Transcription
Jeffrey Snider’s Eurodollar University A
How Dollar becomes ‘Dollar’www.alhambrapartners.com
“The downside of a “dollar” as a opposed to a dollar is that somuch is now unobservable in the form of bank activities thatnever see the light of day (again, the bank at the center). Sincewe cannot even define a wholesale “dollar” we cannot think toeven attempt its measure as it amounts to chasing a phantom.AIP ResearchJanuary 21, 2015What Is A Dollar?www.alhambrapartners.com
“The market for bankers’ acceptances was one ofthe first tasks of the Federal Reserve. There was aflourishing financial trade in acceptances insterling which was purely a matter of the Britishpound being something like the global reservecurrency, at least for a vast portion of globalgeography. With the United States becoming anindustrial and trading power, American interests infinancing trade from the point of view of the dollarwere relatively uncontroversial. The Fed’s role inacceptances was to provide liquidity as “needed”,as the Fed was authorized to buy them with somediscretion.AIP ResearchJanuary 5, 2016Forward Chinawww.alhambrapartners.com
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Where Do Eurodollars Come From?www.alhambrapartners.com
“Recently, I heard a high official of an international financialorganization discuss the Euro-dollar market before a collection ofhigh-powered international bankers. He estimated that Euro-dollardeposits totaled some 30 billion. He was then asked: “What isthe source of these deposits?” His answer was: partly, U.S.balance-of-payments deficits; partly, dollar reserves of nonU.S. central banks; partly, the proceeds from the sale of Eurodollar bonds.This answer is almost complete nonsense.Milton FriedmanRe-Published July 1971www.alhambrapartners.com
“The correct answer for both Euro-dollars and liabilities of U.S.banks is that their major source is a bookkeeper’spen.Milton FriedmanRe-Published July 1971www.alhambrapartners.com
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To EVERY banker in themultiplier chain, theadditional Eurodollar depositcame in the form of a checkfrom Morgan Guaranty NYC.There are now 10 ofeurodollar claims on each 1 of Morgan Guaranty‘money.’www.alhambrapartners.com
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Not a singleFederal ReserveNote www.alhambrapartners.com
THE WORDEURODOLLARIS NOTA TECHNICALLY PRECISETERM’www.alhambrapartners.com
“In reply, Mr. Coombs said an effort could be made to develop such a measure, but hedoubted that it would be successful. The volume of funds which might be shifted backand forth between the of the monetary statistics arose in connection with Eurodollars; he suspected that at least some part of the Euro-dollar-based moneysupply should be included in the U.S. money supply. More generally, he thoughtM1 was becoming increasingly obsolete as a monetary indicator. The Committeeshould be focusing more on M2, and it should be moving toward some new version ofM3--especially because of the participation of nonbank thrift institutions in moneytransfer activities. Some of those institutions were offering 5-1/4 per cent on timeaccounts from which funds could be transferred into a demand deposit by making atelephone call.FOMCSeptember 1974Memorandum of Discussionwww.alhambrapartners.com
“For example, in the mid-1970s, just when the FOMC beganto specify money growth targets, econometric estimates ofM1 money demand relationships began to break down,predicting faster money growth than was actuallyobserved. This breakdown--dubbed "the case of themissing money" by Princeton economist Stephen Goldfeld(1976)--significantly complicated the selection ofappropriate targets for money growth. Similar problemsarose in the early 1980s--the period of the Volckerexperiment--when the introduction of new types of bankaccounts again made M1 money demand difficult topredict.Chairman Ben BernankeNov. 10, 2006Speaking at 4th ECB Conf.www.alhambrapartners.com
“The results of this paper are difficult to characterize. Insofar as the objective was an improvedspecification of the demand function for M1, capable of explaining the current shortfall in moneydemand, the paper is rather a failure. Specifications that seem most reasonable on the basis ofearlier data are not the ones that make a substantial dent in explaining the recent data.Stephen GoldfeldThe Case of the Missing Moneywww.alhambrapartners.com
EURODOLLAR IS NOT STRICTLY OFFSHORE DEPOSITSOF OTHERWISE DOLLARS. IT INCLUDES THETRANSFORMATION OF BANKING INTO A WHOLESALEMODEL OFTEN FREE OF DEPOSITS ALTOGETHER.www.alhambrapartners.com
“Large corporations are able to minimize their demand depositbalances by placing excess funds each day in the short-termmoney market. One way to do this is by arranging an RP – asecured placement of immediately available funds in whichthe borrower sells securities to the lender and agrees torepurchase them at a predetermined price at a future date(often the next day). Such a transaction between acorporation and a commercial bank would convert acorporation’s demand deposit asset into an interestbearing asset that would not be counted in any of thecurrent or proposed aggregates. Yet, since the funds can becommitted for periods of time as brief as just overnight, theyare still readily available for transaction purposes.FRBNYSpring 1979Quarterly Reviewwww.alhambrapartners.com
MISSING MONEY WHOLESALEANY NON-TRADITIONAL ACCOUNTTRANSACTION THAT SATISFIESMONETARY NEEDS OUTSIDE THECLASSIFICATION OF TRADITIONALMONEY AND THE FRAMEWORK OFTRADITIONAL MONEY MECHANICS.TRADED BANKLIABILITIESwww.alhambrapartners.com
EURODOLLARIS TWO PARTS: WHOLESALE OFFSHOREwww.alhambrapartners.com
EURODOLLARWHOLESALE, OFFSHORE WHAT?TRADEDBANK LIABILITIESwww.alhambrapartners.com
“In April 1991, Salomon bid for 3 billion of a 9 billion five-yearnote auction, being awarded that full allotment plus an overbid ona customer account which was not again authorized (Mozer placed 2.5 billion in bids for a customer that claimed it only approved 1.5 billion, which placed 600 million into Salomon's accountand thus more than 35%). But it was the May 22, 1991, auctionthat went not just too far, causing more than a little consternationand attention. All told, Salomon placed bids for its accounts andthose of customers, plus an undisclosed existing long position, formore than 100% of available two-year notes. Further, these bidswere highly aggressive, priced a full 2 bps through the whenissued price.Jeffrey P. SniderJuly 10, 2015The Crony Pretense BehindWarren Buffet’s Banking Buyswww.alhambrapartners.com
“Investigations are continuing, but findings sofar indicate that the crisis escalated far out ofproportion to the money involved. Mozer'sinept little scam had netted the firm only apittance, between 3.3 million and 4.6million, and cost taxpayers nothing ininterest. Contrasted with the billion-dollarlooting of the stock market by convictedfelons Ivan F. Boesky and Michael Milken,Mozer's crime was small potatoes--but it wasenough to bring his swaggering company tothe brink of ruin.LA TimesFebruary 16, 1992Taming The Bond Buccaneersat Salomon Brotherswww.alhambrapartners.com
“The world's currency markets, it seems, are nolonger governed by central bankers in Washingtonand Bonn, but by traders and investors in Tokyo,London and New York, as the chaos in the currencymarkets this past week has shown As of February 1990, the daily worldwide volume ofcurrency trading had reached 650 billion, morethan the market value of the 10 largest Americancompanies, according to the most recent figuresfrom the Bank for International Settlements in Basel,Switzerland. Improved technology, new financialinstruments and the growth of internationalinvestment have combined to make the currencymarkets ever more fluid.NY TimesSept. 17, 1992Agility Counts in CurrencyChaos“In former times, powerful central banks couldusually frustrate speculators. They did so bysimply buying massive amounts of theweaker currency and flooding the market withthe stronger currency. But times arechanging. While the central banks canmobilize tens of billions of dollars, trading inforeign currency markets now runs to atrillion dollars a day.ForbesNov. 9, 1992How the Market OverwhelmedThe Central Bankswww.alhambrapartners.com
Forget money, money demand, or whatever it might be in thefuture. Alan Greenspan’s Fed would control every single bitof it by targeting one single interest rate. Like something outof a Tolkien novel, it was one rate to control it all.The federal funds rate.www.alhambrapartners.com
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That’s what we were told, and what todaymany (most?) people still believe.How Did/Does It ReallyWork?www.alhambrapartners.com
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“The consequences were and still are enormous. For example, in theinitial framework residential mortgages were assigned to the 50%bucket. However, "claims or guarantees" provided by "qualifying"banks and entities (primarily, at the start, the GSE's) would be assignedinstead to the 20% bucket. Thus, a bank for a given amount ofstatutorily-defined "capital" could hold two and a half times moreassets if they could "somehow" define those assets by the "claims andguarantees" of "qualifying" counterparties.Jeffrey P. SniderSept. 30, 2016Banking Really Hasn’t Changed Much Sincethe Panicwww.alhambrapartners.com
“The growth and adoption of VaR in the 1980's wasmore limited, but by the 1990's as the shadow systemsprung up and took over out of the ashes of the S&Lcrisis, VaR became common across every major firm insome form or another. A big break came in 1995,coincident to the rise in speculative eurodollars (i.e., thebirth of the serial bubbles) when JP Morgan for the firsttime allowed total public access to its extensive (andquite impressive) database on variances andcovariances for a far-reaching and meticulous set ofsecurities and asset classes. Morgan called itRiskMetrics, allowing software to be developed andmarketed on that basis.Jeffrey P. SniderJune 19, 2015Americans Are Sheltered And WhollyUnawarewww.alhambrapartners.com
“CHAIRMAN GREENSPAN. Somebodymentioned to me that Bankers Trust had anAugust balance sheet for LTCM. Is that true?VICE CHAIRMAN MCDONOUGH. Yes, butthe balance sheet is a relatively small piece of thewhole action because so much of the latter is offbalance-sheet.FOMCSeptember 1998www.alhambrapartners.com
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“The business was something like an insurance company, where the“guarantees” are all off the balance sheet. Primus only carried 200 billionin long-term debt, no short-term, which meant that those guarantees werepotential fractional claims on about 630 billion in cash and investments(which were also at risk). Nowhere does that 13.5 billion appear (whichballooned to 24.3 billion by the time of the panic), yet counterpartieswere counting on those guarantees as if they were real.AIP ResearchJuly 7, 2015More Important What Is Not ThereThan What Iswww.alhambrapartners.com
“Approximately 379 billion of the 527 billion innotional exposure on AIGFP’s super senior creditdefault swap portfolio as of December 31, 2007were written to facilitate regulatorycapital relief for financial institutionsprimarily in Europe.AIG 2007 Annual ReportManagement’s Discussion andAnalysis of Financial Conditionand Results of OperationNotes, Page 33www.alhambrapartners.com
“In the latter half of the 1990’s when banks agitated for an end to Depression-era legislation, Gramm-LeachBliley was the result of wholesale intentions rather than how it was sold to the public. From what the industrysaid, and what was debated publicly in Congress, banks simply wanted to be able to offer their customers aone-stop shop for all financial products; to sell mutual funds and life insurance inside bank branches becausepeople wanted to be able to get all their services in one place. It was the happy talk of synergy and lower coststo the public.As usual, the real motivation was nothing like that. Citigroup in 1998 practically dared Congress to act onrepealing Glass-Steagall by purchasing Traveler’s Insurance on a two-year compliance waiver from the FederalReserve. Though I don’t want to completely set aside Citi’s profit motive of selling Traveler’s insurance productsdirectly to Citi’s depositor base, in truth what Citi really sought was a greater blend in the whole bank’s overallfunding portfolio; to be more and more free from the vertical money multiplier to be able to purse avenues ofhorizontal balance sheet expansion. Every other major bank followed suit because they all wantedthe shadow bank model as the marginal avenue for expansion and all the far greater(eurodollar) profit opportunities that would open up as a result.www.alhambrapartners.comAIP ResearchNov. 25, 2016A Brief History of Money
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www.alhambrapartners.com“The origins of the US dollar shortage during the crisis are linked to theexpansion since 2000 in banks’ international balance sheets. Theoutstanding stock of banks’ foreign claims grew from 10 trillion atthe beginning of 2000 to 34 trillion by end-2007, a significant expansioneven when scaled by global economic activity. The year-on-year growth in foreignclaims approached 30% by mid-2007, up from around 10% in 2001. Thisacceleration took place during a period of financial innovation, which included theemergence of structured finance, the spread of “universal banking”, whichcombines commercial and investment banking and proprietary trading activities,and significant growth in the hedge fund industry to which banks offer primebrokerage and other services.BIS Working PaperOctober 2009The US Dollar Shortage In Global Banking
“Or, paraphrasing Dickens, a bank that has nodollars, gets another bank that has no dollars, toguarantee that everyone has dollars.Jeffrey P. SniderApril 1, 2016Central Bankers Prefer Wreckage To Recoverywww.alhambrapartners.com
TRADEDBANK LIABILITIESwww.alhambrapartners.com
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“ chasing a phantom.AIP ResearchJanuary 21, 2015What Is A Dollar?www.alhambrapartners.com
How Dollar becomes ‘Dollar’Qualitative Expansion beforeQuantitative ExpansionMissing Money for the 21st Centurywww.alhambrapartners.com
How Dollar becomes ‘Dollar’Eurodollar wholesale offshoreLiquidity non-traditional tradedliabilities, including those (math asmoney) intended to manage balance sheetassets, leverage, and efficiencywww.alhambrapartners.com
Eurodollar UniversityConcludedFor More Information, ContactJeffrey Snider m
Jeffrey P. Snider July 10, 2015 The Crony Pretense Behind Warren Buffet's Banking Buys " www.alhambrapartners.com. Investigations are continuing, but findings so far indicate that the crisis escalated far out of proportion to the money involved. Mozer's inept little scam had netted the firm only a
