Friday, 17 December 2010 09:29

Continuing With The Revelation of The Fed's Stealth Bank Bailout (TARP 2.0), We Present Our Analysis Of The Use And Abuse Of The Primarily Dealer Credit Facility

Primarily Dealer Credit Facility

Note: Paying subscribers may download the fully scrubbed model containing all of the date output by the Fed regarding the PDCF as an Excel pivot table here, Primarily Dealer Credit Facility Analysis. Those who are interested in subscribing to our research should click here.

Yesterday, I illustrated how the Fed buried TARP 2.0 amongst a spreadsheet dump of over 70,000 trades and what amounted to probably a million cells of spreadsheet data distributed among a plethora files, see Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!. Today, we will review another one of those files, dealing with the lending program that the Fed instituted for its Primary Dealer banks.

The Primary Dealer Credit Facility (PDCF) was created in March 2008 as an overnight loan facility that provided funding to primary dealers in exchange for a specified range of eligible collateral. The PDCF was intended to foster the functioning of financial markets more generally. The facility expired on February 1, 2010. Analysis of the Primary Dealer Credit Facility data provided by the Fed indicates appalling facts.

1.      A total $8,959bn was loaned to financial institutions (incl roll over) with a weighted average interest rate of 1.53%. The total collateral against this $8,959bn of loan was $9,665bn, a mere 7.88% overcollateralization in a time of distress and rapidly deteriorating assets. The quality of the collateral posted for PDCF was pitiable. Only 1.4% of the collateral, on average, was traditional collateral posted in form of U.S. Treasury or Agency Debt while corporate securities topped the list with 24% followed by equity at 22% and municipal bond at 14%. Collateral as indicated by rating points to the fact that almost 65% of collateral was either junk or equities. Of the total collateral, 42% was virtually pure junk consisting of MBS / BBB / BB / B / CCC and unrated instruments and equities constituted 23% of collateral.  Of the total collateral, 15% was unrated, 7% MBS, 6% BBB, 4% BB, 4% B and 5% CCC or lower. Only 20% of collateral was AAA while 32% was rated A and above. Basically, the Fed simultaneously became the dumping ground for all of the trash that the nation’s big banks needed to get rid of and the world’s largest vulture fund, it’s just that it paid premium prices for the junk (see Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!).

2.      Citigroup was the biggest user of PDCF using almost 20% of PDCF followed by Merrill Lynch (17%), Morgan Stanley (15%) and Bear Sterns (11%). Of the 20 primary dealers, these four banks were the largest users of PDCF. Of these four, all either collapsed or were rescued save Morgan Stanley, and we issued stern warnings regarding Morgan’s predicament in February of 2008, see the riskiest bank on the Street.It appears we were definitely on to something!

3.      Barclays took out the single biggest loan ($48bn) under the PDCF in September 2008. Of the top 20 single largest users of PDCF in a day, Morgan Stanley topped the list appearing 16 times – again, referencing the riskiest bank on the Street!

4.      Goldman's 86% of  collateral consisted of junk securities including equities (48%) while JPM's 88% of collateral consisted of MBS / BBB / BB / B / CCC and unrated instruments, the worst of the lot followed by UBS (71%) and Citigroup London (70%). We have also warned on the Street and the media OVERESTIMATING the strength and health of JPM Morgan, see An Independent Look into JP Morgan.

5.      Citigroup tapped the facility 279 times followed by Merrill Lynch 226 times; Morgan Stanley 122 times and Bank of America 118 times.  The use of PDCF was highly concentrated with top 4 banks amongst them using almost 70% of the facility.

6.      During Sep 2008 alone, financial institutions collectively borrowed $1,192bn from the Primary Dealer Credit Facility.

Last modified on Friday, 17 December 2010 09:29


  • Comment Link Reggie Middleton Friday, 24 December 2010 10:53 posted by Reggie Middleton

    I didn't say there wouldn't be casualties, nor upheavals if the doo doo hits the fan, but the forecasts of armageddon are overblown and more fodder for the media than empirical analysis. Simply look back through our history for pointers on what to expect. The aftermath of the Great Depression was an extended deflationary period with low economic growth and crashed markets. This is what I foresee here, of the governments don't fix the market pricing mechanisms in lieu or trying to "Fix" market pricing.

    With that being said, for every financial entity that failed that actually had a sustainable business model, there will be at least on other (probably several smaller ones) to take its place.

  • Comment Link Josecito Thursday, 23 December 2010 12:58 posted by Josecito

    Thank you for your reply, Reggie given how busy you are. I understand your answer but the Great Depression of the 20's did have serious repercussions for society. Since the ratios and numbers this time around are astronomically greater than those that caused the Great Depression, don't you believe this would also bring about a resultant societal effect on orders of magnitude in relation to the causes?

    If A produced B, then a multiple of A (larger than A) would produce a multiple of B (larger than B). From what I've read here the counter party risk, the interconnectedness of the banking system and the trillions of derivative/debt exposure would cascade into an economic supernova.

    The cause being simply the inability to make good on payments and the inability of gov'ts and central banks to continue papering over the missed payments. As one institution failed to pay another this would reverberate throughout the entire system as it explodes into an economic supernova taking the whole system into a financial black hole.

    The numbers you present here are gargantuan, the counter party risk is gargantuan and the disaster similarly would be gargantuan.

  • Comment Link Reggie Middleton Wednesday, 22 December 2010 13:55 posted by Reggie Middleton

    I don't think there will ever be an all or nothing scenario. Anytime systems or institutions crash, others will pop up to take their place. The all or nothing mentality comes into play for the oligarchs who are in place who may be at risk of losing their perch. They may convince you that change will bring a Doomsday scenario, "or else", but the reality of the matter is that its just the economic and business cycle running its course. With that being said, there will be some creative destruction once two large countries default back to back or there is a derivatives meltdown.

  • Comment Link Josecito Monday, 20 December 2010 22:50 posted by Josecito

    I typed my question too quickly. I clumped you in with the others. I have read from others stating that trillions of dollars printed up would cause an economic collapse. For ex. one commentator I read frequently has stated that as the FED buys up treasuries more and more will sell into the FED purchases because they buy at a premium. Eventually, the FED would be forced to purchase the entire treasury float and as a result, this would cause a worldwide economic collapse.

    It is these type of all or nothing scenarios that I am curious about. Another example is how interconnected the banking system is. I've read your comments on how the failure of European banks to make payments to other banks in the Euro zone could trigger such an all or nothing event. Since the banks as you have stated have assets which are greater than the GDP of the countries they are domiciled in, this would trigger such an economic calamity.

    These are the types of events I am referencing. The trillions printed by the FED was one such trigger event which another commentator I read frequently states as end world scenario yet it didn't occur so I was curious what would be the tipping point. It truly threw me off at the ability of the FED to lend these massive amounts and not so much as a blip on the world markets. I was wondering why that was so.

  • Comment Link Reggie Middleton Monday, 20 December 2010 21:10 posted by Reggie Middleton

    I don't recall ever saying the world would come to an economic collapse if the fed printed heavily. As a matter of fact, I doubt I ever saidvthat it would be the end of anything besides zombie institutions that shouldn't have been in business in the first place. Banks and businesses have been going out of business for thousands of years, and despite that, the world has never ended. As a matter of fact, it is a must in order for stronger orders to take place.

  • Comment Link Josecito Monday, 20 December 2010 17:52 posted by Josecito

    Reggie, I post regularly here and as I have said in prior posts, your mode of thinking has actually helped me in school. I am currently a student at FIU.

    My question is that given that the FED has "lent" trillions to financial institutions, doesn't that mean that trillions of dollars conjured up out of thin air does not cause an IMMEDIATE effect on the dollar and the economy. The proof is in the pudding because the world did not come to an end economically speaking.

    The reason I ask is because many market pundits like yourself who offer alternative views on the economy have stated that such a move would cause the market to collapse. In this case from your article, it proves that it does not.

    In other words, trillions of dollars printed up by the FED for these types of purposes does not mean an economic collapse. If I extend this further, is it reasonable to assume that trillions of dollars printed out of thin by the FED for whatever reason would also not cause an economic collapse?

    As a result, what is the tipping point? Is it quadrillions or more???

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