 trillion; and Citibank is home to just over $1 trillion.
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