A Bill: Solve The Funding Problem
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2019-09-21 10:17 by Karl Denninger
in Federal Reserve , 142 references Ignore this thread
A Bill: Solve The Funding Problem
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A Bill To Improve Transparency In Financial Markets

Be it resolved that:

Banks, whether commercial, industrial or otherwise, emit credit on a fractionally-reserved basis in excess of their deposits;

Banks, in doing so, rely upon the FDIC to bolster public confidence and prevent "runs" that would destroy them instantly;

Said FDIC insurance is a public obligation of the Government of the United States, funded only in part by insurance premiums;

The overnight and short-term "Repo" market exists to balance reserves between financial institutions in the ordinary course of business;

"Ordinary course of business" does not include, nor can it include, deception up to but certainly not limited to outright fraud.

Therefore be it enacted that:

  • The NY Fed, and all other components of, and participants in, any public "Repo" market, whether forward or reverse Repos, shall be required to disclose, in real time, all bids, offers and participants in which the rate exceeds the Fed Funds rate by more than 1/8th point for all transactions of less than five (5) days, more than 1/4 points for all transactions of less than or equal to seven (7) days, and more than 3/8th point for all term transactions of less than 30 days.

  • Said disclosure shall be made by public Internet site officially run and supported by The Federal Reserve and available to all persons and entities without a login or other authentication, posted within five (5) minutes of said bid, offer or transaction taking place.  Specific identification of all parties to such a bid, offer or transaction along with the gross and net amounts of said transactions, including the specifics of all collateral offered, accepted or rejected, shall be made including but not limited to the CUSIPs of any securities so-involved and the specific haircuts or any other other imputed rate of interest, irrespective of mechanism, applied to same.

  • The NY Fed, and all other components of the Federal Reserve shall be prohibited from extending, participating in or performing any repo operation, irrespective of direction, that extends for more than 30 days.

  • Any institution that shall act to hide, obfuscate or misrepresent, by omission or commission and irrespective of the mechanism, a transaction that violates these rate limits shall have all components of said transaction, whether in cash or securities, deemed forfeit to the United States Treasury upon discovery and the reporting entity, if any shall be entitled to a fee of five percent (5%) of such amount as an incentive to report said transactions.

That ought to do it.  If someone is in trouble either due to excessive leverage or is attempting to hide their insolvency this will force it into the open immediately whereupon everyone can trade on same.

During 2008 prior to the Lehman blow-up we learned via the Valukis Report that Citibank and the NY Fed knew, factually that Lehman had no available good collateral in August.  This was intentionally concealed from the public, from lawmakers and from some -- but only some -- market participants. This sort of behavior, to the extent it is occurring now and in the future, must not stand.

Efficient and open markets only exist when fraud by concealment is not permitted to occur and certainly not when aided and abetted by institutions either chartered or backstopped by the Federal Government and thus the taxpayer.

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