Wednesday, August 3, 2016


You have to do that sometimes when there isn't much light.  For a blogger like me, that means there is little good, solid stuff about which you know a lot.  These days there isn't much of that.  So you have to turn to subjects that interest you, concern you and wished you knew more about and sort of dance around without trying to present a solid opinion simply because that wouldn't be fair.

Take for example the business of clearing Treasury and Agency trades.  Haven't thought about that in years, since the time when an entire group of banks were in the business--not because anybody made any real money doing it but because the guy on the next street corner was doing it and the though always was that somebody mighgt ask why weren't you and not doing so could imply some unknown problems.  I would like to think that the industry became more enlightened but I suspect that the reduction in the number of clearers has been the result of the reduction of the number of banks and before anyone looked up there were only two left; J.P.Morgan Chase and Bank of New York Mellon.  Back to sleep.

Then last week a friend asked what I thought about Morgan getting out of the business.  My answer was not only hadn't I thought about it I didn't even know about it.  Then I started thinking about it which is kinda hard since I don't know anything about the business but I do have some knowledge about that old friend of mine, liquidity, and it struck me that if we are down to one, what happens if BNYM has a bad day, or for that matter an employee of BNYM has a bad day and in the middle of the trading day settlement within this $13 TRILLION publicly held market for Treasuries alone goes tilt?  No big deal say you, just wait until the problem gets fixed.  Yeah, good answer, but remember that game I used to talk about, musical chairs?  These times are not like the good old days.  Risk managers tend to have more of a hair trigger and to be honest, you were never, ever REALLY sure; more of this business than people realized or would admit was based on faith and luck--with the occasional prayer thrown in just to be safe.  Far less so today.  One guy gets cold feet because his trade hasn't settled and starts beginning to off-set...well, we've seen that play before.  Liquidity which was always there suddenly is no where to be found.  One institution settling trillions?  After I finished thinking about it I was left wondering whether anybody else was doing the same thing.  Hopefully, someone who knew something about it.

Another thing to think about are money market funds.  You know, that the places where you rich guys park your unneeded cash that gets lent out on a short term basis to corporates, hedge funds, governments (through bonds) and all sorts of other users.  There was a time when the value of these funds never fell below a buck (whether they did or not).  Then in 2008, a couple "broke the buck."  Total panic.  Everything seized up to the point where Uncle Sam had to come in and guarantee the entire industry.  Not gonna happen again said Congress.  So in October we are looking at an entire new capital requirement for these funds.  Good you say?  Yeah, probably safer to be sure but the WSJ is about to report that half a trillion has come out of funds that lend to corporates and the new action is funds that, essentially, buy short term government notes.  Is a half trillion reduction in corporate liquidity a good thing?  Funny, every government around the world is flooding the marketplace with liquidity to "stimulate growth," but at the same time reducing liquidity through regulation.  Or are the Politicians simply saying, "Lend to me not to him."  As I said, I don't know much about this but I'm thinking about it a lot more.  Perhaps you shoud as well.  May I have this dance, Madame?

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