When Repos Blew Up in 2019, Hedge Funds Were $800 Billion Short U.S. Treasury Futures; Then Margins Blew Out

 

When Repos Blew Up in 2019, Hedge Funds Were $800 Billion Short U.S. Treasury Futures; Then Margins Blew Out

By Pam Martens and Russ Martens: February 3, 2022 ~

New details have emerged to provide a fuller picture of the turmoil that was taking place in the dark corners of markets when the overnight repo market blew up on September 17, 2019 and the Fed had to run to the rescue with trillions of dollars in cumulative loans that went on for months.

Imagine if you were the Federal Reserve and had been thoroughly disgraced by waging more than a two-year court battle to prevent the press in America from doing its job and publishing the granular details of the Fed’s 2007 to 2010 bailout of Wall Street and its foreign bank derivative counterparties. Then the Fed was further disgraced after losing the court battles when in 2011 the details of the $29 trillion bailout were published. Chances are that the Fed would not be anxious to let the public or Congress hear the latest details of bailing out hedge funds for the one percent that were using leverage of 50 to 1 obtained from the very banks the Fed is supposed to be supervising.

That background might help to explain why there was a complete news blackout by mainstream media, including by reporters assigned to cover the Fed, when the Fed began releasing the names of the trading units of the Wall Street megabanks that were pigs at its emergency repo bailout trough from September 17, 2019 through December 31, 2019.

That background might also help to explain why the Treasury Department’s Office of Financial Research (OFR) wrote a research paper attempting to shift hedge fund turmoil in the Treasury futures market to March of 2020 – after the onset of the COVID-19 pandemic in the U.S. – but slipped up and included two graphs that move the onset of the turmoil to smack dab in September of 2019.

As we next describe what happened, it’s important to remember that thanks to the repeal of the Glass-Steagall Act in 1999, Wall Street has been allowed to structure itself into a daisy chain of systemic contagion. The same trading houses giving 50-to-1 margin loans to hedge funds on their Treasury securities as their so-called “prime brokers,” are the same “primary dealers” used by the New York Fed for its open market operations and contractually bound to be buyers of Treasury securities when the government issues new debt. The primary dealers that are the sugar daddies to hedge funds and get a regular pat on the head from the New York Fed, are, for the most part, owned by the megabanks on Wall Street which also own giant, federally-insured, deposit-taking banks that hold trillions of dollars of mom and pop savings accounts and insured money market accounts.

But in addition to holding trillions of dollars of insured mom and pop savings, these same taxpayer-backstopped megabanks also hold hundreds of trillions of dollars in dodgy derivatives which remain, for the most part, a black hole to regulators despite the promise of the Dodd-Frank financial reform legislation of 2010 to clean up this mess.

We mention this because when any part of this highly interconnected daisy chain teeters, the key players begin to back away from providing more lending to the others because the lack of transparency prevents any player from knowing who has the bulk of the risk and might blow up.

This situation has moved the Fed from its original mandate as lender-of-last-resort to commercial banks that are the backbone of the U.S. economy to lender-of-last-resort to the high rollers on Wall Street.

The OFR report explains how hedge funds were getting 50-to-1 leverage from their prime brokers (who are not named in the report but include JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, and Citigroup Global Markets and others) and engaging in a strategy called the basis trade. The OFR report describes the strategy as follows:

“The basis trade relies on a relationship between the cash Treasury market, where investors purchase Treasuries today; the Treasury futures market, where investors agree on a fixed price to pay for Treasuries they will receive in the future; and the repo market, where investors borrow or lend Treasuries against cash today. Theoretically, borrowing a Treasury today in the repo market, for which the investor pays interest at the repo rate, should cost the same amount as purchasing that Treasury today in the cash market with the agreement to sell that Treasury in the futures market at a later date. Very small variations from that ideal can be profitable if the investment is leveraged using borrowed capital.

“Basis trades are three-legged trades that span crucial financial markets: cash Treasury markets, Treasury futures markets, and repo markets. As we show, basis trades use long cash Treasury positions and short futures positions to construct a payoff that, absent financing risks and other frictions, would be a net position similar to a Treasury bill. (In futures markets, long positions are a bet prices will go up; short positions are a bet prices will go down.) One immediate difference between the return on a basis trade and the return on a bill is the possible variation margin on the futures position. (Futures traders make variation margin payments when the value of cash and collateral in their accounts falls below set margin levels.) More importantly, basis traders generally finance the long cash position in the repo market, which exposes the basis trade to rollover and liquidity risks. The return on basis trade is thus equivalent to a synthetic bill plus a risk premium. This risk premium is positive on average but can vary significantly and can turn negative during times of stress in funding markets.”

The OFR report also offers this on the subject of leverage: “Hedge fund leverage is constrained only by the haircuts on the collateral, and for Treasury securities haircuts are typically around 2 percent. This implies a maximum leverage ratio for hedge funds of 50 to 1.”

As we previously indicated, the OFR is attempting to shift all of this to the blow up in the Treasury market in March of 2020 but it slipped up and included the chart above and the chart below. The chart above shows that in 2019, hedge funds’ short positions in U.S. Treasury futures had skyrocketed to more than $800 billion. The chart below shows that the key players became alarmed and started demanding increased maintenance margin on the trades. (Maintenance margin is the minimum equity an investor must maintain in a margin account after the purchase has been made. The amount required at purchase is called the “initial” margin.)

Notice how the sharp rise in maintenance margin first occurred in the month of September 2019 and had started to abate as the Fed pumped in tens of billions of dollars a day in repo loans but then surged again in 2020 as pandemic panic took hold.

The chart below shows the names of the six largest borrowers and their borrowing amounts from the data released by the New York Fed. (These are the cumulative total of the loans, adjusted for the terms of the loans.) This is the information that mainstream media refuses to release to the public – possibly out of fear that it contradicts the Fed’s narrative that the repo crisis in 2019 grew out of corporations withdrawing their quarterly tax payments from the banks. But the largest borrower in the last quarter of 2019 from the Fed’s emergency repo operations was Nomura Securities International, part of the large Japanese investment bank. It certainly wasn’t a major holder of corporate tax payments for U.S. corporations.

A Bloomberg News article on March 19, 2020 named Field Street Capital Management as one of the hedge funds that had lost significant sums on the basis trade.

Yesterday, we checked out Field Street’s Form ADV on file with the Securities and Exchange Commission. Field Street lists as its prime brokers the following: Bank of America Securities; J.P. Morgan Securities; and Merrill Lynch Professional Clearing Corp. (part of Bank of America). Bank of America Securities and J.P. Morgan Securities are two of the Fed’s primary dealers; they were also heavy borrowers during the Fed’s repo bailout; and they are two of the four largest derivatives holders among all U.S. banks.

Field Street’s Form ADV also indicates that J.P. Morgan Securities is not just one of its prime brokers but is also a “marketer” of the hedge fund. As the chart above shows, J.P. Morgan Securities was the second largest borrower from the Fed’s repo bailout during the last quarter of 2019.

This does not mean that the basis trades blowing up were the sole cause of the repo crisis in the fall of 2019.

As we have previously indicated, Nomura was heavily exposed to derivatives; Deutsche Bank, a major counterparty to the derivatives of Wall Street’s megabanks, was in a death spiral; and $2.7 billion in credit default swaps blew up the very day before the Fed launched its repo bailout.

In other words, the ill-conceived, incompetently regulated, and opaque structure of Wall Street appears to have been coming apart at the seams in September 2019.

It is nothing short of a travesty against the American people that Congress has failed to investigate the matter, that mainstream media refuses to accurately report what happened, and that the Fed thinks Americans are stupid enough to believe its dumb corporate tax payment excuse (something corporations do every quarter).

We’ll be forwarding this article this morning to the Senate Banking Committee and the House Financial Services Committee, both of which oversee the Fed.

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A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019

 

WATCH WALL STREET & the FEDERAL RESERVE!

A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019

By Pam Martens and Russ Martens: January 19, 2022 ~

Fed Chair Jerome Powell Testifying Before Senate Banking Committee, November 30, 2021

There are numerous reasons that members of Congress, bank regulators, and mainstream media don’t want to talk about the repo blowup in 2019 and the massive Fed bailout that followed. Economist Michael Hudson previously explained how the Fed lacked authority to bail out a handful of trading houses on Wall Street under the dictates of the Dodd-Frank financial reform legislation. Dodd-Frank restricted the Fed to using its emergency lending powers to rescue a “broad base” of the U.S. financial system.

As we detailed on Monday, there was no “broad base” of the U.S. financial system being bailed out by the Fed in the last quarter of 2019: 62 percent of a cumulative $19.87 trillion in rolled-over repo loans went to just six trading houses: Nomura Securities International ($3.7 trillion); J.P. Morgan Securities ($2.59 trillion); Goldman Sachs ($1.67 trillion); Barclays Capital ($1.48 trillion); Citigroup Global Markets ($1.43 trillion); and Deutsche Bank Securities ($1.39 trillion).

Notice that three of the firms listed above are affiliates of foreign banks (Nomura, Japan; Barclays, UK; Deutsche Bank, Germany.) Now imagine the embarrassment to the Fed if it was forced to admit that it had to secretly bail out the affiliates of foreign banks for the second time in 11 years because the derivatives of U.S. banks were still not adequately regulated, after derivatives had played a central role in the worst financial crash in 2008 since the Great Depression.

All six of the Wall Street trading houses listed above have one thing in common: large derivative exposure. Consider the revelations in the Consolidated Statement of Financial Condition for Nomura Securities International for the period ending March 31, 2019. (As indicated above, Nomura Securities International received the largest cumulative total of repo loans from the Fed in the fourth quarter of 2019.)

The financial statement shows that Nomura Securities International had total assets of $127.5 billion but potential derivative exposure as follows: (See pages 30 and 41.) A “Maximum Payout” on protection sold on credit derivatives of $14 billion; and a “Maximum Payout” on “derivative contracts that could meet the definition of a guarantee” of $97.7 billion.

But here’s the really scary part of Nomura’s pile of derivatives: the name Nomura does not appear once in the report on derivatives that might pose a threat to the U.S. financial system that is published quarterly by the Office of the Comptroller of the Currency (OCC). It didn’t appear in any 2019 report and it still hasn’t appeared there. We asked the OCC about that yesterday and their response was that they don’t comment on individual institutions.

Three of the largest holders of derivatives in the U.S. that do appear on the OCC’s quarterly report just happen to be the trading affiliates of the same three firms that were among the largest six borrowers in the Fed’s repo loan facility in the fourth quarter of 2019: JPMorgan Chase, Citigroup and Goldman Sachs.

If Nomura was a derivatives counterparty to these firms and it found itself on the wrong side of a credit derivative trade, such as the blowup of Thomas Cook one day before the Fed launched its repo bailout, its credit rating could have been in severe jeopardy if this fact became public. A credit ratings downgrade would have likely meant that Nomura would have had to post large sums of additional collateral with its derivatives counterparties. And Nomura was not exactly in an ideal financial position in the fall of 2019.

In April of 2019 the parent company, Nomura Holdings, announced it would need to cut $1 billion in costs and close more than 30 of its 156 retail branches in Japan. It had just suffered its first full-year loss in a decade.

Less than three months after Nomura Securities International had begun to take giant secret loans from the Fed’s repo facility, Nomura Holdings announced that it had named a new CEO, Kentaro Okuda, who was quoted in the Financial Times as taking charge with a “sense of crisis.”

There is a strong stench of the Lehman Brothers and AIG derivatives fiascos of 2008 swirling around the news blackout of the Fed’s secret bailouts of 2019.

According to documents released by the Financial Crisis Inquiry Commission (FCIC), at the time of Lehman Brothers’ bankruptcy on September 15, 2008 it had more than 900,000 derivative contracts outstanding and had used the largest banks on Wall Street as its counterparties to many of these trades. The FCIC data shows that Lehman had more than 53,000 derivative contracts with JPMorgan Chase; more than 40,000 with Morgan Stanley; over 24,000 with Citigroup’s Citibank; over 23,000 with Bank of America; and almost 19,000 with Goldman Sachs.

The U.S. government had to take over the giant insurer, AIG, because it was counterparty to tens of billions of dollars in derivatives to Wall Street banks and had no money to pay them. This is a chart that AIG was eventually forced to release. It documents that more than half of its bailout money came in its front door and then was quietly funneled out the backdoor to pay off Wall Street and foreign trading houses. Five of the Gang of Six that were feeding at the Fed’s repo trough in the last quarter of 2019 appear on this chart: Goldman Sachs, Deutsche Bank, JPMorgan, Citigroup, and Barclays.

It’s long past the time for the Fed to come clean on exactly what happened in the fall of 2019 that caused it to launch its repo bailout facility. Americans will simply never trust the Fed if it doesn’t.

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Nomura, JPMorgan and Goldman Sachs Received a Cumulative $8 Trillion from the Fed’s Emergency Repo Loans in Fourth Quarter of 2019

 

Nomura, JPMorgan and Goldman Sachs Received a Cumulative $8 Trillion from the Fed’s Emergency Repo Loans in Fourth Quarter of 2019

By Pam Martens and Russ Martens: January 17, 2022 ~

The Dodd-Frank financial reform legislation of 2010 ordered the Government Accountability Office (GAO), an investigative body for Congress, to audit the Fed’s alphabet soup of emergency lending programs conducted during and after the 2008 financial crisis. The GAO found that a cumulative $16.1 trillion had been pumped out to Wall Street firms by the Fed – at super cheap interest rates. The GAO provided data for the peak amounts outstanding and also a cumulative total.

Why is a cumulative total essential and relevant? Because one institution in 2008, Citigroup, was insolvent for much of the time the Fed was flooding it with cheap loans. (Under law, the Fed is not allowed to make loans to an insolvent institution.) And when an insolvent institution is getting loans rolled over and over by the Fed for a span of two and a half years, at interest rates frequently below one percent when the market wouldn’t loan it money at even double-digit interest rates, it’s highly relevant to know the cumulative tally of just how much Citigroup got from the Fed. According to the GAO, that tally came to $2.5 trillion for just some of these Fed loan programs. (See page 131 of the GAO study here.)

The academic scholars that compiled the Fed’s loans during the financial crisis for the Levy Economics Institute also provided cumulative tallies. Their tally, which included additional Fed bailout programs not included by the GAO, came to $29 trillion.

The largest of the Fed’s emergency loan programs to Wall Street trading houses in 2008 was called the Primary Dealer Credit Facility, or in alphabet-soup-speak, PDCF. It made a cumulative tally of $8.9 trillion over a span of more than two years. Just three Wall Street trading firms received 64 percent of that money: Citigroup, a cumulative $2.02 trillion; Morgan Stanley, a cumulative $1.9 trillion; and Merrill Lynch, a cumulative $1.78 trillion.

Back in 2008 there was no law that forced the Fed to ever reveal the names of the banks that borrowed this money from the Fed and the amounts borrowed. The Dodd-Frank legislation made these disclosures by the Fed the law of the land. But Dodd-Frank set up a two-tier level of disclosures. If the emergency lending program was under Section 13(3) of the Federal Reserve Act, as the Primary Dealer Credit Facility was, the Fed would have to reveal the firm names and amounts borrowed one year after the program had been terminated. But emergency operations conducted through the Fed’s so-called “open market” operations would not have to reveal the names of the firms and amounts borrowed until two years after the loans were made.

Thus, it appears that in 2019 the Fed decided to make astronomical sums available to Wall Street’s trading houses not through a Primary Dealer Credit Facility (which it set up again in March 2020) but through its repo loan open market operations.

The repo loan market is an overnight loan market where banks, brokerage firms, mutual funds and others make one-day loans to each other against safe collateral, typically Treasury securities. Repo stands for “repurchase agreement.”

On September 17, 2019 the overnight loan rate spiked from an average of about 2 percent to 10 percent – signaling that one or more firms were in trouble. So the Fed effectively became the repo loan market on September 17, 2019 and exponentially grew the amount of loans it was making over the following months. Its repo loans lasted until July 2, 2020, by which time it had re-established the alphabet soup list of emergency loan programs from 2008.

The Federal Reserve Board of Governors in Washington D.C., an independent federal agency, outsources the vast majority of its emergency lending programs to the New York Fed, one of 12 privately owned regional Fed banks. The largest shareowners of the New York Fed are the following five Wall Street banks: JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, and Bank of New York Mellon. Those five banks represent two-thirds of the eight Global Systemically Important Banks (G-SIBs) in the United States. The other three G-SIBs are Bank of America, a shareowner in the Richmond Fed; Wells Fargo, a shareowner of the San Francisco Fed; and State Street, a shareowner in the Boston Fed.

We have now crunched the numbers for the New York Fed’s emergency repo loans for the periods in which it has thus far released the names of the borrowers: the last 14 days of September 2019 and the full fourth quarter of 2019. (The New York Fed is releasing the transaction data on a quarterly basis here. You have to delete the Reverse Repo transactions.)

After crunching the numbers, it now appears that the New York Fed may have intentionally thrown in a dizzying array of term loans to this one-day (overnight) repo loan market in order to disguise the fact that the trading units of the largest banks it supervises were the largest borrowers.

For example, the New York Fed offered one-day repo loans every business day but periodically also added 14-day, 28-day, 42-day and other term loans. Let’s say a trading firm took a $10 billion loan for one-day but on the same day took another $10 billion loan for a term of 14 days. The 14-day loan for $10 billion represented the equivalent of 14-days of borrowing $10 billion or a cumulative tally of $140 billion.

If we simply tallied the column the New York Fed provided for “trade amount” per trading firm, it listed only $10 billion for that 14-day term loan and not the $140 billion it actually translated into.

When we tallied the New York Fed’s “trade amount” column for the fourth quarter of 2019, the New York Fed’s repo loans came to $4.5 trillion. But when we set up a new column that adjusted the loans by the number of days in the term, the Fed’s repo loans for the fourth quarter of 2019 came to $19.87 trillion, or 4.4 times the “trade amount” column.

Just six trading houses received 62 percent of the $19.87 trillion, as illustrated in the chart above. The parents of three of those firms, JPMorgan Chase, Citigroup and Goldman Sachs, are shareowners of the New York Fed. The New York Fed is allowed to electronically create the trillions of dollars it loans at the push of a button.

Below is the chart that shows the understated amounts borrowed using just the New York Fed’s “trade amount” column for the fourth quarter of 2019. Below that we’ve also adjusted the Fed’s repo loans to account for the number of days in the term for the period of September 17, 2019 through September 30, 2019. (The Fed released this transaction data separately at the end of September in 2021.) It shows, convincingly, that from the get-go of the financial crisis in 2019, the same three firms were at the center of the borrowing.

The Fed originally tried to pass the problem off to corporations draining liquidity from the financial system by withdrawing their quarterly tax payments in the fall of 2019. But among the largest depository banks in the country where those quarterly tax payments would be held are Wells Fargo Bank and Bank of America, in addition to JPMorgan Chase and Citigroup’s Citibank. But as the chart below shows, neither Wells Fargo nor Bank of America seem to be having any major liquidity issues. In addition, three of the largest borrowers (Nomura, Barclays and Deutsche) are the trading affiliates of foreign banks. Are we really expected to believe that U.S. corporations are holding their quarterly tax payments with the trading units of foreign banks?

The Fed’s audited financial statements show that on its peak day in 2020 the Fed’s repo loan operation had $495.7 billion in loans outstanding. On its peak day in 2019, the Fed’s repo loans outstanding stood at $259.95 billion. It should be noted that there was no COVID-19 pandemic crisis in the U.S. in 2019. The first case of COVID-19 in the U.S. was reported by the CDC on January 20, 2020.

It’s long past the time for the Senate Banking Committee and the House Financial Services Committee to haul the relevant parties to a hearing, put the witnesses under oath, and get to the bottom of this second clandestine Wall Street bailout by the Fed in the span of 11 years.

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$2.7 Billion in Credit Default Swaps Blew Up One Day Before the Fed Launched Its Repo Loan Bailouts in 2019

$2.7 Billion in Credit Default Swaps Blew Up One Day Before the Fed Launched Its Repo Loan Bailouts in 2019

By Pam Martens and Russ Martens: January 13, 2022 ~

On September 16, 2019, exactly one day before the Federal Reserve would embark on its first emergency repo loan operations since the financial crisis of 2008, $2.7 billion in credit default swaps (CDS) on a single name blew up. The dealers in those credit default swaps were the very same trading houses on Wall Street that sought, and received, tens of billions of dollars in repo loans from the Fed in an operation that grew to a cumulative $11.23 trillion before its conclusion on July 2, 2020. (In just the last quarter of 2019, the Fed pumped a cumulative $4.5 trillion in repo loans into Wall Street’s trading houses, according to the transaction data it released on December 30 of last year. That was before even one case of COVID-19 had been reported in the U.S.)

On September 16, 2019 the U.K. tour operator, Thomas Cook, filed for Chapter 15 bankruptcy protection in the U.S. District Court for the Southern District of New York – Wall Street’s stomping ground. We know that because the Credit Default Swaps Determinations Committee, that would render the ultimate decision on who got paid on the Credit Default Swaps and who didn’t, places that fact in the first paragraph of its final determination decision.

Eight days after that bankruptcy filing, on September 24, Reuters reported that the Determinations Committee had ruled that “some investors in Thomas Cook’s credit derivatives worth as much as $2.7 billion are eligible for a payout.” The same article revealed the source of that information was that the “weekly gross notional value for Thomas Cook’s CDS was $2.69 billion, according to the Depositary Trust & Clearing Corp (DTCC).”

What the DTCC was aware of in Credit Default Swaps on Thomas Cook is not the final word on the total amount that was at risk and eventually paid out. Wall Street firms continue to be able to write bespoke (custom) bilateral contracts on derivatives with only the two parties to the trade having knowledge of its terms.

The idea that the majority of derivatives are now being centrally-cleared is a complete falsehood that is well-documented quarterly when the Office of the Comptroller of the Currency releases its report on derivatives held at individual banks. The OCC’s report for the third quarter of 2019 shows that Goldman Sachs and Morgan Stanley were centrally-clearing zero percent of their credit derivatives, the bulk of which are credit default swaps. The maximum percentage other firms were centrally clearing in non-investment grade credit derivatives ranged from 2 percent to 38 percent. (See Graph 15 here.)

The most recent derivatives report from the OCC for the third quarter of 2021 reports the following on the central clearing of derivatives on page 13:

“In the third quarter of 2021 39.0 percent of banks’ derivative holdings were centrally cleared…From a market factor perspective, 50.5 percent of interest rate derivative contracts’ notional amounts outstanding were centrally cleared, while very little of the FX [Foreign Exchange] derivative market was centrally cleared. The bank-held credit derivative market remained largely uncleared, as 35.3 percent of credit derivative transactions were centrally cleared during the third quarter of 2021.”

In addition, Wall Street banks have moved some of their derivatives activity to their foreign units, beyond the radar of their U.S. regulators and the reporting scope of the OCC report.

Every major trading house and bank on Wall Street is aware of the black hole that exists around derivatives and this is why they ran for cover in 2008 and again on September 17, 2019. No one knew how much exposure any one derivatives counterparty had to Thomas Cook and whether it would set off a daisy chain set of defaults by the counterparties who couldn’t make good on paying out what was owed on their credit default swaps.

In Wall Street lingo, the big players in the repo market simply “backed away” from lending, spiking the overnight lending rate from 2 percent to 10 percent and forcing the hand of the Fed to step in and become repo lender of last resort to the trading houses on Wall Street – its so-called Primary Dealers.

When the final results of the Credit Default Swap auction of October 30, 2019 were revealed, to allow the close out of Credit Default Swap exposure to Thomas Cook, the same names that were getting the largest amounts of repo loans from the Fed’s emergency facility were on the list.

Beginning in May of 2019, hedge funds saw an easy prey in Thomas Cook. On May 22, Fitch downgraded the debt of Thomas Cook to CCC+ and placed it on negative credit watch. On July 17, Fitch downgraded the debt further into junk territory with a CC rating. On September 5, just 11 days before its bankruptcy filing, Fitch downgraded the Thomas Cook debt even further into junk territory with a single C rating.

Not only were hedge funds buying Credit Default Swaps on Thomas Cook, they were also assisting in its demise by shorting the stock. In the six months prior to its collapse, its share price had lost 85 percent. The Guardian newspaper in the U.K. reported that “Two hedge funds – London-based TT International and Whitebox Advisers, from Minneapolis – made up the bulk of the shorts, together holding around 7%, according to ShortTracker data.”

While Thomas Cook may have been the spark that ignited the inferno in the repo market, there were plenty of other problems contributing to a general distrust of each other among global trading houses.

According to a chart published by Bloomberg News on September 24, 2019, job cuts planned by global banks at that point tallied up to 58,200. Shortly thereafter, the Financial Times reported another 10,000 job cuts at HSBC.

On July 31, 2019 Fortune Magazine reported that “Trading revenue at the five biggest U.S. banks on Wall Street dropped 8% in the second quarter, following a 14% slide in the first three months of the year — setting up global banks for their worst first half in more than a decade.”

Two of the large borrowers under the Fed’s emergency repo program that were units of foreign banks were Nomura Securities International (part of a large Japanese bank holding company) and Deutsche Bank Securities (part of the giant German lender, Deutsche Bank). Deutsche Bank’s stock had been setting historic new lows throughout 2019 and in July of 2019 Deutsche Bank had confirmed plans to cut 18,000 jobs.

The share price of the parent of Nomura Securities International, Nomura Holdings, had also been slumping in the first three-quarters of 2019, reaching $3.25 at the end of August. Then, on November 8, 2019 Nomura and Deutsche Bank, along with numerous employees, were convicted in a trial in Italy involving helping the Tuscan bank, Monte dei Paschi di Siena, commit fraud in derivatives deals to help it hide losses.

That made the Wall Street firms that were derivative counterparties to the two firms ever more anxious and fearful of extending loans to them in the repo market. And since no one on Wall Street had granular details on which other firms were major counterparties to Nomura and Deutsche, everyone backed further away from each other. 

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