“The Fed Was Suddenly Facing Multiple LTCMs”: BIS Offers A Stunning Explanation Of What Really Happened On Repocalypse Day, by Tyler Durden

This is far and away the best article SLL has seen on the explanation behind the explosive move in the repo market that saw repo rates go from 2% to 10% in a matter of minutes on September 16, and has forced the Federal Reserve to essentially liquify the repo market. The repo market is where banks, hedge funds, and other institutions finance various instruments, putting up those instruments as collateral for loans for a set term by selling them and agreeing to repurchase the instruments at a higher price that embeds an interest rate. It’s a little known but incredibly important part of the financial markets. From Tyler Durden at zerohedge.com:

About a month ago, we first laid out how the sequence of liquidity-shrinking events that started about a year ago, and which starred the largest US commercial bank, JPMorgan, ultimately culminated with the mid-September repo explosion. Specifically we showed how JPM’s drain of liquidity via Money Markets and reserves parked at the Fed may have prompted the September repo crisis and subsequent launch of “Not QE” by the Fed in order to reduce its at risk capital and potentially lower its G-SIB charge – currently the highest of all major US banks.

Shortly thereafter, the FT was kind enough to provide confirmation that the biggest US bank had been quietly rotating out of cash, while repositioning its balance sheet in a major way, pushing more than $130bn of excess cash away from reserves in the process significantly tightening overall liquidity in the interbank market. We learned that the bulk of this money was allocated to long-dated bonds while cutting the amount of loans it holds, in what the FT dubbed was a “major shift in how the largest US bank by assets manages its enormous balance sheet.”

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