AuthorTopic: Da Fed: Central Banking According to RE  (Read 40045 times)

Offline Surly1

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Re: Da Fed: Central Banking According to RE
« Reply #270 on: September 27, 2019, 04:55:12 AM »
Isn't the Fed's response just to start QE again. Just print as much fiat money out of thin air to buy all those treasuries that the government needs to sell to finance the exploding deficits? Just inflate the money supply to the moon? Is that what the market wants? And for all those people on Wall Street, do they ever see a problem in that? How does it crack and break? Don't all those Treasury bonds (that are the world's safest investment) someday/somehow become worthless electronic numbers?
AJ

How do we know that those bonds aren't ALREADY "worthless electronic numbers?" In every way that matters, those bonds are back by the full faith and credit of the Empire's nuclear arsenal.

“The old world is dying, and the New World struggles to be born: now is the time of monsters.”

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Re: Da Fed: Central Banking According to RE
« Reply #271 on: September 27, 2019, 09:00:19 AM »
So, RE, you are the finance wizkid. Explain to me a mere bio major/lawyer. I read all the above posts on the repo crisis. Isn't the Fed's response just to start QE again. Just print as much fiat money out of thin air to buy all those treasuries that the government needs to sell to finance the exploding deficits? Just inflate the money supply to the moon? Is that what the market wants? And for all those people on Wall Street, do they ever see a problem in that? How does it crack and break? Don't all those Treasury bonds (that are the world's safest investment) someday/somehow become worthless electronic numbers?
AJ

When Da Fed does QE, it doesn't just sprinkle free money around and get nothing in return for it.  They don't make unsecured loans, you have to trade good collateral for the freshly printed FRNs.  What is "good collateral"?  Loans made to credit-worthy customers.  But what happens when there aren't enough credit worthy customers out there to make loans to?  What happens when the collateral they do have is non-performing loans (NPLs)?

What happens is what the BoJ does, which is the CB buys the Bonds issued by Da Goobermint directly.  This finances Goobermint spending, but it doesn't make money for the banks, which are in the bizness of making loans to make money,  If banks aren't making money making loans, how do they make money?  By using the cash they do have speculating in equities.  But what happens when everybody is expecting a stock crash?  They all want to get out of stocks,  but they can't sell them without driving forward the crash.  So they try to take out more short term loans to cover the shortfall in expected earnings.  If everybody is doing this, you get a liquidity crisis, which is what they got at the moment.

Da Fed is TRYING to push more money into the system to ease this crisis, but apparently even $75B/month isn't enough to do the trick.  If they can't inject more cash into the system, you'll get a liquidity lock-up, which is very Bad Newz  for everybody, right down to J6P.  That's the kind of thing which makes all the ATMs go down at the same time.

RE
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🏦 Shadow banks could be playing role in repo-market drama, economist says
« Reply #272 on: September 27, 2019, 09:15:53 AM »
Right on cue...

RE

Shadow banks could be playing role in repo-market drama, economist says

Published: Sept 27, 2019 9:03 a.m. ET


Any behind-the-scenes trouble may become clearer at the end of the quarter
Author photo

By
Greg
Robb
Senior economics reporter
Author photo
Sunny
Oh
Bloomberg
Pedestrians walk past the New York Federal Reserve Bank building in lower Manhattan.

Pressure in money markets that has led the Federal Reserve to step in to provide short-term liquidity may be the result of financial troubles in the so-called shadow banking system, said Joseph LaVorgna, chief economist for the Americas, at Natixis.

LaVorgna, on Twitter, said the magnitude and persistence of the Fed’s aid to the repo market was troubling.

    The magnitude and persistence of this is troubling to me. https://t.co/nwPFeFUwlb
    — Joseph A. LaVorgna (@Lavorgnanomics) September 26, 2019

Asked for more details, LaVorgna on Thursday told MarketWatch that he thought some firms may have been caught on the wrong side of the “massive, violent sell-off” in the bond market earlier this month. Shadow banking refers to a range of non-bank credit-market participants, including hedge funds.

“There was a massive dislocation in the markets” this month if you look at momentum trading, said LaVorgna, who began his career at the New York Fed. In addition to a selloff that sent Treasury yields higher, a heavy rotation out of previously favored growth and momentum stocks in to value was also thought to have caused pain for traders.

Borrowers, including banks, securities firms and hedge funds, use the repo market to borrow cash over the short term in return for collateral, including securities such as U.S. Treasurys.

Last week, overnight repurchasing rates soared to three times their usual rate, pushing the effective fed funds rate briefly beyond its target range. This lending rate reflects how much investors and banks have to pay to borrow cash over a short period, in return for highly rated collateral like Treasurys.

The pressure in a key part of the U.S. financial system’s plumbing forced the New York Fed to step in on Sept. 17 and begin offering daily overnight repo operations. In its operations, the Fed lends funds in return for collateral with a small group of banks or securities dealers known as primary dealers, who, in turn, work as intermediaries between the Fed and other investors. The volatility sparked a search for explanations and prompted criticism of the New York Fed’s handling of the market.

When the market moves that violently there are always some entities that are caught offside, LaVorgna said, speculating that it’s possible “someone got caught on a trade and had to liquidate.” If so, the identities of those firms might become known after the end of the quarter, he said.

LaVorgna said he didn’t think the turmoil was tied to problems with the banking sector because the fed funds rate, which is the rate at which banks provide overnight loans to each other, didn’t spike.

Analysts have been divided about the root causes of the market turmoil. Some blame the Federal Reserve for being slow to react and letting its balance sheet shrink too far as its bond buying program begun after the 2008 financial crisis was slowly unwound . Critics said the Fed should have been aware that factors cited for the funding squeeze, including quarterly tax payments and Treasury auction settlements, could cause dislocations.

New York Fed President John Williams said his bank was investigating the recent market dynamics. The New York Fed has said it would continue to offer daily repo operations of at least $75 billion through Oct. 10 and has instituted other measures.

Market participants say the moves have brought some measure of calm back to the market.

“In the short-term, the Fed has worked it out. But there will need to be a longer-term solution. Increasing the balance sheet is one,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities, in an interview with MarketWatch.

In a Thursday blog post, Brian Sack of hedge fund D.E. Shaw, and Joseph Gagnon of the Peterson Institute for International Economics said one way to prevent another seizure in funding markets would be for the central bank to expand its portfolio of securities by $250 billion over the next two quarters. Sack is a former head of the New York Fed’s Markets Group, while Gagnon is a former Fed official.

They also urged the Fed to implement a standing fixed-rate repo facility and said the Fed should be explicit in its desire to control the repo rate rather than prioritizing the fed funds rate. They said the Fed should consider targeting the repo rate instead of the fed funds rate when setting policy.

Others have pointed the finger at post-crisis regulations stipulating banks carry ample reserves which in turn constrained their ability to lend out short-term funds to money markets and bring down overnight borrowing costs when they got out of hand.

Under those rules, U.S. lenders with more than $250 billion of assets have to keep highly liquid assets on their balance sheet in order to deal with cash outflows.

“In another time, this type of dislocation would have been something banks could have arbitraged away,” said Dave Leduc, head of Mellon’s actively managed fixed-income arm.

“Banks were unable to get involved to provide liquidity,” Leduc noted. “Has there been some unintended consequences in that the stricter regulatory environment where it’s creating dislocation problems in the market?” asked Leduc.

Ultimately, LaVorgna said he didn’t think the Fed bank was to blame.

Instead, he said it’s more likely to a “micro architectural” problem with the financial system. “There are some clogs in the financial plumbing,” he said. It is hard to know who is feeling pain now because the Fed’s daily moves to add liquidity to the system has the effect of masking where the problem lies, he said.
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Offline RE

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💰 Repo Madness - An Enormous 'Margin Call'
« Reply #273 on: September 27, 2019, 03:23:00 PM »
So, RE, you are the finance wizkid. Explain to me a mere bio major/lawyer. I read all the above posts on the repo crisis. Isn't the Fed's response just to start QE again. Just print as much fiat money out of thin air to buy all those treasuries that the government needs to sell to finance the exploding deficits? Just inflate the money supply to the moon? Is that what the market wants? And for all those people on Wall Street, do they ever see a problem in that? How does it crack and break? Don't all those Treasury bonds (that are the world's safest investment) someday/somehow become worthless electronic numbers?
AJ

Here's another explanation AJ.  More or less what I said, but with more detail.

Somebody big is calling in Derivatives on somebody else big who was on the wrong side of the trade.

Who was it?  Deutch Bank? JP Morgan?  Goldman?  The BoE?  The SNB? The BoJ? The PBoC?  No way to know that until "IT" happens.  If any of these monsters pulls a Lehman, TSHTF BIG TIME.

Even if it's only Soros going Tits Up, it will be a pretty big ripple.

RE

https://seekingalpha.com/article/4293875-repo-madness-enormous-margin-call

Repo Madness - An Enormous 'Margin Call'
Sep. 27, 2019 7:09 AM ET|
9 comments
|

Dave Kranzler
Long/short equity, Deep Value, special situations, contrarian
Investment Research Dynamics


On Wednesday, the Fed announced that it was increasing overnight repos to $100 billion and doubling the two-week term repo operations to $60 billion.

Typically, the repo rate should correlate tightly with the Fed Funds rate. But last Tuesday, it spiked up briefly to 10%.

Think about what happened as the start of a giant "margin call" on a global financial system that is likely reaching its limit on credit creation.

    "Central Banks are panicking... the whole system is on the verge of disappearing into a black hole."

    - Egon Von Greyerz on USAWatchdog.com

On Wednesday, after the overnight repo operation had $92 billion in demand for the $75 billion operations, the Fed announced that it was increasing overnight repos to $100 billion and doubling the two-week term repo operations to $60 billion. Well, that escalated quickly.

The rationalization is "end-of-quarter liquidity needs" by the banks, which have to increase reserves against assets (loans) or face taking earnings write-downs. But this dynamic occurs every quarter, and repo operations have not been required to keep the banking system from seizing up since QE was initiated.

Note that overnight repo operations were not necessary when the Fed flooded the banking system with QE funds. The banking system requires immediate liquidity for the first time since QE commenced. Why? Recall how you go bankrupt: first gradually, then suddenly.

Typically, the repo rate should correlate tightly with the Fed Funds rate. But last Tuesday, it spiked up briefly to 10%. The media and Wall Street analysts did a good job reporting that there was an obvious liquidity squeeze in the banking system but they did nothing to explain the underlying causes. Moreover, there's still $1.3 trillion remaining from QE sitting in the Fed's Excess Reserve Account, which means banks with cash have plenty of cash to lend overnight to banks which need money.

But the banks with cash were unwilling to lend that cash even on an overnight basis. So why did the Fed have to inject, by last Wednesday, $75 billion in liquidity into the banking system?

Think about what happened as the start of a giant "margin call" on a global financial system that is likely reaching its limit on credit creation. The enormous increase in derivatives magnifies the problem. One immediate contributing factor may been losses connected with the cliff-dive in the price of the 10-year Treasury bond. Hedge funds loaded up on Treasuries chasing the momentum higher using margin provided by the banks (prime brokerage loan agreements). The 10-year Treasury price dropped $4 in eight trading days - i.e., the 10-year benchmark yield jumped 55 basis points.

This may not sound like a lot in stock price terms, but losses on speculative Treasury bond and Treasury bond futures positions likely ran into the billions. Several entities lost a lot of money during that rate rise, which means there had to have been some margin calls and derivatives blow-ups which required cash collateral or faced liquidation. Banks themselves carry large Treasury positions, which fell tens of millions of dollars in value over that 8-day period.

In addition to losses on Treasury bonds, I'm certain there's been a general erosion of bank assets - primarily debt-based securities and loans, which have led to enormous losses when Credit Default Swap derivatives are factored into the mix. In effect, there likely was a large systemic margin call which has created a cash and collateral squeeze in the banking system with the primary dealers, which is why the overnight funding mechanism required a cash injection by the Fed eight days in a row now. This is similar to what happened in 2008.

For now, the Fed is going to plug the funding gap at the banks with these repo operations. But my bet is that the problem is escalating rapidly. It is much bigger in aggregate globally than anyone can know, just like in 2008. In all probability, the Fed has no clue how big the potential problem is, and these repo operations will eventually morph into outright money printing.
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💰 The repo crisis is a warning signal in the financial system
« Reply #274 on: September 28, 2019, 12:38:23 AM »
Bets being accepted now on who is going to BLOW first?  ???   :icon_scratch:

I will put my money on Deutche Bank.

RE

https://www.ft.com/content/1735cc1e-e057-11e9-b112-9624ec9edc59

The repo crisis is a warning signal in the financial system
Banks need much higher level of reserves to feel secure than pre-crisis


John Williams, president of the Federal Reserve Bank of San Francisco, listens during a Hutchins Center on Fiscal and Monetary Policy panel discussion at the Brookings Institution in Washington, D.C., U.S., on Monday, Jan. 8, 2018. The event was entitled Should the Fed Stick with the 2 Percent Inflation Target or Rethink It. Photographer: Andrew Harrer/Bloomberg

Some market participants ask whether John Williams, director of the NY Fed, has the experience to handle the repo crisis © Bloomberg

When commentators want to describe the abstract world of finance they reach for water-based metaphors: capital “flows” around the system, while assets face selling “pressure”. Last week, the cost of short-term funding in the overnight money market surged upwards. Many have wrongly dismissed this rise as merely a technical issue with the market “plumbing”.

Turmoil in the repo market raises concerns about the operations of the dollar funding market and the US banking system. Almost two weeks after the episode, normality has just about returned to the money markets, the wellspring of the world’s financial system. Dodgy plumbing can quickly undermine the whole foundation.

The repo market allows banks and investors to exchange high-quality assets, usually US government bonds, for short-term cash funding. Borrowers then repurchase the assets for a slightly higher price at an agreed date, usually the next day, creating what is in effect a short-term loan. The market lets banks meet their short-term funding needs and is essential for the smooth operation of the dollar-based financial system. It seized up during the financial crisis in 2008.

No one fully understands exactly why the market froze suddenly last week. Many explanations centre on a sharp increase in demand for liquidity partly in order to meet corporation tax payments and the US Treasury department increasing its own cash pile in order to fund spending.

Others point to an increasing concentration of excess bank reserves in the hands of just a few players while the Federal Reserve tries to shrink its balance sheet after a decade of extraordinary monetary policy. Just four banks, JPMorgan Chase, Bank of America, Wells Fargo and Citigroup, have much of the excess dollar bank reserves.

The New York Federal Reserve, the branch of the central bank that takes much of the responsibility for the functioning of the US financial system, stepped in to provide more cash to the market the day after the spike. It also held a two-week repo auction this week to help alleviate funding pressure over the end of the quarter, when banks sometimes step away from short-term lending. Yet many in the market suggest the episode exposed deficiencies in the NY Fed’s ability to act as a steward of the financial system.

It comes at an unfortunate time for John Williams, director of the NY Fed, who has had to recently reorganise the markets section of the central bank. Simon Potter, head of the NY Fed’s markets group with 21 years experience, recently left the team along with Richard Dzina, the head of the financial services group. Some market participants ask whether Mr Williams, an economist by background, has the necessary experience to handle the crisis.

Others suggest it shows a more fundamental problem with the banking system. Interest rates on offer in the repo market touched 10 per cent during last week’s upheavals. But this was not enough to tempt lenders to increase supply, despite excess reserves only earning 1.8 per cent when deposited at the Federal Reserve. That reflects that bankers now see a greater need to have cash on hand to meet the regulatory requirements imposed on them since the financial crisis.

This all means the funding system will be more prone to these kind of rises than in the past and banks will have less capacity to act as a shock absorber. Instead, the Fed may find it needs to resume some form of asset purchases far earlier than it might feel comfortable with in order to keep lending flowing. Central banks need to get used to the new normal.
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Offline AJ

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Re: Da Fed: Central Banking According to RE
« Reply #275 on: September 28, 2019, 02:40:50 AM »
All very interesting. Thanks for the explanations RE! I kinda know now how the repo market is supposed to work. However, it seems that none of these "players" really know what they are doing except coming up with ad hoc explanations for what they think happens when repo funding interest dramatically rises. Guess I'll just have to wait along with everyone else to see if this blows up the financial system.
AJ
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Re: Da Fed: Central Banking According to RE
« Reply #276 on: September 28, 2019, 03:32:47 AM »
All very interesting. Thanks for the explanations RE! I kinda know now how the repo market is supposed to work. However, it seems that none of these "players" really know what they are doing except coming up with ad hoc explanations for what they think happens when repo funding interest dramatically rises. Guess I'll just have to wait along with everyone else to see if this blows up the financial system.
AJ

It is as the saying goes "uncharted territory".  ::)

Nobody even knows the total value of the derivatives, and they don't know how it will net out.  It's  very big pile of notional money without a real good accounting of it.  A Mystery wrapped in an Enigma.

I do think somebody quite large is getting a run.  I can't see another reason for a liquidity lockup of this magnitude.  It has to be a big player.

WTF IS IT!?!?!?!?!

RE
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Central Banking According to Q Anon
« Reply #277 on: September 28, 2019, 11:34:09 AM »
So, RE, you are the finance wizkid. Explain to me a mere bio major/lawyer. I read all the above posts on the repo crisis. Isn't the Fed's response just to start QE again. Just print as much fiat money out of thin air to buy all those treasuries that the government needs to sell to finance the exploding deficits? Just inflate the money supply to the moon? Is that what the market wants? And for all those people on Wall Street, do they ever see a problem in that? How does it crack and break? Don't all those Treasury bonds (that are the world's safest investment) someday/somehow become worthless electronic numbers?
AJ

When Da Fed does QE, it doesn't just sprinkle free money around and get nothing in return for it.  They don't make unsecured loans, you have to trade good collateral for the freshly printed FRNs.  What is "good collateral"?  Loans made to credit-worthy customers.  But what happens when there aren't enough credit worthy customers out there to make loans to?  What happens when the collateral they do have is non-performing loans (NPLs)?

What happens is what the BoJ does, which is the CB buys the Bonds issued by Da Goobermint directly.  This finances Goobermint spending, but it doesn't make money for the banks, which are in the bizness of making loans to make money,  If banks aren't making money making loans, how do they make money?  By using the cash they do have speculating in equities.  But what happens when everybody is expecting a stock crash?  They all want to get out of stocks,  but they can't sell them without driving forward the crash.  So they try to take out more short term loans to cover the shortfall in expected earnings.  If everybody is doing this, you get a liquidity crisis, which is what they got at the moment.

Da Fed is TRYING to push more money into the system to ease this crisis, but apparently even $75B/month isn't enough to do the trick.  If they can't inject more cash into the system, you'll get a liquidity lock-up, which is very Bad Newz  for everybody, right down to J6P.  That's the kind of thing which makes all the ATMs go down at the same time.

RE

I have it on good A-U-T-H-O-R-A-T-A-Y the the ATMs will only go down for 4 days.  Then a new system already to go is put into place and ATMs start working again.

I'm in Crispy-Cream getting a chocolate long john and 16 oz coffee.  Two blocks from work on my way in.  Next to the doughnut display case.

'Sir could I bother you for a moment.

A man hands me a card, the first line says:

DID JEFFERY EPSTEIN PISS YOU OFF?

I hand it back but say something pleasant so the convo begins.

9-11 radiation poisoning in New York.  Small tactical nukes.  It goes on from there.  I've paid for my doughnut and coffee.  Scanning my phone for the rewards points I finish at the counter and move to the door.  My new friend plays his part well but out of the blue he fucks up.

'Keith there won't be a collapse.  The ATMs will go down and everything gets frozen for four days.  After that there is a plan.

Who said anything about a collapse?  Not me.  Ooops.

The deep state is practicing like we all are; in the theatre of real life.  Consequently such mistakes and growing pains are to be expected.  A woman approaches the door with children.  I take advantage opening the door for her.  She thanks me.  I make my get-away saying something polite.  I escape only by taking his card.

On the card is a website.  I go to the conspiracy filled website with one aim in mind.  To figure out if it is the rant of a crazy person or flypaper.  My conclusion, too much detail, all the bases are covered.  This is not the work of a crazy man or even two or three.  This is flypaper, total flypaper.  Throw anything at the wall hoping something like Dancing to the image of Shiva at CERN will stick and give me a hard on.

I'll believe in conspiracies when they give me back my hood ornament that they stole when I was hauling your ass to the airport.  But the take away:

Exclusive news from the US military.  The ATMs only go down for 4 days.

And if one website does not reach out to discredit my K-Dog efforts they have two others on the card to send me to.  The back of the card I was given talks about adreochrome.  I know enough about that not to want to know anything more.  The only thing missing in this drama is MONEY.  That is a hint and I wish the neighbors would stop irradiating my room with microwave radiation.  It is getting me agitated.
« Last Edit: September 28, 2019, 12:02:29 PM by K-Dog »
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Offline RE

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Re: Central Banking According to Q Anon
« Reply #278 on: September 28, 2019, 01:53:20 PM »
That is a hint and I wish the neighbors would stop irradiating my room with microwave radiation.  It is getting me agitated.

You need to get some tinfoil pajamas.



RE
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Offline RE

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Max agrees with me.  It's probably an EU bank, probably Deutche Bank.  He's also a Deflationista.  :icon_sunny:

RE

<a href="http://www.youtube.com/v/yz2PFN-pmHw" target="_blank" class="new_win">http://www.youtube.com/v/yz2PFN-pmHw</a>
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Re: Da Fed: Central Banking According to RE
« Reply #280 on: September 29, 2019, 03:22:22 AM »
Thanks again RE. This was a good video about repo (until he lost me on bitcoin). The question becomes is a bankruptcy of Deutsche Bank going to bring down the entire dollar fiat money system or just give us a GREAT depression OR the collapse of civilization?? Tell me oh wise one. :icon_scratch:
AJ
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🏦 Repos And Reverse Repos
« Reply #281 on: September 29, 2019, 03:30:47 AM »
https://seekingalpha.com/article/4294011-repos-reverse-repos

Repos And Reverse Repos
Sep. 28, 2019 3:01 PM ET|


David Kotok
Chief Investment Officer, Wealth Preservation, portfolio strategy
Cumberland Advisors
(1,366 followers)
Summary

The week of September 16 saw the Federal Reserve Bank of New York inject funds into the repo market in response to an unusual spike in rates that was above the initial target range for the federal funds rate of 2.0-2.25%.

It remains somewhat of a mystery as to why the sudden pressures have arisen in this market.

Some observers point to the need for about $70 billion in corporate tax payments that had to be made, which drew down funds to some extent from money market mutual funds, and to the issuance by the Treasury that same day of about $50 billion in securities that had to be financed.

But to get a better understanding of what was going on and why the repo market was hit requires us to get into the weeds a bit in terms of the background and structure of that market and to understand who the main participants are before further exploring the possible causes of the problem.

By Robert Eisenbeis

The week of September 16 saw the Federal Reserve Bank of New York inject funds into the repo market in response to an unusual spike in rates that was above the initial target range for the federal funds rate of 2.0-2.25%. (The target rate was lowered to 1.75-2.00% after the close of the FOMC's meeting on Wednesday, September 18.) The repo rate, which is usually closely linked to the federal funds rate, spiked to levels close to 10% on Monday that week, causing a squeeze on broker-dealers that finance their portfolios of Treasury and agency securities in the repo market.

On Tuesday, September 17, the Fed provided about $52 billion in funds to primary dealers (broker-dealers who regularly act as counterparties to the Fed in its open-market transactions), followed by $75 billion or more each subsequent day through September 25 and declining to $71 billion on September 27.[2] In each case, the Fed offered to buy Treasuries and MBS overnight from primary dealers in return for funds.

It remains somewhat of a mystery as to why the sudden pressures have arisen in this market. Some observers point to the need for about $70 billion in corporate tax payments that had to be made, which drew down funds to some extent from money market mutual funds, and to the issuance by the Treasury that same day of about $50 billion in securities that had to be financed.[3] Both of these transactions ran through the primary dealers and arguably may explain some of the rate spike, or at least its timing.

The current repo transactions entered into by the Fed can be thought of as an extension of what was the Primary Dealer Credit Facility, which the Fed established in March 2008 in response to the financial crisis and problems in the tri-party repo market. The Facility was closed at the beginning of February 2010.[4] As its name implies, the Primary Dealer Credit Facility was designed to support some of the important primary dealers, that is, specially designated counterparties who were authorized by the Federal Reserve Bank of New York to buy and sell securities with the Fed in connection with issuance and distribution of Treasury securities and the conduct of Federal Reserve daily open-market operations.[5] Later in October 2008, the Federal Reserve also created the Money Market Investor Funding Facility, designed to provide emergency liquidity to money market funds that were experiencing withdrawals and liquidity problems. That program was terminated on October 30, 2009.[6] The repo transactions last week put the Fed once again in the position of being a significant lender to primary dealers. One way to think of the Facility is that it is similar to the discount window for banks, but is provided not to banks but to broker-dealers.

At its December 16, 2015 meeting, the FOMC authorized the New York Fed to supplement its normal open-market desk operations by initiating what it called Over Night Reserve Repos as a supplemental (but supposedly temporary) tool to control overnight money market rates.[7] Authorized counterparties included certain banks with assets of more than $30 billion, GSEs, primary dealers, and money market mutual funds. This facility has been heavily used, until recently almost exclusively by money market funds, as the chart shows.

This history brings us to the last piece of institutional detail relevant to the current problems in the RRP market. First, in the normal operation of the Fed in the repo market, it sells securities overnight, and it calls that sale a reverse repo.[8] The Fed contracts with the buyer (i.e. counterparty) to buy back the securities the next day, as is the case with an overnight repo.[9] The Fed keeps the securities on its books, and on the liability side of its balance sheet it draws down the reserve account of the counterparty's bank and increases an account that it calls "reverse repurchase" agreements. There is no impact on the size of either the Fed's assets or its liabilities, just a change in liability composition. The same is not true when, as was the case last week, the Fed purchased securities from the primary dealers to address their funding problem. In that case, the Fed bought securities overnight and recorded the transaction as an increase in "repurchase agreements" on the asset side of its balance sheet, and it also increased bank reserves of the primary dealers' banks by the same amount on the liability side of its balance sheet. In this case, the transactions did increase the size of the Fed's balance sheet.

Another element of the transaction needs to be clarified. Of the four categories of approved participants in the Fed's repurchase program, only banks are permitted to hold deposits at the Fed and to receive interest on those funds. GSEs are permitted to hold deposits at the Fed, but they cannot receive interest on those deposits. Neither the primary dealers nor money market funds can hold deposits at the Fed, so if they need funds or are experiencing liquidity problems, they turn to the Fed through the repurchase market and transact through primary dealers. Most of the primary dealers are broker-dealers and are affiliated with a bank or bank holding company. US law limits bank lending to subsidiaries or affiliates, essentially precluding a bank from borrowing funds at the discount window and lending those funds to its securities affiliate in times of stress. It also seems that banks are often reluctant to lend to the securities affiliates of other banks or bank holding companies. This may be one possible source of the recent stress in the market, especially if money market funds were liquidating securities holdings through the primary dealers.

Against this background, what do we now know about what might have happened to cause the spike in the repo rate? Simple supply and demand theory implies that when a rate such as the repo rate spikes, there can be three possible explanations: The demand for funds has suddenly increased; the supply of available funds has suddenly dried up; or a combination of both.

Some of the most insightful thinking about developments in the repo market over the past few months has been provided by Credit Suisse's Zoltan Pozsar. He has been dissecting the evolution of the repo market for more than a year and was prescient in anticipating the kinds of problems that led to the Fed's recent injection of funds. His analysis is detailed and nuanced, so that it is not possible to cover all that he details here.[10] What follows is a distillation of some of his key points and insights. His analysis suggests that supply and demand factors for both Treasuries and for short-term funding have been important in laying the groundwork, across numerous domestic and international short-term funding markets, for current pressures in the repo market.

In August, Pozsar noted that by the end of this year, the Treasury was on pace to issue more than $800 billion in new debt and to increase its deposits at the Fed by $200 billion, while at the same time, he suggested, primary dealers had a limited supply of funds to accommodate such an influx before being impacted by required leverage ratios.[11] Furthermore, Pozsar detailed a number of factors, all tending to reduce market demand for securities, that help explain what has been a steady rise in primary dealers' inventories of securities from an estimated $75 billion in 2018 to almost $300 billion as of the second quarter of 2019.[12] He argues that non-dealer demand for Treasuries has been dampened due to several factors, including shrinkage of off-shore corporate holdings of Treasuries and the inversion of the yield curve, making Treasuries less desirable investments. Finally, it is also the case that foreign central bank usage of the Fed's reverse repo facility has added to the volume of securities in the overnight market. Foreign central banks have been buying securities overnight from the Fed in return for a cash balance that shows up on the Fed's balance sheet as a reverse repurchase agreement. Remember that such transactions reduce bank reserves (since foreign entities must transact through a bank with a reserve account) and increase recorded reverse repurchase agreements, thus acting to sterilize about $290 billion of reserves that might otherwise be available in the market. All told, it is estimated that total demand for US Treasuries has shrunk by about $800 billion since 2018, which has bloated dealer inventories and increased the demand for overnight funding by the primary dealers. At the same time, collateral supply is up by about $1 trillion that also needs to be financed.[13]

Against this background, Pozsar also argues that there is in fact a hierarchy of both providers and users of both cash and securities in the repo market, depending upon whether or not they are members of the Fixed Income Clearing Corporation (FICC), who ultimately transact through the primary dealers.[14] Cash lenders would include money market mutual funds and hedge funds that are not members of the FICC and that transact in the repo market at slightly different rates than do FICC member institutions such as banks, some GSEs, and branches of foreign banks. Like the cash providers, there are also providers of collateral, some of which are members of the FICC and some not, and which consist of essentially the same types of institutions as the cash providers; and they too face different interest rates. The important point is that this hierarchy means that there is not one clearing rate in the repo market, but a sequence of rates depending upon whether FICC institutions and non-FICC members are trading with like member institutions or with non-member institutions. Shortages and surpluses of both cash and securities can exist in any of these markets, which can result in rate spikes and liquidity problems.

One last point. It is being reported that the Fed is considering increasing the size of its balance sheet so as to inject more reserves into the banking system as a way to deal with the problem in the ON RRP market. Presumably, this would endow banks with additional excess reserves, possibly making them more willing to lend to the primary dealers. Indeed, if the problems are in institutions that are not permitted to hold reserves at the Fed, then the private market must rely on banks' willingness to lend reserves to address the needs for funds by either the primary dealers or money market funds.

The problem with proposals to increase the size of the balance sheet is that there is no guarantee that an increased amount of bank reserves would find their way into the various segments of the repo market where needed. Just increasing bank reserves does not guarantee that lending will take place. Moreover, there is little to guide the Fed on how much of an expansion of its balance sheet would be needed to ensure that the problem would not arise again.

One possible reform that would clearly address the problem would be to grant the primary dealers access to a permanent discount-window repo facility.[15] A downside is that this would put the Fed in the position of lending to many subsidiaries of foreign institutions; plus, it doesn't address the issue that the Fed's foreign RP facility is uncapped and acts to reduce bank reserves as the facility expands. Another option would be to modify both its regular open market operations and the ON RRP facility so as to engage in continuous transactions during the day. This move would eliminate the need to try to guess at the beginning of the day what market funding needs might be by day's end and ensure that rates were within the target range.[16]

[1] The following discussion relies heavily upon institutional details and insights provided by James McAndrews, who was formerly head of the Open Market Desk at the Federal Reserve Bank of New York.

[2] Some of the transactions were overnight and some were term transactions. For details see: https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000

[3] See https://www.marketwatch.com/story/wall-street-raises-questions-about-feds-late-action-on-funding-squeeze-2019-09-17.

[4] See https://www.newyorkfed.org/markets/pdcf.html.

[5] Primary dealers were also obligated to participate in Treasury auctions, whether they wanted to or not.

[6] See https://www.federalreserve.gov/regreform/reform-mmiff.htm.

[7] See FOMC transcript https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20151216.pdf.

[8] The Fed's terminology is a bit skewed, since the sale of a security for repurchase is technically a repo; but the Fed describes the transaction from the perspective of the counterparty, who technically is engaging in a reverse repurchase agreement.

[9] Term repos are also done from time to time.

[10] Indeed, to get the full picture, the reader is urged to look at Pozsar's work.

[11] See Zoltan Pozsar, "The Revenge of the Plumbing," Credit Suisse Economics, Global Money Notes #23, August 12, 2019.

[12] Pozsar goes on to provide a lot of detailed analysis of how these factors have impacted spreads and trading.

[13] See Zoltan Pozsar, "Sagittarius A*," Credit Suisse Economics, Global Money Notes #24, August 21, 2019.

[14] See Zoltan Pozsar, "Design Options for an o/n Repo Facility," Credit Suisse Economics, Global Money Notes #25, September 9, 2019.

[15] See Zoltan Pozsar, "Design Options for an o/n Repo Facility," Credit Suisse Economics, Global Money Notes #25, September 9, 2019.

[16] This commentary may be reproduced or distributed without requiring permission.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Offline RE

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Re: Da Fed: Central Banking According to RE
« Reply #282 on: September 29, 2019, 03:55:46 AM »
Thanks again RE. This was a good video about repo (until he lost me on bitcoin). The question becomes is a bankruptcy of Deutsche Bank going to bring down the entire dollar fiat money system or just give us a GREAT depression OR the collapse of civilization?? Tell me oh wise one. :icon_scratch:
AJ

That is really on the outside limits of Nostradamus prognostication.  I will do a reach on this, but don't get on my case if I don't have it precisely correct.  I'm not even sure yet that it's Deutche Bank that is getting the run yet.  It might actually be a run on multiple banks.

However, let us look at the case where it is JUST D-Bank getting hit on here.  DB is VERY big, with counter-party relationships with all the other TBTF Banks, aka JP Morgan Chase, Goldman etc.  So if DB goes BK, they're gonna carve up whatever assets they have (not too many I am sure) and divvy them up in some way to keep the counter parties from ALSO going BK.  This is what as known as Financial Cross Contagion.  See David Korowicz for more detail on this phenomenon.

Now, the issue here is that whatever is left in the vault of DB isn't NEAR enough to cover the derivatives they wrote, essentially insurance policies on BKs of various institutions and goobermints.  To make up the shortfall here, SOMEBODY (Da Fed, Da ECB etc) will have to step in and cover those losses, elsewise the capital structure of those banks also collapses.  Then you have your "Great Depression" scenario.  See the collapse of Credite Anstaldt (Austrian Bank) prior to the GD to understand how this works.

I *thiiink* the "smartest guys in the room" are quite aware of this, hell fucking Ben Bernanke made his career on looking at this stuff.  So I do not think they are unprepared for it entirely, but then again it's different now than the financial system in place when the GD Collapse of the banking system went down.  The amounts of notional money and complex financial instruments is much larger, and really NOBODY knows how big they actually are.

So to try and answer your question, it's a fucking SHIT STORM waiting to happen.  If it does cross over to the counter parties, then yes it is the absolute end of this monetary system, and HELL will follow.

BAnd I looked, and behold a pale horse: and his name that sat on him was Death, and Hell followed with him.


RE
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🏦 Why the next global financial crisis may dwarf the one in 2008
« Reply #283 on: September 29, 2019, 11:02:27 AM »
https://www.scmp.com/comment/opinion/article/3030442/why-next-global-financial-crisis-may-dwarf-one-2008

Why the next global financial crisis may dwarf the one in 2008

Opinion


Macroscope by Anthony Rowley
Why the next global financial crisis may dwarf the one in 2008

    Big risks today include the nonbank financial sector and high corporate debt. There are more ‘zombie companies’ now than at any time during the 2008 crisis, while huge dollar liabilities in banks outside the US and emerging market indebtedness add to the dangers

Why the next global financial crisis may dwarf the one in 2008

    Big risks today include the nonbank financial sector and high corporate debt. There are more ‘zombie companies’ now than at any time during the 2008 crisis, while huge dollar liabilities in banks outside the US and emerging market indebtedness add to the dangers

Anthony Rowley

Anthony Rowley 

Published: 11:00pm, 29 Sep, 2019

Updated: 11:21pm, 29 Sep, 2019

Look to US, not China for 2019 financial crisis. Here’s why

Since the 2008 crisis, the global non-financial corporate sector has stepped up its borrowing sharply, boosting outstanding debt to US$73 trillion (or 92 per cent of world gross domestic product), according to the Institute of International Finance. At the same time, the quality of the corporate bond market has deteriorated.

If a recession comes or when interest rates rise, a multitude of such companies will be severely distressed and face bankruptcy. If enough fail, that will constitute a major shock to the financial system, similar to the US savings and loans crisis in the 1980s, Tran believes.
The Federal Reserve Bank of New York has been injecting money into the financial system to calm stress in the overnight lending market. The turmoil raises fears of how and where the next big financial crisis may strike. Photo: AFP
The Federal Reserve Bank of New York has been injecting money into the financial system to calm stress in the overnight lending market. The turmoil raises fears of how and where the next big financial crisis may strike. Photo: AFP
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There are far more “zombie companies” now than at the time during the global financial crisis, partly because central banks have accumulated US$19.4 trillion of financial assets, including corporate securities. This has unleashed what Tran calls a “powerful search for yield”, leading to excessive risk-taking and overvaluation of securities – particularly corporate debt.

It has kept zombie companies (those not profitable enough to pay interest) alive, and the dynamism of the economy has been sapped.

In an already illiquid corporate bond market, a sharp downward price movement from current historically high levels and in disorderly market conditions will have significant contagion effects by intensifying investor risk aversion, Tran says.

Threats to the financial system do not end there. Banks outside the US have built up dollar liabilities estimated at up to US$15 trillion, according to the Bank for International Settlements. They have relied on short-term interbank and currency swap markets to fund dollar loans and are vulnerable to changes in market sentiment and risk appetite.

“When they run into funding distress, they don’t have recourse to a lender of last resort to provide emergency dollar liquidity on a sufficient scale,” Tran fears. “If a global financial crisis breaks out, huge dollar funding distress by non-US banks will put us in uncharted waters.”
How cash-rich corporations can save the world if recession hits

Again, the problems do not stop there. Emerging market indebtedness has reached a record US$69 trillion, or 216 per cent of overall GDP, according to the Institute of International Finance. Borrowing by emerging market non-financial corporations has soared to US$30 trillion and China’s non-financial corporate debt has hit US$15.4 trillion.

Against this, many emerging-market countries have accumulated foreign exchange reserves totalling around US$7.2 trillion since the 1997 Asian financial crisis, of which China accounts for about US$3 trillion. China thus seems well placed to provide emergency support in the event of any new crisis.

Even so, Chinese reserves and those available through arrangement, such as Asia’s Chiang Mai Initiative Multilateralised Agreement, are only capable of dealing with balance-of-payment crises of one or a small group of countries.

Of key importance are the currency swap agreements among major central banks, led by the US Fed. But as Tran says, “given the dysfunctional international political environment, it is unclear whether currency swaps on a sufficient scale can be counted on”.

It may be much more difficult to stabilise the next global liquidity crisis.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
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🏦 The Real Story Of The Repo Market Meltdown, And What It Means For Bitcoin
« Reply #284 on: September 30, 2019, 12:20:48 PM »
https://www.forbes.com/sites/caitlinlong/2019/09/25/the-real-story-of-the-repo-market-meltdown-and-what-it-means-for-bitcoin/#1e87cc227caa

39,764 views Sep 25, 2019, 02:55pm
The Real Story Of The Repo Market Meltdown, And What It Means For Bitcoin


Caitlin Long
Senior Contributor
Crypto & Blockchain
I bring you bitcoin/blockchain thru a 22-year Wall St. veteran's lens


    Last week the financial system ran out of cash.
    At a systemic level, the traditional financial system is as fragile as Bitcoin is anti-fragile.


Last week the financial system ran out of cash. It was a modern version of a bank run, and it’s not over yet. Stepping back, it reveals two big things about financial markets: first, US Treasuries are not truly “risk-free” assets, as most consider them to be, and second, big banks are significantly undercapitalized. The event doesn’t mean another financial meltdown is necessarily imminent—just that the risk of one is heightened—since the brush fire can be doused either by the Fed, or by the banks raising more equity capital. However, it provides a “teachable moment” regarding systemic fragility and anti-fragility. 

What’s Happening, In Plain English?
Somebody—probably a big bank—needs cash so badly that it has been willing to pay a shockingly high cost to obtain it. That’s the layman’s explanation of what’s happening. Interest rates have betrayed common sense—interest rates in the repo market should be lower than rates in unsecured markets, for example, because repos are secured by assets and thus supposedly lower-risk. But repo rates spiked way above unsecured lending rates last week, even for “risk-free” collateral such as US Treasuries. 

But US Treasuries are not risk-free. Far from it. (By this, I’m not referring to the US potentially defaulting on its debt obligations. Rather, I’m referring to the practice in the repo market that allows more people to believe they own US Treasuries than actually do. It’s called “rehypothecation.”) Why was someone willing to borrow cash at a
Today In: Money


10%


interest rate last Tuesday, in exchange for pledging US Treasury collateral that yields only 2% or less? That trade lost someone a whopping 8% (annualized) overnight, but presumably the trade allowed the bank to stay in business for another day. As risk premiums go, 8% is shockingly high—for a supposedly risk-free asset!
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On the flip side, the better question is why banks weren’t willing to lend against “risk-free” collateral for an 8% “risk-free” gain? Banks are supposedly healthy and flush with cash, right? So why aren’t banks falling over themselves to rake in such easy, “risk-free” profits? Shockingly, the Fed admitted to asking itself this same question, as revealed in an extraordinary interview on Friday with New York Fed President John Williams in the


Financial Times


. The Fed has a theory about why. Many analysts do too. But almost no one is talking about the elephant in the room. 

The Elephant In The Room
For every US Treasury security outstanding, roughly


three parties


believe they own it. That’s right. Multiple parties report that they own the


very same asset


, when only one of them truly does. To wit, the IMF has estimated that the same collateral was


reused 2.2 times


in 2018, which means both the original owner plus 2.2 subsequent re-users believe they own the same collateral (often a US Treasury security). This is why US Treasuries aren’t risk-free—they’re the most rehypothecated asset in financial markets, and the big banks know this. Auditors can’t catch this because GAAP accounting standards obfuscate it, as I’ll explain later. What it all means is that, while each bank’s financial statements show the bank is solvent, the financial system as a whole isn’t. And no one really knows how much double-, triple-, quadruple-, etc. counting of US Treasuries takes place. US Treasuries are the core asset used by every financial institution to satisfy its capital and liquidity requirements—which means that no one really knows how big the hole is at a system-wide level. This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs—no one knows how many players will be without a chair until the music stops. Every player knows there aren’t enough chairs. Everyone knows someone will eventually lose. Financial regulators can’t publicly admit to this, but big banks know it’s true—and that’s why they hunker down (and stop lending) when they sense one of their kin is in trouble. They recognize that what appears to be an 8% risk-free arbitrage is anything but risk-free. Most financial regulators baffle us with jargon when they discuss this issue, making it barely intelligible to regular folks (cloaking it in such terms as “clogged transmission mechanisms,” “length of collateral chains”). The closest I’ve heard a financial regulator speak publicly of this is former CFTC Chairman Chris Giancarlo, to his credit, when he answered a question after a 2016 speech :

    “At the heart of the financial crisis, perhaps the most critical element was the lack of visibility into the counterparty credit exposure of one major financial institution to another. Probably the most glaring omission that needed to be addressed was that lack of visibility, and here we are in 2016 and we still don’t have it.”

This is why the FT’s interview with Williams was so extraordinary. It’s as close as a regulator will come to admitting the reality that the system doesn’t work the way most of us think it does and that the Fed may not even understand critical things about it. Specifically, the Fed’s focus on the fed funds market is misplaced because the real action is in the much bigger, much more global repo market; the Fed shouldn’t have allowed America’s big banks to pay dividends or buy back stock when they’re so capital-constrained that they can’t even pick up an 8% “risk-free” arbitrage; the Fed’s proclamation that “the financial system remains resilient,” when it released the results of the most recent


bank stress tests


in June 2019, strains credulity; a


staggering amount


of US dollar liabilities have been issued offshore in recent decades and the Fed not only doesn’t control them but can’t measure them with any degree of accuracy; and banks’ financial statements don’t accurately reflect their financial health. No one really knows how solvent (insolvent?) the financial system is.   Auditors can’t help here, and the accounting profession bears some of the blame for this problem. In June 2014, FASB updated


the US GAAP accounting rules for repos


. Here’s what the books of three parties show when a transferee (Party A) sells pledged collateral to a third party (Party C):

    Party A owns a particular US Treasury Bond, showing an asset of $100.
    Party B borrows it, showing a liability of $100 ($100 of securities sold, not yet purchased).
    Party C shows an asset of $100.

If you add up the positions of all parties, economically there’s no problem because the net of the two longs and one short position add up to $100. The problem arises when you aggregate the three US GAAP financial statements. Both Party A and Party C report that they own the same asset (!) The balance sheets balance because Party B records a liability, so auditors don’t catch the problem. When that same bond is reused again and again and again in similar transactions, the magnitude of double counting within the financial system builds in a manner that no one can accurately measure.  For years, IMF economist Dr. Manmohan Singh has done terrific work estimating it (see examples

). Singh has been recommending for years that regulators’ financial stability assessments of big banks be adjusted to back out “pledged collateral, or the associated reuse of such assets.” Financial regulators should have followed his advice years ago! What does this mean for markets in the short-term? No one knows, but I doubt this is “the big one.” Sure, the repo market is flashing red sirens. But the run on repo can be stalled in one of two ways: (1) banks raise new equity capital, or (2) the Fed injects more dollars into the system. Yes, it’s true that a run in the repo market is serious, since the big banks are still overly reliant on it and one dropped ball by the Fed could quickly turn the brush fire into an inferno. But, as usual, the Fed will almost certainly do what it always does—stem the run by injecting cash into the system in various ways, thereby socializing losses among all US dollar holders. 

A Teachable Moment
If this topic makes you uncomfortable, it should. It made me uncomfortable when I first realized all of this, which for me happened during the financial crisis while I was working on Wall Street and took a deep dive into why the crisis was happening. The financial system is fragile. It’s unstable. It always has been. What started in the repo market last week isn’t new—it’s actually the


fourth such episode


since 2008.

At a systemic level, the traditional financial system is as fragile as Bitcoin is anti-fragile.
An anti-fragile system is one that becomes stronger and more resilient as a result of shocks, not weaker. This describes Bitcoin, whose network security grows as the


system’s processing power


grows.  Here I distinguish between price volatility and systemic volatility. Bitcoin’s price is highly volatile, but as a system it is more stable. In stark contrast to the traditional financial system, Bitcoin is not a debt-based system that periodically experiences bank run-like instability. In this regard, Bitcoin is an insurance policy against financial market instability. Bitcoin is no one’s IOU. It has no lender of last resort because it doesn’t need one.  For me, Bitcoin is empowering because it provides a choice


Caitlin Long

I’m a 22-year Wall Street veteran who has been active in bitcoin since 2012, and whose passion is a fair and stable financial system. I saw inaccuracies in Wall Street’s...
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