After Breaking The Repo Market, JPMorgan Wants To Start Using The Fed's Discount Window Again
Back in 2013, JPMorgan's billionaire CEO reminded the general public why it hates bankers so much when in response to a simple question from bank analyst Mike Mayo, he answered "that's why I'm richer than you." Dimon's arrange aside, nothing in that exchange explained why Dimon is richer not only than Mayo, but 99.9999999% of the US population; the real reason why Dimon was richer than most is that every few years, JPMorgan, now America's biggest bank, gets a generous taxpayer or Fed bailout even as Dimon claims he never needed that bailout and would have been perfectly ok if unlike his failing peers, he was left to his own devices. He did that in 2008, and he did it again today.
As a reminder, back in 2008, JPMorgan - alongside most other major US commercial banks - received a $25 billion bailout as part of the TARP program (which was created by current Minneapolis Fed president Neil Kashkari). With the money, JPMorgan, whose fate was inexorably intertwined with that of its its weakest peer and counterparty, would have ceased to exist long ago. However, thanks to the Fed's generosity which not only did not shutter any bank but rewarded bank CEOs handsomely for blowing up the financial system in 2008, JPMorgan flourished, eventually becoming the largest US commercial bank, and made Jamie Dimon into a billionaire. Of course, being a master at revisionist history, Jamie has repeatedly claimed that he didn't need the $25BN TARP bailout, and that the bank would have been perfectly ok, but he only took the money under duress and to appear in solidarity with his far more insolvent peers.
That, of course, is a lie: facing tens of billions in exposure to counterparties that would have liquidated and dragged JPM down with them, Dimon's bank needed the money as much as anyone, because only if the entire financial system was rescued would every bank survive - there would not be piecemeal winners or survivors. The fact that he not only got the money, but then pretended he didn't need it - amazingly without any serious pushback - is why Jamie Dimon was "richer than you" for the past decade.
So fast forward 11 years, when on the 11th anniversary of Lehman's bankruptcy, the repo crisis shocked Wall Street when on Sept 16, 2019 it suddenly became apparent that despite $1.3 trillion in "excess" deposits, there was not enough liquidity in the system. A month later we were the first to piece together the puzzle, which confirmed that it was JPMorgan's drain of over $100 billion in repo and money market liquidity that was the precipitating factor for the repo market collapse. In other words, not only did JPMorgan precipitate the repocalypse (and it's not just us who make this claim, but other more "reputable" websites and news sources have since joined our clarion call), but with its actions it also triggered the launch of the repo liquidity flood and, a few weeks later, the Fed $60BN in T-Bill purchases, aka QE4. And yes, with JPMorgan stock surging as a result of JPMorgan once again holding the financial system hostage and forcing the Fed to inject hundreds of billions in liquidity, Jamie Dimon just became "even richer than you."
But wait, there's more, because after pretending it had nothing to do with the repo market fiasco or the resultant QE4, the same way it did not need a TARP bailout in 2008, JPMorgan - which singlehandedly forced the Fed's hand into injecting over $600BN in liquidity in the past 4 months - today said that it planned to borrow funds through the Federal Reserve’s emergency lending facility in "an exercise designed to break the stigma attached to a program that can scare investors and spark political attacks" according to Bloomberg.
Wait, what? Didn't JPM just get the benefit of hundreds of billions in repo and QE4 funding? Well, yes, it did... and for the bank's next trick, it plans to "virtue signal" its way to the funding mechanism that originally started the global financial crisis. Recall that it was speculation, innuendo (and fact) that first Bear and then Lehman, was using tens of billions in discount window liquidity, which helped precipitate a bear raid against the insolvent banks (and which allowed JPMorgan to acquire Bear Stearns for $10/share, up from $2 originally).
In a moment of brutal hypocrisy, Jennifer Piepszak, JPM’s CFO and the woman who certainly was involved in the bank's decision to drain repo markets and eventually force the Fed to inject hundreds of billions in repo and QE4 funds, said Tuesday the bank would borrow from the so-called discount window from time to time this year and had discussed the plan with regulators.
“We think this is an important step for us to take to break the stigma here,” Piepszak, who is also "richer than you", said during the firm’s investor day in New York, without even a trace of self-referential humor from the bank that has now made repo market access the next big "stigma." Because while nobody actually cares about the Fed's tiny discount window which hasn't been used in over a decade, not a single bank will admit that it is one of the dozens of dealers that submit daily (or term) collateral to the Fed in exchange for emergency liquidity.
As a reminder, the Fed’s discount window was meant to provide emergency liquidity to banks that otherwise have healthy balance sheets; however after QE1, QE2, QE3 and now QE4 as well as the restart of repo, the discount window fell into disuse as there were far bigger and far more efficient ways to inject liquidity into the system. As a further reminder, in a cash crunch, banks could pledge collateral to the Fed's discount window in return for cash. Well, they can do the same now... only it's called repo!
Meanwhile, when banks still did use the discount window, they become increasingly reluctant to use it because of the reaction it would provoke among investors, who feared it reveals a more serious problem - after all why would a bank need emergency liquidity if it wasn't in dire strats - and among politicians keen to attack taxpayer-funded bank bailouts.
In short, the hypocrisy of JPMorgan truly knows no bounds: after making a mockery of the 2008 bailout, the bank which acquired one of its top peers which imploded after using the discount window, is now thriving thanks to launching QE4 and repo liquidity injections, yet in doing so has shifted the stigma away from the discount window, or any other Fed funding vehicle, and to the Fed's repo operations.
As Bloomberg notes, Piepszak's remarks come less than three weeks after Randal Quarles, the Federal Reserve’s vice chairman for banking supervision, spoke of the need to make it easier for banks to access emergency lending from the Fed.
"The discount window is meant to be used by healthy banks when it is needed,” Quarles said in a Feb. 6 speech. “While there has long been discussion about how the discount window is ‘broken’ because of stigma about using it, we know it is still an important part of firms’ contingency planning and preparations."
Quarles also discussed in his speech how improving access to the discount window could also help enhance money-market liquidity by reducing the demand among banks to hold excess reserves parked at the Fed. That demand contributed to a shortfall of lending by banks into overnight funding markets in September, forcing the Fed to boost reserves with purchases of Treasury bills. By making Treasuries more substitutable for reserves while still meeting liquidity requirements, the thinking goes, Quarles’ plan might encourage banks to hold more Treasuries and fewer reserves. Alternatively, it would merely reincarnate the same stigma that ended the discount window use in the first place.
Joseph Abate, a money-market strategist at Barclays Plc, wrote in a Feb. 12 note to clients that the Fed could help overcome the long-standing stigma attached to the facility by making it “significantly more attractive” for banks to pledge Treasuries for cash through the discount window.
Well, of course, but why? After all pledging securities for cash to the Fed is now done via the Fed's daily or term repo operation, which just like the discount window has stigma associated with it.
Don't believe us? Just ask the Fed, or JPMorgan, which banks participate in the Fed's repo ops, or which banks sell Bills to the Fed as part of QE4. Spoiler alert: the highly confidential answer will never be revealed because it would result in the stigmatization of the associate banks.
Which simply means that as JPMorgan has now mastered the art of soaking up liquidity from every possible Fed orifice, it is now seeking to distract by pretending that it is willing to use the discount window (even as it aggressively uses repo) ahead of the next crisis.
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