A week ago the Fed announced its latest expansion to its Fixed-Rate Reverse Repo facility, which boosted the maximum allotment per counterparty to a whopping $3 billion from $1 billion (initially this was “only” $500 million), to wit: “this week the Committee authorized the Desk to modify the terms of the exercise. The maximum allotment cap will be increased to $3 billion per counterparty per day from its current level of $1 billion per counterparty per day, effective with the operation on Monday, December 23, 2013.” Some wondered why. Today we got the answer, when the Fed announced that an unprecedented $198 billion (that’s 20% of a trillion) among 102 entities was reverse repoed to it (an average of just under $2 billion per counterparty) in what can only be characterized as the most grotesque temporary open market operation conducted by the Fed in history.
We will leave it up to readers to decide what is more surreal: that the Fed is allowing banks to “window dress” to the tune of several times more than total Treasury holdings owned by the Primary Dealers as disclosed by the Fed, or that there is an unprecedented $200 billion in free liquidity floating out there.
And yes, nobody actually ever had to sell anything to hand over the fungible electronic cash equivalents to the Fed because… the magic of repo and shadow banking rehypothecation of claims. Remember: $2.5 trillion in excess deposits serve as dry powder to chase risk higher purely in the form of initial margin on marginable securities like the E-Mini, and no money every actually changes hands.
