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Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash

The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009. $7 billion of that was the net cash transferred to the US Treasury from its note and bond sales less outlays. The Fed still had to meet the other $76 billion. These transactions were revealed in the Fed’s weekly H.4.1 report.

The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed’s System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed’s stated target of $2.654 trillion. Prior to this week, it had not strayed from by more than $7 billion since June. The Fed’s action was not only a direct contradiction of its stated policy, but it was done without warning or explanation. It ran counter to Bernanke’s penchant for telegraphing every important move the Fed makes so that the banking/speculating organizations can front-run it.

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The Fed took another unusual and virtually unprecedented action to fund these massive withdrawals. It borrowed $43 billion  from foreign central banks (FCBs) through Reverse Repurchase Agreements (revese repos, or RRPs).
Fed Reverse Repos Chart- Click to enlarge

The Fed’s commitments of reverse repurchase agreements, where it pledges its securities holdings in return for cash loans, bulged by a record amount to a record level. The magnitude of this action is unprecedented.

These RRPs were done with FCBs. There were no open market operations with the Primary Dealers or Tri-party RRP participants reported in the NY Fed’s daily postings, or in the H41.

This borrowing and the sales of the Treasuries covered all but $10 billion of the withdrawals. The Fed issued currency to cover about $7 billion, and covered the rest with minor adjustments to other accounts.

This action was such a surprise and done with such stealth, that apparently I am the only person in the in the known universe, who writes regularly about the Fed, who noticed it. I could find no coverage of it anywhere this weekend, either in the mainstream Wall Street lackey press, or in the financial wackosphere, of which, like it or not, I am a member. Since I know that I’m not that smart and the big boys at the Wall Street Urinal are, I have to assume that there’s nothing going on here… (Uh… Not).

One other surprise item on this week’s Fed H41 was the U-turn in foreign central bank buying, which I suspect is related to these withdrawals. After 7 weeks of record selling of their Treasury holdings, the FCBs last week did an about face and made record purchases, reversing much of their recent selling. The dollar rose sharply on Tuesday and Wednesday. I covered the details, with charts, in the Wall Street Examiner Professional Edition Treasury update (Rising Cesspool Lifts All Floaters).

Whether there’s any relationship between these gigantic FCB actions and the giant withdrawals from the Fed’s deposit accounts, I can’t say. Unfortunately, I’m not one of the Fed’s fair haired boys to which they like to leak inside information. For that, your business card must include the magic words– Wall Street Journal, New York Times, or Washington Post.

I actually did put in phone calls to Michael Derby at the WSJ, and Greg Robb at Marketwatch, but it was late in Friday afternoon, and neither returned my call. It will be interesting to see if, and what, they report as a result of my calling this to their attention. They obviously have the inside contacts which I do not and I was hoping to glean some information from them, or to tip them to what might be a story worth pursuing. I wait with baited breath to see if anything comes of these contacts– Or maybe a press release from the horse’s mouth (cue visual- horse’s backside) itself.

Until then, I don’t know whether this is some kind of technical adjustment, however big, or a sign that the wheels might be beginning to come off the world financial system. Given what’s going on with countries and brokerages going bankrupt and internet coupon companies setting the investing world on fire, it’s difficult not to suspect the latter.

We’ll have to see what hits the fan this week. If no reports show up in the mainstream media, rather than concluding that there’s nothing here, I would tend to suspect that there is, and that the reason there’s no reporting is that the Fed does not want us to know. I’d infer from that that Dr. Bernankenstein has lost control of his monster.
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  7 comments for “Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash

  1. Whadda
    November 6, 2011 at 2:25 pm

    I’m sure Congress is on top of things and will take care of any improprieties…okay, maybe not.

    Wasn’t I reading where with foreign entities rejecting US paper that the Federal Reserve would force their Central Banks to take up the slack in purchasing and make them carry it on their books?

    Being the reserve currency, a little disturbance in the force like MF with an added touch of Greece being force fed then it is not surprising an infusion of cash was/is needed to draw on. Watch the inter-bank lending rates in Euroland for any signs of real trouble, you already know Greek bonds rates are sky high. Wait until China just throws Euroland some bread crumbs.

  2. ZH Fan
    November 6, 2011 at 5:17 pm
  3. November 6, 2011 at 7:19 pm

    Mr. Durden’s post cites the RRPs but not the other transactions which I believe are of equal or greater importance, and help to flesh out a more complete picture. I am uncertain about his conclusions (as well as my own), especially in light of the fact that the FCBs made a record purchase this week which reversed most of the sales of the past few weeks. Mr. Durden’s post cites only the prior sales and does not mention this week’s record purchase.

    Mr. Durden’s piece does not mention the withdrawal of cash from the deposit accounts at the Fed, nor the Fed’s sale of assets, which I believe may hold the keys to this mystery. Given all of the facts, I absolutely agree with him that something big is going on. I just don’t share his conviction about specifically what it is. In truth, I just don’t know. More facts are needed. The idea that there’s no liquidity in the market, at least in the US, seems misplaced, but we shall see this week. I’ve covered the major indicators in the Fed Report which I hope to have posted within an hour or so.

  4. beowulf
    November 6, 2011 at 10:16 pm

    You’re confusing the thunder with the lightning. The sale of assets is what caused the drop in cash deposits, not vice versa. Think about it, if a bank (for itself or as an agent) buys an asset from the Fed, where do you think the purchase money comes from?
    The currency swap with the ECB was clearly an effort to help out our friends across the sea, isn’t the point of any Fed reverse repo draining dollar reserves and not “borrowing cash”?
    The Fed has no more need to borrow dollars than Keebler elves have to borrow cookies; their power to make more is unconstrained and absolute. Speaking of which, I’m off to the store to engage in a dollars for cookies asset swap.
    http://designdeliver.com/images/Keebler_2.jpg

  5. November 6, 2011 at 11:12 pm

    The Fed did not willfully initiate a sale of assets. That I am sure of. It would run absolutely counter to the stated policy, not just in the letter, but in the spirit of the policy. I cannot buy your view that the asset sale came first. The Fed would not have performed an operation that would have the effect of draining reserves willfully. You’ll have to come up with a better story.

    I’m all ears for suggestions, but they have to contain at least a modicum of common sense.

    Better yet, inside info.

  6. Ole C G Olesen
    November 7, 2011 at 9:05 am

    It would be very helpful for Dummies like me .. if You ..who has the insight ..would attempt to make a ( Graphical ) FLOW CHART … describing the various flows of Money / Collateral ..within this system ..
    Would that be possible ? .. evt with a short description ( including abbreviations ) classifying the various account and transaction types

  7. November 7, 2011 at 9:12 am

    This is an excellent idea. Even though the the result might be short and concise, the time required to put something together that’s coherent would not be, but it’s a worthwhile idea, and when the opportunity presents itself, I’ll try to see whether it’s possible to produce a simple visual model. It may not be. There are lots of variables, and the Fed changes the rules every few months. It’s not even the same game with the same playing field that it was a few years ago.

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