Primary dealer

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See also Federal Reserve, Federal Reserve bibliography, Reform of the Federal Reserve,and repo.

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The Federal Reserve Bank of New York trades U.S. government and select other securities with designated primary dealers, which include banks and securities broker-dealers. Weekly transaction, market share data and primary dealer lists are updated periodically. Much of the information is submitted voluntarily. The Bank expects primary dealers to submit accurate data, but the Bank itself does not audit the data.



A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States ("the Fed").[1]

Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.[2]

They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.[3] [4]

Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market, for example, according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in world financial markets. Group membership changes slowly.

The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.

In response to the subprime mortgage crisis and to the collapse of Bear Stearns, on March 19, 2008, the Federal Reserve set up the Primary Dealers Credit Facility (PDCF), whereby primary dealers can borrow at the Fed's discount window using several forms of collateral including mortgage backed loans.[5]

List of Federal Reserve primary dealers

List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York.

  • -- BNP Paribas Securities Corp.
  • -- Banc of America Securities LLC
  • -- Barclays Capital Inc.
  • -- Cantor Fitzgerald & Co.
  • -- Citigroup Global Markets Inc.
  • -- Credit Suisse Securities (USA) LLC
  • -- Daiwa Securities America Inc.
  • -- Deutsche Bank Securities Inc.
  • -- Goldman, Sachs & Co.
  • -- HSBC Securities (USA) Inc.
  • -- Jefferies & Company, Inc.
  • -- J. P. Morgan Securities Inc.
  • -- MF Global
  • -- Mizuho Securities USA Inc.
  • -- Morgan Stanley & Co. Incorporated
  • -- Nomura Securities International, Inc.
  • -- RBC Capital Markets Corporation
  • -- RBS Securities Inc.
  • -- Societe General
  • -- UBS Securities LLC.

The latest list reflects the following changes:

  • Effective April 1, 2010, Daiwa Securities America Inc. changed its name to Daiwa Capital Markets America Inc.
  • Effective July 27, 2009, Nomura Securities International, Inc. has been added to the list of primary dealers.
  • Effective July 8, 2009, RBC Capital Markets Corporation has been added to the list of primary dealers.
  • Effective close of business June 26, 2009, Dresdner Kleinwort Securities LLC has withdrawn its name from the list of primary dealers.

NOTE: This list has been compiled and made available for statistical purposes only and has no significance with respect to other relationships between dealers and the Federal Reserve Bank of New York. Qualification for the reporting list is based on the achievement and maintenance of the standards outlined in the Federal Reserve Bank of New York's memorandum of January 22, 1992.

Government Securities Dealers Statistics Unit Federal Reserve Bank of New York

New York Fed releases new primary dealer rules

  • New rules require 1 yr of experience in relevant markets
  • Noncompliant firms face suspension or loss of status
  • NY Fed says application process to be 'more formal'

The Federal Reserve Bank of New York on Monday announced a new set of standards it will use in its dealings with banks and securities firms known as primary dealers.

The rules contain tighter requirements, including a higher minimum net capital level and a year's worth of operating experience for new applicants for primary dealer status.

Currently 18 banks are authorized to deal directly with the Fed, the U.S. central bank. They are required to bid on Treasury securities auctions and help the Fed implement monetary policy.

Existing primary dealers are likely to find they already meet the requirements.

"I can't imagine that they would set a rule that would cause recently accepted primary dealers or others to be kicked out of the club," said William O'Donnell, the head of Treasury strategy at RBS Securities in Stamford, Connecticut. "It just shows that as the ranks of aspiring dealers grows, the Fed is making a noble effort to clarify the terms of admission,"

The New York Fed will now require primary dealers to hold at least $150 million in net capital, up from $50 million.

To be a primary dealer, a firm will now have to show that it has engaged in businesses relevant to primary dealer operations for at least a year. Applicants will have to demonstrate their involvement in Treasury, repo and cash desks and prove they can "provide sizable, sustained performance in operations" in those markets, as well as others in which the New York Fed participates.

The rules also touched upon possible actions the New York Fed could take against firms that do not continue to meet primary dealership standards, including suspension or withdrawal of the status.

Primary dealer status has been viewed among banks and their clients as a stamp of government approval, but there has been little public information about the process by which the New York Fed evaluates applicants.

"I find it relatively consistent to what people thought the Fed had already been requiring," said Ernest Patrikis, a partner at White & Case in New York. "It's just that it's spelled out now from soup to nuts and it levels the playing field."

In Monday's announcement, the New York Fed emphasized that primary dealer status "in no way constitutes a public endorsement."

After consolidation and fallout from the financial crisis took a hefty toll on the number of primary dealers operating, interest in the status grew. Analysts expect more firms apply for primary dealership status in the coming months. Two firms, MF Global and TD Securities, are awaiting approval from the New York Fed to become primary dealers.

Primary Dealer Credit Facility

The Primary Dealer Credit Facility (PDCF) was created in March 2008 as an overnight loan facility that provided funding to primary dealers in exchange for a specified range of eligible collateral. The PDCF was intended to foster the functioning of financial markets more generally. The facility expired on February 1, 2010.

When, in the spring of 2008, there came a sudden burst of CLO issuance, there was some speculation that the securitisations were being created to take advantage of a new Federal Reserve facility.

The Fed’s Primary Dealer Credit Facility, or PDCF, was initiated in March 2008, in response to troubles at Bear Stearns and the seizing-up of money markets. The facility let primary dealers, the Fed’s official trading partners, borrow from the central bank in return for posting investment-grade collateral.

Lehman’s $2.8bn Freedom CLO, we know now thanks to Anton Valukas’ report into the bank’s bankruptcy, was created with the express intention of using the deal at the facility.

The troubled bank pledged Freedom’s $2.26bn senior A-rated tranche to the Fed three times, receiving a total of $6.93bn. Other CLOs, and some as yet “unknown” collateral, were also pledged to the Fed, according to the report.

In total Lehman accessed the PDCF seven times before its bankrupcy.

JP Morgan, meanwhile, did something similar with its $1bn Ares Enhanced Loan Investment Strategy 2008-3 CLO. Other CLOs created at the time — by Deutsche Bank and Barclays – were also thought to be possible contenders for use as PDCF collateral, though that has not been confirmed.

Use of the PDCF was of course, to be expected. The Fed set it up with the idea of relieving market illiquidity. Note for instance, that Citi refused Freedom and similar Lehman CLOs when they were offered as collateral to secure intraday clearing exposure. No one, except the Fed, wanted these things.

The controversy over Lehman’s Freedom deal should focus on the bank’s concealment of the CLO’s purpose — you can’t fault the company for taking advantage of a Fed facility. Reports that the bank had sold about $2.2bn of the senior notes in the securitisation suggested Lehman was finding genuine demand for its assets — something which, we know now, simply wasn’t true in the spring of 2008.

Likewise the bank’s insistence that it was simply “testing” Fed PDCF demand, as opposed to actually tapping the facility, is market obfuscation, as is deleting references to the PDCF in Freedom’s summary.

Transparency, then, was the key.

The market looks to have been more certain of the purpose of JP Morgan’s Ares CLO — and, at least, the bank did mention in its 2008 annual report its use of the PDCF as a source of funding.

Primary dealers short Treasury debt

Increases in "indirect bidding" reduce primary dealer importance

They are the official trading partners of the Federal Reserve Bank of New York, currently numbering 18, but they’ve had to contend with some difficult newsflow in recent weeks.

For a start, the Federal Reserve decided last week to change its requirements for PDs, raising the net capital requirement for banks to $150m from $50m. This prompted speculation that the Fed was preparing itself for a sudden rush of applications for PD status, eager to take advantage of things like record Treasury issuance and the Primary Dealer Credit Facility.

Then, lo and behold, at least three non-US banks were outed as wannabe-PDs last week.

But is the rush to PD-status coming at exactly the wrong time?

Recall that there are three categories of bidders at Treasury auctions: PDs, the historical counterparties for the Fed, indirect bidders, which are Treasury-buyers who bid through PDs, and direct bidders, who bypass the PDs and bid directly (duh).

Two of last week’s big four Treasury auctions saw a spike in direct bidding, prompting speculation of a single large bidder, or a more long-term, structural shift in demand for US Treasuries. We’d also note that growing use of the Treasury Automated Auction Processing System (TAAPS) , which enables any institution to place bids themselves online, may be having an impact too.

Here’s Deutsche Bank’s Marcus Huie on the rise of direct bidding:

Because any institution can bid through TAAPS, it isn’t clear which category of institution is actually shifting its bidding away [from indirect bidding mostly]. We can examine the auction allotment data published by the Treasury, but the results are inconclusive. From the auction allotment data, there are only 3 categories of bidders who make up most of nearly every auction: Dealers and brokers, Investment funds, and Foreign and international. The first category can include both primary dealers, and broker/dealers who aren’t primary dealers yet but might be seeking to apply for primary dealership status. Foreign and international could include foreign central banks, commercial banks, or investment managers. An increase in direct bidding often has no corresponding shift in the auction allotment data. Sometimes there is a relationship, but it can’t be identified with one particular category. For example, the record rise in 2Y direct bids last October, amounting to an increase of $7 bn in direct fills, was reflected in the allotment data by a $2 bn increase from investment funds and $5 bn from foreign and international. But the rise in direct bidding in the 10Y from October through December wasn’t related to a consistent increase in any one category.

Thus it appears that direct bidding may come from any of the 3 principal categories, and means that a range of customers are increasingly bypassing the primary dealers. This trend could raise the cost for primary dealers of participating in auctions, since they no longer see the information content of customer flows. In combination with the raising of capital requirements for primary dealers, to $150 mm from $50 mm, primary dealership is on the margin slightly less attractive. This has not been reflected in recent auction statistics, however, since primary dealer participation remains high. In the long term, however, this might lead to more volatility in auctions.

Current primary dealers, for those interested:

BNP Paribas, Bank of America, BarCap, Cantor Fitzgerald, Citi, Credit Suisse, Daiwa, Goldman Sachs, HSBC, Jefferies, JP Morgan, Mizuho, Morgan Stanley, Nomura, RBC Capital Markets, RBS, UBS, and, err, Deutsche Bank.

Growing indirect bids for Treasury auctions

Reuters -- Two minutes after the U.S. Treasury Department closed a multi-billion dollar debt auction last month, one banker was angrily punching in numbers of a hotline he'd found on the Treasury's Web site.

Primary dealers, including his bank, had just been blindsided by a large order from a group of so-called direct bidding firms whose presence is growing.

Financial firms acting as direct bidders are sapping profits for the big banks that have long seen themselves as the main intermediaries in the sale of government debt.

Primary dealers say direct bidders need tighter control given risks they could make auctions more volatile and expensive for the U.S. government at a time when it is borrowing record amounts to fund its programs.

The U.S. Treasury, however, says it supports broader access to auctions on grounds it raises competition and cuts costs.

The banker, who did not want to be named for this story, said he called Treasury to find out more about the firms in this group: He wanted to know how many had bid that day and what the standards were for allowing them to participate.

Primary dealers say a large direct bid in an auction makes it harder for them to properly price their own bids for Treasuries ahead of time. If primary dealers guess direct bidders will turn out in force for an auction, they could choose to pull back from a portion of their bids. They say Treasury auctions could begin to show less stable results. This would likely raise borrowing costs for the U.S. government.

"Because of the direct bid, determining the accurate price in the auction becomes more problematic. If it becomes more problematic fewer people will be willing to put capital at risk for size in the auctions," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford Connecticut.

Some primary dealers are asking the Treasury for limits on the percentage of direct bids that can be placed in a given auction. This, they say, would cut down on the level of uncertainty that has taken hold ahead of auctions recently.


On the day the angry banker made his phone call, direct bidders took down more than 17 percent of a $21 billion auction of 10-year notes, a far higher portion than normal. Direct bidders took 8.9 percent of the December 10-year note auction, and in November their bids made up 4.5 percent of the total. Similarly, January's three-year note auction saw direct bidders take 23 percent, while they accounted for only 2.9 percent of the December three-year auction.

"More and more buy-side accounts are so starved for yield that they're trying to go around the dealers," said Chris Whalen, co-founder of Institutional Risk Analytics. "Why should PIMCO go through a primary dealer?"

But despite the constant communication between these big banks and the government, they can't hope for much change.

"We support broad access to the auction process and we think that this is a good thing from the standpoint that it breeds competition and helps us achieve our goal of financing the government at the lowest cost over time," said Matthew Rutherford, the deputy assistant Treasury secretary for federal finance, speaking to reporters at last week's quarterly refunding announcement.

The direct bidder issue is one on which the primary dealers have little leverage in persuading Treasury. Despite the record size of recent Treasury issuance, investors are still snapping up U.S. government debt, creating healthy demand that has led to smoothly executed auctions.

This means the Treasury Department has little incentive to do more than listen to primary dealers' complaints about direct bidders.

"I think they like having a larger number of people with access to their auctions," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. He explained that in the event of a disaster such as the 9/11 attacks, which knocked out New York firms' systems, a broader network of direct bidders could step in and make sure an auction went smoothly.

There are few details on the makeup of the group of direct bidders available to the public. Treasury does not disclose the number of firms authorized to participate as direct bidders, and there's little information available to indicate the potential size of firms that have direct bidding terminals.

Primary dealers aren't afraid to speculate on who the mystery bidders might be. Some posit they are smaller securities firms that are preparing to apply to become primary dealers, while others say those firms aren't well-capitalized enough to make much of a dent in a single auction.

Treasury dealers say direct bids risk upending auction process

"Direct bids from investors at Treasury auctions risk distorting prices in the $7 trillion market for U.S. government debt, bond dealers underwriting the sales told U.S. officials.

Three of the nine primary dealers that met with Treasury officials ahead of today’s announcement of the government’s quarterly financing plans said they’re concerned about the increase in so-called direct bids, according to people involved in the discussions. The Treasury will release details of discussions with its debt advisory group today, as well as how much in 3-, 10- and 30-year securities will be sold next week.

Direct bidders accounted for 10 percent or more of the total in 12 of 42 fixed-rate auctions since July, compared with only 6 times from 2004 to 2008, according to Treasury data. The Wall Street firms say the increase in bids sent directly to the Treasury by investors including banks, large money managers and hedge funds may raise borrowing costs for the Treasury and taxpayers if dealers bid less aggressively because of higher volatility at the sales.

“It doesn’t crash our market, but it becomes an interference, and it will become more costly to place the debt,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, one of the 18 primary dealers that also act as counterparties to the Federal Reserve when it sets monetary policy..."

Repo transactions decline for primary dealers

"The sharp reduction in financial leverage since the collapse of Lehman Brothers is illustrated by the steep decline in the use of repurchase or repo transactions by Wall Street dealers.

In a repo, an investor can borrow cash for a short period from another party, using securities as collateral for the loan. Investors with large portfolios of securities can thus lend these out and earn a return over time.

Federal Reserve data shows that financing volumes of mortgages, US Treasuries and corporate debt by primary dealers has dropped almost 50 per cent from levels seen before Lehman’s demise. Overall repo activity in the US during the first six months of this year has fallen to levels not seen since 2003.

“Everybody now pays more attention to due diligence and looks at their counter party risk a lot more closely,” says Scott Skyrm, senior vice-president at Newedge, a repo broker dealer.

At the centre of the US repo market sits the tri-party model, where a custodian bank, Bank of New York Mellon and JPMorgan, helps to administer a repo agreement between two parties. An investor places its money with the custodian bank, which in turn lends it to another institution, and then assets are pledged as collateral for the loan.

Such a model functions well when liquid assets such as Treasuries are being used, as this type of collateral can easily be sold.

During the credit boom, which peaked in the first half of 2007, the type of collateral being pledged for cash in repo transactions, had steadily migrated away from Treasuries and towards other assets such as private label mortgages and corporate securities. This reflected the drive by investment banks and investors to boost their leverage and garner higher returns.

“The tri-party repo framework that worked so well for Treasuries was not as robust for less liquid securities,” says Lou Crandall, economist at Wrightson Icap. “The system works if the clearing banks are confident that they can liquidate collateral quickly.”

The near-failure of Bear Stearns six months before Lehman’s demise alerted the Fed to the dangers associated with having two clearing banks supporting the financial system.

Tri-party was very popular with investment banks as it allowed them to finance their balance sheets with short-term funding.

However, as soon as market sentiment turned negative on lower quality or more complex assets, investors who had funded these repo agreements began to pull their money out.

That sparked a run on the investment banks, potentially exposing the clearing banks.

This has left regulators and the market with one big fear: if one clearing bank ran into trouble, could the other step forward and support the system? There is also a separate issue, which is that when investors become worried about a particular institution, any move by a clearing bank to tighten standards could spark a bigger run on the borrower in question that ultimately results in bankruptcy or rescue.

The consequences for the repo market are best highlighted by the plunge in dealers financing corporate securities. A common transaction during the boom involved investors lending out Treasuries and then using the pledged cash to borrow corporate securities. They made money on the difference between the higher rate for corporates than Treasuries.

This daisy chain collapsed when investors lost faith in using corporates as collateral and the relationship between Treasuries and corporate securities changed sharply.

Based on Fed data, corporate securities being financed via repo is currently around $92bn. Last September corporate repo was running at $180bn; it then plunged in the wake of Lehman’s bankruptcy and AIG’s secured lending problems.

Standards for collateral used in repo remain much higher and traders say reforms for the repo market, which are still being discussed by dealers and the Fed, should focus on making sure that continues.

“Haircuts and margin for repo trades are still significantly higher than what they were before the crisis,” says Joseph Abate, money markets strategist at Barclays Capital. “There were a lot of assets that should not have been used as collateral in the repo market to start with. Repo is not a one-size-fits-all market.”

Agreements used by the Federal Reserve Bank of New York

Uses of Securities Holdings

  • --Securities Lending: Many central banks (including the NY Fed) hold large portfolios of government securities. Securities lending is a common way to generate additional return on these assets.
  • --The NY Fed Securities Lending Program: Prior to 1999, the NY Fed rarely lent securities to market participants. In the interests of aiding the smooth functioning of the US government securities market, in 1999 the NY Fed implemented a formalized securities lending program that makes available a large portion of the NY Fed’s securities holdings on a daily basis. The purpose of the program is not to seek to generate return but to aid the smooth functioning of government securities market. (The NY Fed cares about an efficient market because, among other things, a smooth functioning market makes it easier to implement monetary policy.) The program is a “temporary and secondary source of Treasury securities to the market.” The program is different from standard return-based programs in that it operates later in the day, is overnight (not term) and has a required minimum bid rate.
  • --Consistent with the intent that the program operate to aid the smooth functioning of the market, at the sole discretion of the NY Fed, securities lent may be limited if a particular issue is trading “special” or it appears that one dealer may be attempting to corner an issue.

“Rehypothecation” after Lehman

"Many hedge funds offer high returns based on leverage, making money from bets made with borrowed assets. They rely on being able to borrow those assets, usually from prime brokers, at rates they can afford.

The most common way to ensure this is to allow the prime brokers to use the assets they hold on behalf of the hedge funds to lend (or swap or otherwise use) to other clients. This “rehypothecation” of assets has been an essential part of both the hedge fund and prime brokerage business model for many years.

“Rehypothecation is essential if clients want cheap and reliable financing,” says Dougal Brech, managing director in Credit Suisse’s investment banking division, responsible for European client services. The alternative would be credit lines – borrowing directly from a bank – but although this seems more straightforward, and in the current low interest rate environment, perfectly affordable, it is vulnerable to change.

“If credit ratings change, or interest rates rise, those credit lines get pulled first,” says Mr Brech. So rehypothecation has been a common feature of the relationship between hedge fund and prime broker.

It works very well for all parties until a prime broker goes bust, as did Lehman Brothers, leaving hedge funds desperately trying to get back the assets the prime broker was holding on their behalf. The events of September 2008 and since have offered a salutary lesson to many hedge funds, who had not paid sufficient attention to the documentation of their transactions with prime brokers.

In an ideal situation, the documentation would be very detailed, stating clearly how the hedge fund’s level of indebtedness to the prime broker is calculated, precisely which of its assets can be used for rehypothecation and the financing terms the prime broker will offer in return.

The gold standard for rehypothecation agreements, says Mr Brech, include “daily transparency on what you have, what they are using, what they could use”.

In the US, regulations in place before the Lehman collapse limited rehypothecation to those assets a hedge fund held in a margin account, ie had not fully paid for. Assets it owned fully were held separately, usually in a cash account.

US regulation also limited the amount of leverage a hedge fund could avail itself of from a prime broker, which, by implication, capped the amount that could be rehypothecated. This led to a large number of hedge funds looking for funding in Europe, particularly the UK, where such leverage was not generally capped.

However, when the unthinkable happened and a large prime broker did go out of business, it emerged that those funds using a European branch of Lehman not only had more assets lost in the labyrinthine relationships of a prime broker but they had less protection for them than in the US, where hedge fund assets were treated as separate from the assets of the bank.

Following this realisation, many hedge funds either stopped allowing rehypothecation or placed strict limits on what could be used. According to a report from the International Monetary Fund, the amount available for rehypothecation across the industry plunged by $1,774bn (£1,105bn, €1,235bn) in the year to December 2008, significantly changing the shape of the prime brokerage industry, and indeed the liquidity of the financial markets.

Since then, there has been a loosening up of attitudes to rehypothecation, but the landscape nevertheless looks very different.

A growing number of hedge funds are following the example of such canny peers as Brevan Howard, which stated in its annual management review “we limit the rights of prime brokers to rehypothecate our securities. We move our cash balances away from our prime brokers to segregated custody accounts at third parties.”

So widespread is this attitude becoming that some prime brokers are starting to offer this facility, or something like it, without being asked. Deutsche Bank recently announced it would offer clients a hybrid custody version of prime brokerage, named DB Integrated Prime Custody.

This “allows funds to hold unencumbered assets that were typically held within their prime brokerage in a separate custody account held at BNY Mellon”, according to a press release.

While hedge funds may be keeping a closer eye on what exactly their prime brokers are doing with their assets, rehypothecation nevertheless remains an important part of the business model for both parties.

“Nowadays rehypothecation is still important, but rather than being the main source of funding, it is just a part of it,” says Mr Brech. “Clients are almost putting pressure on us to use more of their assets.”

In general, the more illiquid the asset available for rehypothecation, the better the financing terms the prime broker offers.

Although this makes it more desirable, for the hedge fund, to allow the prime broker to re-use illiquid assets, the very reason for the improved deal is the increased risk that in an insolvency event, it would be impossible to get back the asset.

Tri-party repo transactions and the Lehman bankruptcy

"...In the week following the Lehman collapse, Barclays, as part of its Asset Purchase Agreement, was supposed to purchase (at first) $70 billion worth of assets (coupled with assuming the related $69 billion of debt): an amount which for liquidity-depleted Lehman was financing with overnight loans from both the NY Fed and from JPMorgan, which acting as a Fed agent, was involved in a tri-party repo transaction with Lehman Brothers. Yet Barclays did all it could to minimize the amount of cash it would have to pay JPM, as it suddenly realized the assets it had purchased were quickly dropping in value. A good summary is presented in the UCC filing:

On Friday night, for the first time as far as we know, the Bankruptcy Court was apprised of a different 'deal' between Barclays Capital and Lehman Brothers -- and that Barclays Capital was no longer purchasing $70 billion in assets and assuming $69 billion in related debt. But the Court was not apprised of the purchase that Barclays Capital now says it agreed to make. Instead, of the Court being told that Barclays Capital was purchasing approximately $49.7 billion in securities for $45 billion in cash, the Court was told that Barclays Capital was purchasing $47.4 billion in securities for $45.5 billion in cash. In addition, the Court was told that the reason for the change was a deterioration in market prices, an explanation that we now know to be incorrect .... [I]nasmuch as you ended up taking securities that had not been part of the 'Fed collateral' -- again, some were part of the 'Barclays Capital tri-party collateral' and still others were not financed by JPMorgan at all -- we believe that a full accounting should be done. It is altogether possible that the LBI estate and its creditors gave you more or less value than you were entitled to receive. Moreover, the Bankruptcy Court was told that Barclays Capital was to receive $47.4 billion (not $49.7 billion) in securities and to pay $45.5 billion (not $45 or $45.2 billion) in cash. We are both duty-bound to ensure that LBI received the value it was supposed to receive in exchange for your $45 billion. We have offered several times to do this accounting with you (and, as appropriate, the Fed), and it is ntirely possible that the SIPA Trustee and the Bankruptcy Court would want such an accounting, but your personnel have declined, citing the amount of time and effort it would take. We should do this accounting and should do it now...

A different way to explain what was happening is provided by the transcript of Kirk's confidential deposition in court, also made public:

. . . [A]s I understood it from the way that Mike Keegan explained it to me was that the Fed had been providing a repo for Lehman Brothers earlier in the week of approximately $50 billion, that the Fed had made it known that they wanted to be repaid on that repo, and that Barclays had agreed to assume that repo obligation from the Fed. Without that financing the firm would have collapsed the next morning. So the way it was explained to me was, during the transfer of those -- that loan and the collateral associated with that loan, there were many pieces of collateral that Barclays could not value, so they did not accept them in transfer from the Fed. And mechanically, it was explained to me the way that worked was, in a tri-party repo, the Fed transferred all of the positions to JPMorgan and then JPMorgan began transferring those positions upon the receipt of money from Barclays transferred money, and then they would transfer the positions that secured that repo. And at some point during that process, Barclays became very uncertain as to some percentage of that collateral, I don't recall the exact amount, but it was a large number, maybe as much as, you know, 20 percent of the collateral, and when Barclays didn't accept those positions, they, by definition, just got left at JPMorgan. They -- so JPMorgan was left with collateral that they were not comfortable with but Barclays would not accept, so -- and JPMorgan, I guess they attempted to negotiate but couldn't get that negotiation done.").

Barclays' attempt to nickel and dime JPM (and the US taxpayers) so infuriated Jamie Dimon that he penned an angry letter to John Varley, Barclays Group CEO (which CC:ed Barclays' president Bob Diamond), threatening with litigation in case Barclays is intent on sticking JPM with Lehman collateral that it thought was without value and not worth assuming in a time when every single day stock prices were crashing further lower.

Fed alleged to support Wall Street

Source: Wall Street profits from trades with Fed Financial Times, August 2, 2009

"Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

US deficit expansion fuels Wall Street

Source: Son of McCoy Helps Fed Field New Treasury Masters Bloomberg, July 20, 2009

"The U.S. Treasury market is regaining its allure to the so-called Masters of the Universe as banks and securities firms swell the ranks of bond dealers that underwrite the government’s record debt sales.

Jefferies Group Inc. and Royal Bank of Canada joined the central bank’s primary dealers in the past month, the first time two firms have joined in a single year since 1988. CRT Capital Group in Stamford, Connecticut, announced on July 8 that it intended to become one after hiring 29 sales and trading staff. MF Global Ltd. and Nomura Securities Co. said they’re in discussions to join the network.

The deficit is projected to quadruple to $1.85 trillion in the fiscal year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the Congressional Budget Office.

Bond trading is still the mainstay for Wall Street’s profits. Goldman Sachs Group Inc. said last week its fixed income, currency and commodities group generated a record $6.8 billion in revenue in the quarter ended June 26.

JPMorgan Chase & Co.’s investment banking revenue, which includes bond trading, rose 33 percent to $7.3 billion in the quarter ended June 30 from a year earlier. Both New York-based firms are primary dealers.

“It’s become a much better business to be in because of the built-in and ongoing supply that is going to be generated by the government,” said David Robin, an interest-rate strategist in New York at institutional brokerage firm Newedge USA LLC, who started in the bond business in 1980. “It pays to be a distributor of sort of an endless supply of any product.”


The current system of primary dealers was set up in 1960 with 18 dealers. The number of primary dealers grew to 46 in 1988 and then declined to 21 in 2007.

Effective June 18, 2009, Jefferies & Company, Inc. has been added to the list of primary dealers.

On August 1, 2006 Cantor Fitzgerald was added as a primary dealer. The previous last major addition to the list (excluding name changes) was Countrywide Securities, which joined in 1999.[6]

On September 15, 2006, ABN AMRO Bank, N.V., New York Branch withdrew its name from the list of primary dealers; CIBC World Markets Corp. withdrew on February 8, 2007; and Nomura Securities Inc. withdrew on November 30, 2007. However, in February 2009, Bloomberg reported that the Fed is considering adding several additional firms to the list of primary dealers, including Nomura Securities.[7]


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