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Are the Fed’s Repo Loans Being Repaid by Wall Street’s Trading Houses or Just Rolled Over and Over?

Courtesy of Pam Martens

Trader on the Open Markets Trading Desk at the Federal Reserve Bank of New York

Traders at the New York Fed Have Speed Dials to Wall Street’s Biggest Firms (Photo Source: Federal Reserve Educational Video)

Last Friday, the usually reliable and fact-intensive financial website, Wolf Street, threw a hissy fit over how the Wall Street Journal (and by extension, Wall Street On Parade) is reporting the tallies for the repo loans that the New York Fed has been pumping out every business day since September 17, 2019 to the trading houses on Wall Street.

The inflammatory headline blared: “The Wall Street Journal (and Other Media) Should Stop Lying About Repos.” The author of the piece, Wolf Richter, explained his criticism as follows:

“Here is the ‘in’ of a repurchase agreement [repo loan]: The Fed buys securities (mostly Treasury securities and some agency mortgage-backed securities) in exchange for cash. This adds liquidity to the market.

“Here is the ‘out’ of a repurchase agreement: Every repo matures on a set date when the counterparties are obligated to buy the securities back from the Fed at a set price. At this point, the repo unwinds, and it drains liquidity from the market.”

The key flaw in Richter’s analysis is that last sentence: “At this point, the repo unwinds, and it drains liquidity from the market.”

Neither the public nor Congress have any proof that these repo loans are being unwound. One or more of the 24 trading houses on Wall Street (primary dealers), that are authorized by the New York Fed to borrow from its money spigot at super cheap interest rates, could simply be rolling over the same loans or using term money to pay off one loan while taking out another loan.


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