I did a couple of videos recently about the FED’s Reverse Repo facility in which I said that it’s been used by the FED to soak up the excess currency in the system in order to prevent inflation getting higher than it has been. (At least until out Overlords deem the time is right to unleash a second wave on inflation on the population).
There is however, another reason the FED is operating the Reverse Repo facility which I should have talked about … and that is … it’s been helping out distressed banks. So basically, the banks are getting help with an overnight funding facility - bailed out in secret.
It would seem that they’re doing this in secret and are reluctant to call it a Bailout because of public sentiment on the subject of bailouts - as a result of what occurred in the 2007 / 2008 Financial Crisis. Our Overlords are concerned about the backlash they might suffer if they were to make it known publicly and call what they are doing a bailout and perhaps with good reason.
Anyway, what’s the situation? What’s been going on?
Well, the recent round of FED rate hikes, starting back in Spring 2022, has caused significant problems for the banks.
In the past, banks bought a lot of US Bonds.
When interest rates rose, the market value of the Bonds held by banks on their books became lower. Their Bonds came to be worth less than they were when interest rates were low. This has meant that the value of their assets has declined. These are known as “unrealized loses” or “paper loses”.
We can say that the rising interest rates put the Banks under considerable financial pressure because they’re sitting on huge unrealised, paper losses as regards their Bond holdings.
It could be argued though that this needn’t be a big problem provided the banks hold the Bonds to term, because when the Bond reaches its maturity date, the Government pays out the amount owed – the par value of the Bond in technical jagon. So, perhaps no big deal.
But, what if the bank needs to raise cash all of a sudden … for whatever reason … maybe if there’s a bank run?
To raise funds, they would have to sell assets which would include the lower valued Bonds. And this would turn the unrealized paper losses into actual losses.
Let’s now consider the situation in relation to the Reverse Repo Facility …
As I said in the other videos, the issue we need to consider is that the Reverse Repo Facility has been emptying of late.
Timings are always tricky, but Rafi Farber thinks that, judging by the current rate of drainage from this facility, we have a relatively short time before it empties – possibly only a couple of months. So, we’re looking at maybe March of this year.
When the Reverse Repo Facility is empty, the banks might well have no option, but to sell the Bonds at market value. This is called “mark to Market” in technical jargon. And they won’t get a good price for them. They will be sold well “below par” to use some more technical jargon.
As I said, that’s when the unreali
