The Bailout Bonanza is Back! (Pt 2: Hedge Hogs Demand More!)

The emphasis has to be on HOG as they squeal for corporate welfare and push their snouts into the trough. One hedge hog says the government needs to bail out all businesses by paying all wages so companies that depleted all cash don’t have to pay to retain all workers:

Mr. President, the only answer is to shut down the country for the next 30 days and close the borders. Tell all Americans that you are putting us on an extended Spring Break at home with family. Keep only essential services open. The government pays wages until we reopen.

— Bill Ackman (@BillAckman) March 18, 2020

[Ackman] went on to tweet that there should be no defaults, no foreclosures. In fact, he says he wants to see “a 30-day rent, interest and tax holiday for all” immediately…. Without it, he warns that every day we postpone a complete shutdown “costs thousands, and soon hundreds of thousands, and then millions of lives, and destroys the economy.”

MarketWatch

No problem. The government that was already running hog-wild with a bloated $1.2 trillion deficit so that it could give tax cuts to corporations so they could buy back stocks for shareholder gains just to lose all of that when stock prices evaporated … that government that already gave away the farm to corporations should now triple down on that deficit!

It’s time on the business calendar to socialize the losses … again!

Remember, American capitalists only like capitalism when it is feeding them. Now, in the absence of big-pig profits, they still want to keep pocketing personal profits that are paid for by loans the corporations they manage can take out cheaply thanks to the return last weekend to Free Fed Funds or by the government.

If they hadn’t already maxed out the company credit limits just to fatten themselves for the present slaughter by milking their corporations dry, they wouldn’t need government support in a crisis! They’d have room to run up their own deficits on unused lines of credit. After all, with such a “strong economy” as they and the president claimed month after month, why should they have had to run up any debt! (Except to fatten shareholders with future profits brought forward!) They should be overflowing with cash right now!

All it took was a little virus and a really, REALLY big scare.

With all those “strong earnings” they kept claiming from a “strong, very strong economy” and all those really big windfalls from the Trump Tax Cuts socked away in a rainy-day fund, they could weather through paying their own employees during a seasonal layoff. Of course, they already knew they could lean on the government to distribute that cost to taxpayers if bad times came so they didn’t bother to be prudent. They knew that because of the moral hazard we established back in the 2008 crisis.

Everyone knows it’s best to be prepared

Even “consumers” have long been counseled to have three months worth of bills covered by savings in case of hard times so we can be self-reliant. And I have lived by the philosophy of always having enough groceries stored away and/or a big enough garden that we can feed ourselves for, at least, a month plus have a surplus to share.

Always have something to share because, if everyone were to operate that way, we wouldn’t have people acting desparate when times are hard. We wouldn’t have to rush to hoard when everyone else is tearing apart the store shelves and climbing over each other. It’s easier, then, to be one of the calm ones, instead of one of the crazies.

Yet, here we are where the biggest of billionaires run to the government for emergency relief because their own companies don’t have enough money to help their own employees because their companies didn’t set aside reserves! Not even enough to share with the people who made those companies what they are. Taking care of their own is something these hogs can barely stomach because, setting aside funds for skinny times, takes delicious slop out of their own troughs.

The swill was already being bailed in buckets into the government troughs for decades

According to US Treasurer Steven Munching, the government is already on this. The thousand-dollar checks for the common person are awaiting congressional sign-off and will go out in the mail from the treasury to every known taxpayer, and you have been given a tax holiday extension of 90 days beyond April 15th until you have to pay your tax-day bill.

I’m OK with the government helping average people through this because the government is forcing them not to work, but I’m not OK with the government doing it so corporations don’t have to do their part help those who have long helped them and who have always gotten the smaller share. However, the Federal government is now limited in its ability to help, too, because (and I’ll let a pro-capitalist, pro-business publication make the point for me) …

The massive 2017 tax cuts, which primarily helped wealthy taxpayers and big corporations, provided a small, temporary boost to economic growth, but they and the subsequent feeding frenzy of spending increases approved by the Republican Congress have left us with a $1-trillion federal deficit even before the economic effects of the coronavirus epidemic ripple through the economy.

Most economists agree recoveries are times to fill the federal coffers and crises or recessions are the time to spend the money. But there’s little room for the huge fiscal stimulus some economists say is needed to fight this crisis.

MarketWatch

So, no one gets away with saying this is just an unforeseeable problem created by the Coronacrisis. Sure, we couldn’t see the virus coming more than a couple of months before it assailed us; but everything we have done over the past decades to wallow in excess has made us weaker for facing times such as these, and we all know viruses exploit weakness.

That’s what happens when most of the population gorges on personal debt and corporate debt and government debt to live high, instead of paying down debt in the good times. We could have demanded our government stop its feeding frenzy, but I suppose we partly despaired of believing we could make a difference and partly wanted our tax cuts or wanted our programs or wanted our big military or wanted to dominate the world. So, we drained our reserves and our available credit on all of that.

As a result, we have less room to work in the bad times.

Then the hedge hogs arrived

I pointed out a couple of months ago how the real culprits at the center of the Repocalypse that I spent all of the final quarter of 2019 following were hedge funds and their clearing houses. I used a central-bank report to prove it.

Zero Hedge has been blazing that trail, too (with a lot more fire power than I can bring to it, but I deliver the insights I can and try to pull together under one theme the best stories I can find, so here’s another one:

...The Fed was also bailing out dozens of hedge funds engaging in highly levered trades … in the Treasury cash/swap basis…. The return of the Fed’s repo ops was nothing more than the Fed preemptively bailing out all those hedge funds that would have imploded had basis trades gone haywire. Below is a key excerpt from that post:

“One increasingly popular hedge fund strategy involves buying US Treasuries while selling equivalent derivatives contracts, such as interest rate futures, and pocketing the arb, or difference in price between the two. While on its own this trade is not very profitable, given the close relationship in price between the two sides of the trade. But as LTCM knows too well, that’s what leverage is for. Lots and lots and lots of leverage.“

We also said that “hedge funds … are not only active in the repo market, they are also the most heavily leveraged multi-strat funds in the world, taking something like $20-$30 billion in net AUM and levering it up to $200 billion. They achieve said leverage using repo.”

“Too big to fail is back, and this time it’s not the banks, it’s levered financial institutions….”

Zero Hedge

That is what is slaughtering treasury bond funds and driving the Repo Crisis. ZH notes that some of the funds that had readied themselves for slaughter were ExodusPoint Capital Management (which had its worst month ever), an LMR Partners’ fund (which fell 12.5% in the first two weeks of this month), Capula Investment Management’s Global Relative Value Fund, and Field Street Capital Management’s fixed-income relative-value flagship fund … and …

BlueCrest Capital Management, whose trader Raymond Wang was fired on March 9, the day after that historic Sunday night when the 30Y traded bidless for hours as the S&P crashed limit down.

I’m sure there were plenty more stuck pigs where those came from.

“We’ve had 10 years of a perfect paradise and so people have been picking up pennies thinking there’s no risk in holding strategies like the basis trade…. A lot of the strategies … that hedge funds tend to use don’t work when markets aren’t stable. You’ll see more of these types of blowouts.”

Without doubt … except that you many not SEE them because the Fed does all it can to hide them.

And here’s the mother of all hogs

Nevertheless, I revealed a whale of a pig in the exposè I wrote just for my own patrons about the core troubles in the Repocalypse (now shared here in a glimpse for everyone), where I said:

Its all due to hedge hogs

Now do you want to know what insidious disaster is forcing this mess, aside from the more benign and obvious overlying problem of a shortage in bank reserves?

The Fed is now the repo market’s hostage because it has allowed so many hedge funds to use repos — something that was not allowed before the Great Recession. Hedge fund use of the repo market has grown unseen … beneath the surface of the market and was forced into the open when reserves became short and banks became overloaded with treasuries, leaving hedge funds suddenly short on money for their high-risk ventures….

So long as everyone was glad to offer repos to hedge funds in exchange for US treasuries, all was well. The extent to which clearing houses could bust if one or two major hedge funds go down because they cannot get their repos any longer is massive beyond even the kinds of collapse we saw in the Great Financial Crisis.

The Fed has engendered a situation that it now cannot back out of without crashing the financial system at its core again along with the whole economy because of the problem’s scale….

The mystery of what was happening deep beneath the riled repo waters was laid out by the Bank for International Settlements, which recently issued a report that summarized the repo crisis as a problem with shortages in US bank reserves but pinpointed the main source of troubles:

“The mid-September tensions in the US dollar market for repurchase agreements (repos) were highly unusual…. US repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains.…”

Later in its report, the BIS gets down to pinpointing the deep cancer in the repo system that is exacerbating these problems we see on the surface. (The rocks beneath the rapids.)

“Leveraged players (eg hedge funds) were increasing their demand for Treasury repos to fund arbitrage trades between cash bonds and derivatives. Since 2017, MMFs [Money Market Funds] have been lending to a broader range of repo counterparties, including hedge funds, potentially obtaining higher returns. These transactions are cleared by the Fixed Income Clearing Corporation (FICC)…. The resulting remarkable rise in FICC-cleared repos indirectly connected these players. Market intelligence suggests MMFs were concerned by potential large redemptions given strong prior inflows.”

That’s why the repo funding available from the Fed’s primary treasury-dealing banks to hedge funds via the FICC suddenly dried up! Banks got scared about the risky activity from hedge funds gambling en masse with repos as a source of cheap money for whatever the heck they were doing with …. DERIVATIVES!

Yes, we’re back to those nasty derivatives causing serious stress in financial markets, resulting in September’s panic seizure of repos, just like in 2008, which the Fed is covertly smoothing over with new massive injections of QE that is “not QE!”

…the FICC, a massive clearing house tied up in these repo-derivative bargains, became so financially stressed when repo suddenly seized up that the Fed had to essentially bail them out….

If the supersized FICC crashed, that would be as big as the crash of the AIG would have been in the Great Recession, had the Fed not bailed it out.

Yes! We’re back to all the same crap, but it is happening covertly. The Fed is not talking about the underlying garbage at all. Had the Fed not leaped in with over $400 trillion, the FICC and other clearing houses would have collapsed….

“Fed Fights Catastrophic Financial Collapse“

So, there, now you have it — an excerpt from my January Patron Post that pinpointed the core issue of the Repocalype and laid out the case for where the Fed’s major headaches were going to be coming for the remaining year.

Then the Coronacrisis landed in the middle of all that mess, and all hell blew loose in the pig pen.

FICC is the mother of all hogs, and it’s just the only one the BIS came right out and named. Where there’s stink there’s pigs, so there are plenty more, but that’s how Mamma Sow was made sick by her suckling, prickly little hedge hogs.

And that’s why the hedge hogs are demanding bailouts — bailouts they were already getting and shouldn’t even have been eligible for in the first place! Bailouts they needed more and more as they ramped up their trade. Bailouts they need more still with the Coronacrisis causing their funding. The Fed had to give because, once again, there was an institution “too big to fail” — a hog so fat her feet didn’t reach the ground any more so she might roll over on all her hedge hogs and squish them!

That’s also why JPMorgan and others got the heck out of repo! They didn’t want to become collateral damage like the Spratt splat that happened when Jack’s wife fell on him.

More squealing from the pigs who keep demanding more

One reason the Fed initially held off on opening a repo window directly to hedge funds, which would have cleared their member banks out of harm’s way, is that easy access would entice fat little squealers to eat more from the Fed’s trough.

But now the Fed’s old bailout facilities are being dusted off, and the Great Recession is repeating. In fact, look at how much the Fed has already done:

In my January Patron Post, I shared a graph showing how far back to its original balance sheet size the Fed had already rushed because of the Repo Crisis:

The little downtick at the end represented the Fed’s meager attempt to fulfill it’s vain promise to start unwinding its “not QE” in January. I knew that would blow up on them, so I shared another graph showing what seemed more likely to play out, since this was really going to be QE4ever, based on the Fed’s own graph of all of 1) its balance sheet expansion during the Great “Recovery” and 2) then its aborted unwind and then 3) the new rise from “not QE”:

The dotted line added at the end represented what was most likely to happen next; however, what actually happened next thanks to the Coronacrisis was:

Now, that’s what I call QE4ever!

This is not new costs created by the Coronacrisis to help citizens; this is funds blowing up and the financial industry blowing apart in an area where it was already badly fractured, as I’ve been arguing, because money is now running for cover from deeply flawed financial vehicles and high-risk enterprises that have no margins to operate in high-risk times!

The Coronavirus just kicked the badly flawed system’s butt and made everyone run; but these are not actual costs being paid out to save anything other than our financial hogs and their high-risk bets. It’s wagers, not wages for employees. It’s not doing anything to put factories back to work that are not shut down for financial reasons anyway or fund the creation of emergency hospitals or test kits or masks. This is money running for cover and the Fed making up the shortfall in available funds (liquidity) just to keep the financial system from completely breaking down!

Notice how right after that tiny downtick and before the Coronacrisis hit the US, the Fed struggled for about two months unable to get the balance sheet back down at all. It couldn’t do what it said it would even before the crisis hit. Then the Coronacrisis blew trembling repo up all over again, and the Fed flooded more fiat money back into the system than it did during any QE event at ANY TIME in the Great Recovery, instantly blasting its balance sheet into orbit higher than it has ever been, and still …

Guggenheim Partners Global Chief Investment Officer, Scott Minerd, is already arguing for the necessity of a new TARP (Troubled Asset Relief Program) in the amount of, oh say, a casual $2 trillion. And then, “on the back of that … introduce a TALF-style program.” (Term Asset-Backed Securities Loan Facility)

Minerd baits policy makers into taking these massive actions to help financial institutions (like maybe his?) with the following warning:

If the United States is not already in a recession, it will enter one shortly…. The risk is that for the first time since the 1930s we are facing the possibility of a downward spiral into something akin to a global depression … if policymakers don’t act quickly…. As the economy continues to slow, crisis will start to cascade through many industries, and the problems will come faster and faster…. There really needs to be a dedicated pool of money that is available to step in and salvage viable companies that are struggling…. And remember, TARP was a money-making exercise for the government. We should get away from the idea that we are bailing people out…. Should policymakers fail to get these sorts of programs in place quickly, there is increasing risk that we could fall into a deep, dark spiral.

But we are bailing people out! We’re bailing out high-rolling gamblers who have long been allowed to grow like a tumor on our financial spinal cord just so rich people can make a lot of money at high risk to everyone’s financial system. (They sure expect the financial system to bail them out when the risk gets blown out of the water!)

Once again, we have someone like Minerd saying, “Let’s maintain economic denial and avoid calling reality what it is!” Minerd knows the term, “bailout,” agitates those who are sick of seeing the rich bailed out when they bring these calamities upon everyone else by doing everything they can to create bubbles that benefit only them.

So, he’s begging for nomenclature that is less laden with toxic feelings.

Does anyone else hear the belly of the Great Recession growling again, as I long said it would be, in Minerd’s desperate plea for an immediate $2 trillion in TARP plus more?

It’s baaaack!

Next Up: “A Sustainable Solution to Endless Cycles of Economic Collapse!“