Thursday, June 22, 2017


The WSJ published a very interesting article concerning winners and losers in the bond market following Dodd/Frank.  Not surprisingly, it was determined that bigger is better.  No kidding, but the real tale is the switch in the nature of the market makers or perhaps a better phrase would be the participants in the market because market maker implies a very specific function.  I'm not sure the nature of the business remains the same and as I have written this could, through the lack of future liquidity, present multiple problems.  This is the real importance of the WSJ story.

We have gone over the importance of being able to move paper, in size, particularly during periods of market upset, and there is no need to replow that field again.  However, what has not been discussed is the very simple  delineation between banks and other financial corporation and it is almost as simple as Paul Volker's observation that, "Banks are different."  What's the difference between Citibank and a hedge fund or a private equity fund...or for that matter even an enormous funds manager such as Blackstone?  The association with the Federal Reserve.  These days the Fed doesn't like to point that out but in the end, it is the last refuge in a desperate situation, BUT to take advantage of what the Fed offers you have to be a bank.  Make a market?  That means you use your capital often when it inconvenient to so do.  What's the difference between capital and liquidity?  In certain conditions, not much.  At the end of it it comes down to the Fed and if you can't go there...well, you don't make a market which if the condition is enough widespread, exacerbates the problem.  So thanks, WSJ.  Between us we might fix this thing.  Of course we might need the Fed to own up to some basic truths out there in Realville.  That could really help.

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