Friday, April 16, 2010

Did the Government Pay J P Morgan Chase 5 Basis Points to Borrow $271 Billion?

Buried in a financial supplement report to the first quarter 2010 SEC filing by J P Morgan Chase is a note that reports that J. P. Morgan chase was paid 5 basis points to borrow $271 billion in repos, which were part of the liquidity provided by the Fed to primary dealers (Wall Street firms) to strengthen financial markets.

A post by Edward Harrison on the blog Naked Capitalism argues that, in effect, the government (Federal Reserve) paid J P Morgan Chase to borrow money. Here is how he defends that charge against those who said that technically, the borrowing was not between J P Morgan Chase and the Fed, but between J P. Morgan Chase and its counterparties:

A commenter felt my reference to borrowing from the government was misleading. So, note that technically Repo counterparties are largely banks lending and borrowing excess reserves from one another. So, they are not really borrowing from the government. However, the Fed has set the Fed Funds rate at 0.00-0.25%. It controls the Fed Funds rate to within that range by making repurchase and reverse repo agreements that are collateralized loans to primary dealers of Treasury securities. The supply and demand dynamics in the repo market are largely controlled by the Fed in order to maintain the repo rate at the specified level set by the Fed.

So, while the repo market participants may be borrowing from each other, in essence they are borrowing from the Fed. The repo rate is set and controlled by the Federal Reserve. You could suspend all counterparty transactions in the market and have dealers just repo with the Fed and the net effect would be the same.
To read the entire post, click the link below:

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