March 23 - The Day Massive Stimulus for Corona Crisis Occurred

Noah Rosenblatt

Talking Manhattan on
Staff member
Some thoughts.

The problem - Massive deflationary forces due to global shutdown from the Corona Virus. Add in a oil price war. Each on its own would be destructive. Together, its a black swan event. Health situation is scary, as everyone knows. But the financial side is even scarier. You got the shadow banking system thath is in the order of $15-20+ Trillion (no idea real number, anyone know?). Think repo markets, commercial paper, money market funds, foreign exchange reserves, eurodollars, treasuries corporate and high yield bond markets, etc etc . As revenue implodes from the shutdown, how will rents and mortgages and bills get paid for individuals, small businesses, big businesses, etc. How many will lose jobs? How many will be back at their job after this? The ripple effects are ugly. So something needs to happen and something majorly massive, far exceeding 2008/2009 credit crisis.

What Fed is Doing - lowered rates to zero, backstopping the banking system (especially shadown banking system/credit markets), adding trillions in liquidity to short term markets, and engaging in massive, and I mean massive, debt monetization (ie, printing money) by buying MBS & commercial MBS, ABS, Corporat Debt, Treasures, Commercial Paper, Repos, etc to primary dealers via POMO - Here is the Fed's statement from 8am this morning - - All of this focus is to mitigate risk of a credit event or a freeze up of the shadow banking system that will cause massive liquidations & credit shocks (think Lehman, but way worse)

What Govt is Doing - fiscal stimulus and yes it will be massive. The goal will be to give everyone $$ to bridge this situation. The problem is there will be a demand problem that we dont yet know when will return. Expect this package to be announce in phases, up to $2Trillion maybe at first with perhaps more traunches later on as needed. How will they fund this? Well normally they would issue Treasuries to fund stimulus and let the markets buy em up. But this time it seems they may order US Mint to create two, yes 2, Trillion dollar coins. I guess with the order that another coin or two may be needed in the future. So, now the Govt has these trillion dollar coins, how do they convert that to $$ to pay for this? The Fed buys the coins and mouse clicks $2Trillion into Govt accounts for use. Same thing as the Fed buying MBS and Treasuries from primary dealers via Permanent open market operations

We got the Fed actions already, quite fast and insanely massive. The fiscal side is coming any day. End of day Fed balance sheet could pop to over $10trln by the time we are out of this.

We do not have an inflation problem with all this stimulus. We have massive deflationary hurricane problem that fed/govt is trying to mitigate and provide a bridge for so this doesnt turn into a depression. Its very possible unemployment temporarily spikes to 20-30% from this. Its sad to think of job losses if this goes on for longer than 1-2 months.

X Factors:

Duration until Treatment - vaccine is year away, min, so we need treatment. If we can get this approved and distributed and available and people stop dying from this, that will be huge.

Duration until Peak Containment - hugely critical. Everyone waiting for this as we know #s will surge for next 1-2 weeks as tests get reported on. How long until that curve flattens

Duration of Shutdown - hugely critical. How long does this last. It feels like markets are pricing in 1-2 months. What if its 3+ months. Praying the scientists innovate a treatment here.

Amount & Effect of Stimulus - Fed monetary is all in, and will continue be. No limits. Govt fiscal, time will tell. How does either effect this crazy cycle.

Credit Event - Will we wake up one day and have more Lehmans by the time this is done and where does that push markets?

Jobs - How does stimulus effect job losses and do we come right back after this.

So many factors as far as I see. Scary, but hoping for a positive factor to evolve...praying for treatment!

David Goldsmith

All Powerful Moderator
Staff member

Tom Barrack predicts commercial mortgage market crisis
Barrack laid out concerns and potential solutions in a white paper posted to Medium on Sunday

Colony Capital chairman and CEO Tom Barrack thinks the commercial mortgage market in the United States is on the verge of collapsing.
Barrack wrote in a white paper, posted to Medium late Sunday, that the coronavirus pandemic and subsequent shutdown of sectors of the U.S. economy could lead to margin calls, foreclosures, evictions and potential bank failures. He claimed the impact of this could be greater than the impact of the Great Depression.
“Immediate concerted action must be taken to fend off this crisis and avoid the need for a taxpayer-funded bailout of the real estate market and banks,” Barrack wrote. “In particular, the banks, mortgage REITs and debt funds must agree on a collaborative solution — implemented with the reinforcement and support of federal government policy — to ensure stability moving forward.”

The paper specifically focuses on how fragile mortgage real estate investments trusts are, along with the lenders and credit funds that give them liquidity through repurchase financing.

Barrack advocates a rescue plan that would include $500 billion of taxpayer funds to inject liquidity into the financial system, temporary suspensions of mark-to-market accounting and delaying a new accounting rule that governs the recognition of credit losses until 2024.

On Monday morning, the Federal Reserve announced a plan to unclog credit by expanding its facilities to include different types of municipal and corporate debt. Its mortgage security purchases from last week are now unlimited, it’s planning to buy $250 billion worth of mortgage securities this week and it will start purchasing commercial mortgage-backed securities that were issued by government-supported entities.

Noah Rosenblatt

Talking Manhattan on
Staff member
yeah i mean, thats how the dominoes fall. This is why the Fed is doing what they are doing. But landlords and banks need to get paid, so, how does that get fixed

David Goldsmith

All Powerful Moderator
Staff member
Now matter how much liquidity goes into buying them, how do they "work" if the underlying debt service isn't being paid? And how does that happen without rent collection?

David Goldsmith

All Powerful Moderator
Staff member

Real estate stocks fall despite Fed’s move to expand lending
REITs struggle as markets tumble after Congress fails to pass stimulus deal

Real estate stocks continued to tumble Monday, in some measures performing worse against the broader market, after Congress failed to pass a nearly $2 trillion stimulus package.

Markets closed lower even as the Federal Reserve announced taking bolder steps to prop up the country’s economy in the wake of the coronavirus pandemic with a plan to expand lending.

The S&P 500 fell 2.9 percent Monday, and the Dow Jones Industrial Average plunged another 3 percent, or 582 points. But real estate stocks also sank, with losses continuing to outpace the broader market.

The FTSE Nareit All REITs index, which tracks public real estate investment trusts, plummeted 5.3 percent. Nareit’s index for equity REITs — firms that own and operate properties — was down about 5.2 percent. Nareit’s index for mortgage REITs, which provide financing for income-generating real estate, appeared to suffer worse in response to the Fed’s actions, nosediving over 11 percent.

Major brokerage firms also were in the red: CBRE Group was down 12.9 percent; Cushman & Wakefield lost 6.5 percent; and Newmark Group’s stock declined 0.8 percent. At least one brokerage, however, did notch gains, as Realogy Holdings Corp closed at $3, up 7.9 percent.

The central bank on Monday said it would buy back agency commercial mortgage-backed securities, in addition to previously announced mortgage-backed securities. It also would provide up to $300 billion in new financing to boost the flow of credit to employers, consumers and businesses, among other measures.

Monday’s steps taken by the central bank appeared to not calm investors, who have been taking part in a broad-based equity sell-off for the past month on fears that the coronavirus pandemic will cause the global economy to grind to a halt. Investors also responded negatively last week, after the Fed slashed interest rates for the second time in a month and resurrected another credit-boosting program from the financial crisis.

Senators in Washington, meanwhile, have been deadlocked on passing a $1.8 trillion economic assistance package that would help the U.S. economy, lifting up industries like aviation, particularly hard hit by travel restrictions. The New York Times reported that Democrats argued that the proposal would serve as a bailout for big businesses, and they called for greater protections for the millions of workers set to be laid off as governments shut down businesses and public places to prevent the spread of the virus.

Write to Mary Diduch at

David Goldsmith

All Powerful Moderator
Staff member
Dow Futures appear to be way up on the news that if people have to die in order to save the market that's ok.

David Goldsmith

All Powerful Moderator
Staff member
Is this the tip of the credit crisis iceberg?

As crisis worsens, Related’s Israeli bonds worry auditors
Bad timing for developer’s securities maturing in the year of coronavirus

Since entering the Israeli bond market in 2015, the Related Companies has been one of the blue-chip U.S. firms of the Tel Aviv Stock Exchange, largely immune to the swings other issuers have experienced.

But with just six months until its bonds are due to mature, questions are being raised about whether Related’s Tel Aviv subsidiary will survive the coronavirus crisis and prolonged economic uncertainty.

The bond-issuing entity, Related Commercial Portfolio, reported an operating capital deficit of $128 million at the end of 2019, according to an earnings report published Tuesday night in Tel Aviv. The deficit is mainly caused by an upcoming $207 million payment due Sept. 30, when Related’s bonds mature.

“Historically, the company has had positive cash flows from operations and access to sources of financing,” the report notes, laying out how Related hopes to solve the problem. “Management intends to recycle the Series A bonds by raising funds in the Israeli capital market, or through other potential alternatives such as refinancing at the asset level, the sale of individual assets, or taking on mezzanine debt.”

That might not be easy. In light of the coronavirus crisis, the deficit “raises significant doubts about the continued existence of the company as a going concern,” auditors with the Israeli division of Ernst & Young note in their report on Related Commercial. A decline in property values caused by coronavirus or disruption in capital markets could make it harder for Related to secure the financing.

Related Commercial Portfolio’s bond price tumbled nearly 20 percent the following morning in Tel Aviv, trading at just about 80 cents on the dollar.

Israeli business daily TheMarker, which first reported on these disclosures, called them an “earthquake in the debt market,” noting that Related Commercial is a company “of great financial strength” with $456 million in equity capital and an A+ credit rating. Israeli rating agency Maalot has since downgraded Related Commercial’s bonds to BBB.

Related calls these concerns a technicality. “The going concern opinion included in our financial statements exists as a technical matter due to the near-term maturity of Related Commercial Portfolio’s Series A bonds,” a spokesperson for Related Commercial Portfolio said. “Related Commercial Portfolio expects the bonds will be refinanced in the ordinary course.”
Related Commercial owns stakes in four residential and six commercial properties in New York City, New Jersey and Chicago, according to disclosures. These include the $650 million Bronx Terminal Market, the $351 million Abington House luxury rental tower near Hudson Yards, and a $132 million office condominium at Time Warner Center.

David Goldsmith

All Powerful Moderator
Staff member
Extell's Israel bonds follow closely behind Related:

"Extell’s bonds are now trading at about 76 cents on the dollar, down nearly 25 percent from the start of the year. That is even worse than the 16 percent decline of the Tel Bond Global index — which tracks foreign bond issuers, including many New York-based real estate firms — over the same period."

David Goldsmith

All Powerful Moderator
Staff member
Trump regulators leave a warning for the Biden team
As they head out the door, Trump-led financial regulators are warning the incoming Biden team that a little-known yet critical corner of Wall Street is broken.

Their concern centers on the short-term funding market, which provides money to businesses, local governments and market players. When this market breaks down, the entire economy can screech to a halt.

That's what happened during the 2008 financial crisis -- and the pandemic caused it to collapse again.

Alarmingly, the short-term funding market imploded late last year and then again in March when the pandemic erupted -- forcing the Federal Reserve to come to the rescue by pledging hundreds of billions of dollars of support.

"Recent events, including the financial fallout from the pandemic, have confirmed that potentially significant structural vulnerabilities remain" in short-term funding markets, the Trump-led Financial Stability Oversight Council (FSOC) warned late last week in its final annual report.

FSOC, created by the 2010 Dodd-Frank law, is a team of regulators from the SEC, Fed, FDIC and other agencies charged with identifying risks to the financial system. It's chaired by Treasury Secretary Steven Mnuchin. Next year, assuming she's confirmed by the US Senate, the council will be led by Janet Yellen, whom President-elect Joe Biden tapped as Mnuchin's successor.

The FSOC is concerned enough about the liquidity issue that it called on regulators to study the short-term funding market and, "if warranted," take "appropriate measures to mitigate these vulnerabilities."

The council did not offer any potential solutions, however -- leaving that task up to the incoming team.

"Our short-term markets don't seem to be able to function without a very significant government backstop. We need to fix it," said Jeremy Kress, a University of Michigan professor who researches financial regulation.

'Structural vulnerabilities'

That won't be easy, because regulators and experts don't seem to know exactly why this corner of the financial market keeps breaking down.

"There is still so much we don't know about these markets and how they work," said Kress. "That's a big part of the problem,"

But there's little doubt short-term markets are vulnerable to bouts of market stress.

Just look at what happened to money market funds, a type of mutual fund that invests in very short-term debt. Although money market funds are supposed to be very safe, in the last dozen years they had to be bailed out twice by Uncle Sam.

As the pandemic erupted earlier this year, money market funds came under severe pressure, prompting investors to yank their cash. In March, outflows from certain institutional and retail money markets exceeded that of the September 2008 crisis, according to FSOC.

Fed comes to the rescue

Companies, local governments and market players rely on this funding to function. When it dries up, it can become difficult for companies and everyday Americans to borrow money.

Money market funds are significant buyers of a short-term form of debt known as commercial paper. But in March as markets cratered on recession fears, these funds stepped away from the commercial paper market, causing it to be "severely disrupted," according to FSOC. Borrowing rates reached levels unseen since 2008.

"Many firms reportedly were unable to issue CP or to only issue at a very high yield," FSOC said.

The Fed was forced to come to the rescue.

The US central bank invoked its emergency powers to launch (and in some cases, re-launch from its 2008 playbook) a series of programs aimed at unlocking markets.

At its peak in April, the Fed's money market liquidity facility provided $54 billion of loans. The programs worked as the exodus from money markets stopped and the commercial paper market calmed down.

"It's absolutely preposterous that money market funds needed a backstop during this crisis just like they did during the last," said Isaac Boltansky, director of policy research at Compass Point Research & Trading. "My sense is that the Biden administration will take another swing at that corner of the market."

'Defied any rational explanation'

The repo market, which is also part of the short-term lending market, blew up months before the pandemic. Although it operates in the shadows, this overnight market plays a central role in finance, allowing banks and market players to quickly and cheaply borrow money for a short period of time. More than $4 trillion in repo borrowings were conducted during the second quarter alone.

Overnight lending rates spiked in mid-September 2019 -- the first such period of extreme stress since 2008. Except, unlike in 2008, this breakdown occurred during an otherwise calm period for markets and the economy.

"In 2008, it made sense. At the end of last year, the short-term funding market defied any rational explanation," said Kress, the University of Michigan professor.

Worse, the unexpectedly high volatility in the repo market caused a relatively modest spillover to the fed funds market, according to FSOC. That caused the effective federal funds rate to break above the target set by the Federal Reserve --a bad sign because it suggests the Fed has lost control over the market.

The Fed was forced to step in by conducting its first repo operations in more than a decade. To further calm markets, the US central bank promised to buy $60 billion per month of Treasury bills. By injecting vast amounts of liquidity, the emergency steps worked to calm down the repo market, at least until the pandemic hit this year.

"The repo market was strained again because of the market dislocations caused by the Covid-19 pandemic," the FSOC report said.

The role of hedge funds

In March, the Fed calmed the repo market by pledging to buy Treasury securities, initially at a pace of $75 billion a day.

In its report last week, FSOC urged regulators to study the role of nonbank players, including hedge funds and real estate investment trusts, in contributing to the repeated repo market turmoil.

Now, that task will fall to Yellen and the Biden team of regulators.

Kress said the incoming administration will have to decide whether to "chip away" at the problem or "go bigger" by implementing larger-scale reform.

"We cannot continue to rely on the Federal Reserve to preserve the functioning of short-term funding markets," he said. "We need to get to a place where these markets can function on their own."

Hopefully that will happen well before the next crisis.

Noah Rosenblatt

Talking Manhattan on
Staff member
Its all about credit spreads! We built this bad boy earlier this year - - tracks 6 corporate credit markets of varying risk to treasuries and aggregates into a equally weighted index. So far its been spot on during the crisis to if your trading equities as an indicator of risk on/off - we are in the euphoric part of the melt up phase I think now, and not too optimistic about how this all ends in 2021. Policy errors likely to be high


Noah Rosenblatt

Talking Manhattan on
Staff member
I expect a final melt up phase, which we are in early stage of now, and expect a quick pop with fiscal coming that will push us to farther record highs. It will get stupid and silly, and be fast. From that top, whenever it is, I expect a crash of 40-50% or more to take place over a quick period as the bubble pops. It will all be fast. From then, I think we embark on a longer term sustainable trend higher with inflation picking up mid and later in this decade. Built credit spread to help time these moves so I can plan accordingly.

David Goldsmith

All Powerful Moderator
Staff member


David Goldsmith

All Powerful Moderator
Staff member

Update on the Fed’s QE​

No Wonder the Cry Babies on Wall Street are clamoring for more. Five SPVs, already on ice, will expire on December 31.

The Fed released details today of its corporate-bond purchases in November ($215 minuscule millions) and corporate-bond ETF purchases in November (zilch). Last time it bought any ETFs had been on July 23. It released details about its other activities in its Special Purpose Vehicles (SPVs), which are essentially on ice. Five of them will expire on December 31, including the SPV that handles the corporate bond purchases.
The Fed unwound its “repo” positions in early July down to zero, and more recently most its “central bank liquidity swaps.” Its purchases of residential mortgage-backed securities (MBS) have been in a holding pattern since mid-September. What it is still buying at a steady clip are Treasury securities, thereby monetizing part of the debt the government is adding monthly to its gigantic pile.
The net effect is that its total assets have edged up just 1.0% since June 24, with a dip in the middle, after exploding higher in the prior three months. This is the Fed’s tool to bail out asset holders during each crisis, and enrich them when there is no crisis:

There is now clamoring among the crybabies on Wall Street that the Fed should increase its asset purchases, and they’re pressuring the Fed to announce a big increase at the next meeting, because, I mean, how else are markets going to keep on going up?
In terms of 2020: Total assets on the Fed’s balance sheet for the week ended December 9 rose by $20 billion from the prior week to $7.243 trillion, but were down a smidgen from the peak on November 18, having gone essentially nowhere over the past five months:

Repurchase Agreements (Repos) remained at near-zero:

The Fed is still offering to buy repos but at a higher interest rate that is unattractive to the market. Since early July, there have been essentially no takers, except for a few tiny transactions every now and then.
Repurchase agreements, as the name implies, are in-and-out transactions. The Fed buys Treasury securities or MBS from a counterparty with an agreement to reverse the transaction on a specific date. The most common repos are “overnight repos” that mature the next day, which is when the Fed gets its money back, and the counter party gets its securities back. Repos are not cumulative; they’re in-and-out transactions as part of the agreement.
The repo market is huge, with $2 trillion to $4 trillion in repos traded each day, and the Fed, even back when it was in it with both feet, was dwarfed by the rest of the daily volume.

Central-bank liquidity-swaps fade, but look at the Swiss National Bank.

The Fed’s “central bank liquidity swaps” by which it provided dollars to a select group of other central banks, fell out of use and are down to just $9.6 billion, a tiny sliver of the Fed’s $7.2 trillion balance sheet, and down from a peak of $448 billion in early May. These swaps mature on a given date at which the Fed gets its dollars back, and the other central bank gets its local currency back at predetermined exchange rates.
But the Swiss National Bank is the exception: Its swaps with the Fed have been increasing since October, and in the latest week reached $5.8 billion, which is strange given that it has a habit of selling swiss francs for USD to buy US stocks with. Whatever its shenanigans may be, it now holds over 60% of the Fed’s tiny amount of remaining dollar swaps:

SPVs on ice, 5 of them will expire on Dec 31.

The Fed loans to the Special Purpose Vehicles (SPVs) that it set up. The Treasury Department provides the equity capital. The amounts in each of those SPVs on the Fed’s balance sheet is the sum of the Fed’s loans to the SPV, the equity capital from the Treasury Department, and interest earnings from the securities that the SPV acquired. But the Fed has barely lent to them, and the entities have been in decline for months.
Five of the SPVs are set to expire on December 31 – PMCCF, SMCCF, MLF, MSLP, and TALF – after Treasury Secretary Steven Mnuchin sent the infamous “Dear Chair Powell” letter to the Fed on November 20, where he explained that these five SPVs were no longer needed for numerous reasons that boiled down to markets are frothing at the mouth, and that those funds could be better used for fiscal support of the economy. Fed Chair Jerome Powell responded with his own “Dear Mr. Secretary” letter.
Even the SPV that holds corporate bonds and bond ETFs, the CCF (combined PMCCF and SMCCF), has been put on ice. The Fed stopped buying bond ETFs in July and added only minuscule and declining amounts of bonds since then, with the total of holdings now amounting to $13.6 billion. The rest of the $46.1 billion in the SPV is unused equity capital from the Treasury Department that Mnuchin now wants back, and interest earned from the bonds. Here are the SPVs:

MBS in a holding pattern since mid-September.

The balance of mortgage-backed securities on December 9, at $2.0 trillion, was down a smidgen from September 16. MBS, as the chart below shows, are peculiar bonds.
All holders of MBS, including the Fed, receive pass-through principal payments when the underlying mortgages are paid off, such as during the current refinance boom. So the Fed needs to buy large amounts of MBS just in order to maintain its balance.
The Fed buys MBS in the “To Be Announced” (TBA) market, which take two to three months to settle, which is when the Fed books the trades. In addition, the Fed sells some MBS outright from time to time. And the timing between pass-through principal payments and settlements of trades is always off, creating this erratic line:

Treasury securities do the lifting.

This is where the Fed is steadily adding to its balance sheet, at a clip of about $80 billion a month, after the huge binge of purchases in March and April.
Over the past five months, the Treasury Department, in order to fund the budget deficits, has added $900 billion to the US national debt. And the Fed has bought $400 billion of it – monetizing 44% of this new debt.
But during the binge in March and April, the Fed bought $1.5 trillion in Treasuries, monetizing nearly 100% of the debt the Treasury Department was adding to the pile at the time:

David Goldsmith

All Powerful Moderator
Staff member
How will the markets react to the "compromise" between Republicans and Democrats of taking away the remaining $429 billion in unspent CARES Act funding for the Federal Reserve's credit lending facilities and repurposing it as an offset for a new $900 billion coronavirus relief bill?

Does this mean the new stimulus only really added $471 billion? ("Only" haha)

David Goldsmith

All Powerful Moderator
Staff member

Paper Dollars in Circulation Globally Spike amid Hot Demand. But a Mexican Bank, after Run-ins with the US, Can No Longer Unload its Hoard of Paper Dollars​

Triggering a showdown — Government of Mexico v. Central Bank — over paper dollars, with ramifications in the US and globally.

The amount of “currency in circulation” – the paper dollars wadded up in people’s pockets and purses, stuffed under mattresses, or packed into suitcases and safes overseas – jumped again in the week ended December 30 to a new record of $2.09 trillion, according to the Federal Reserve’s balance sheet, where currency in circulation is a liability, not an asset. This was up by 16%, or by $293 billion, from February before the Pandemic. The amount has doubled since 2011:

This amount of currency in circulation is a function of demand – and that demand has been red hot: US Banks have to have enough paper dollars on hand to satisfy demand at ATMs and bank branches. Foreign banks will also request paper dollars from their correspondent banks in the US, or return unneeded cash to them.
When there is demand for paper dollars, banks buy more of them from the Fed. They pay for them usually with Treasury securities they hold or with excess reserves they have on deposit at the Fed.

The surge of paper dollars is a sign of hoarding, not of increased payments. In the US, the share of paper dollars for payments has been declining for years, replaced by electronic payment methods, such as credit and debit cards, PayPal, Zelle and similar systems, all kinds of smartphone-based payment systems, the automated clearinghouse (ACH) system, and checks every now and then.
During periods of uncertainty, people load up on cash, as they have done leading up to Y2K, during the Financial Crisis, and now during the Pandemic.
But much of the hoarding of US dollars takes place overseas, with demand for those paper dollars then winding its way to the US banking system via the correspondent banks. These paper dollars also lubricate all kinds of corruption, drug trafficking, and other activities – and laundering this cash is a big profitable industry.
But these paper dollars overseas can pose their own challenges, such as in Mexico where the Bank of Mexico is now facing off against the government over the paper dollars at a Mexican bank that can no longer unload them.

Here is Nick Corbishley’s report on this paper-dollar showdown in Mexico:

These paper dollars appear to be causing all sorts of headaches for one of Mexico’s biggest domestic lenders, Banco Azteca, which is sitting on a growing mountain of dollar bills. But the bank’s owner, Ricardo Salinas Pliego, is Mexico’s second richest man and wields a lot of influence, particularly with Mexico’s current government. Three weeks ago, the government unveiled a new draft law that will force Bank of Mexico (Banxico for short) to become <u>the buyer of last resort</u> of U.S. dollars that commercial banks cannot return to their country of origin. Banxico would be forced to buy those paper dollars, regardless of how these banks had obtained them.
Defenders of the law say it would help Mexicans shut out of the financial system, such as illegal migrants and hospitality sector workers paid in dollars, to save cash. They also argue that it is necessary after a crackdown on money laundering in the US led some U.S. banks to cut ties with their Mexican counterparts, which are now struggling to offload their surplus paper dollars.
But the law’s critics, including Banxico’s Deputy Governor Jonathan Heath, argue that it could undermine the central bank’s independence and risked tarnishing Mexico’s reputation with international financial authorities. Plus, it is only really intended to benefit one bank: Banco Azteca.
“There are plenty of arguments against the proposed central bank reforms,” tweeted Heath. “One of the most important is that it’s wrong to change the law only for the sake of one company, especially one that has already had a run in with the SEC.”
In 2005, Salinas Pliego delisted two of his companies, Elektra and TV Azteca, from the U.S. after settling fraud charges brought by the U.S. Securities and Exchange Commission without admitting wrongdoing. In 2011, the U.S. Office of the Comptroller of the Currency investigated Banco Azteca’s ties with its then-correspondent bank in the U.S., Lone Star National Bank and unearthed numerous money laundering risks, which led Lone Star to sever its ties with Azteca.
Since then Azteca has been without a correspondent bank in the U.S. and has been unable to offload hundreds of millions of cash dollars, according to the newspaper Proceso. But that could all change if the proposed central banking reform becomes law. The draft ruling has already passed the Mexican Senate but its final passage has been held up by a storm of protest, not only from Banxico but also from other banks in the country as well as overseas financial institutions.
Moody’s warned that the reform would be “credit negative” for Mexico’s sovereign debt because it would compromise the bank’s autonomy in a country that underperforms on rule of law. Mexico currently only complies with 5 of the 40 recommendations issued by the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, says the head of Mexico’s Financial Intelligence Unit (UIF), Santiago Nieto Castillo.
Given the power of organized crime in Mexico, Banxico is loath to buy commercial banks’ surplus foreign cash without being able to verify its source of origin. Not only would it make it easier for the proceeds of illicit transactions to flow into Mexico’s financial system; it would mean they could end up forming part of Banxico’s international reserves. And that could expose the central bank to money laundering sanctions and even disruptions to its dollar swap lines with the U.S. Federal Reserve.
Most members of President Andres Manuel Lopez Obrador’s Morena party still believe the reform is worth pursuing, ostensibly to help Mexican migrants get dollars into the banking system. Yet according to Banxico, which tracks money entering Mexico from overseas, 99.3% of remittances arrive electronically, meaning that less than 1% arrive in the form of cash.
On Thursday, Mexico’s finance minister raised an additional objection: the draft bill “would only transfer the problem commercial banks have to the central bank because the central bank would have the same problem: how to export dollars.”
But the law’s backers have a solid majority in both branches of Congress. And they seem determined to use it.
“We are going to approve the law. This we want to make clear,” said Mexican senator Alejandro Armenta, who heads the senate’s finance committee. “We cannot put the concerns of the financial system at the center of our interests while the population suffers from the problem of exchanging dollars when they return from the United States, after working and leaving their families. We have to find a balance.”
The senator added that the bill will pass in February and will include amendments to ensure that it does not facilitate money laundering.
“What is their use if the reserves are just saved, sitting in vaults or as electronic data? The Bank of Mexico is one of the country’s institutions that has to adapt to the changes that the country needs,” he said.
Some of the law’s most strident opponents warn that its real purpose — as depicted by Armenta’s words — is as a trial balloon to gauge the reaction of monetary authorities and investors, both within Mexico and beyond, to government moves against Banxico’s independence. What Mexico’s cash-strapped government really covets, they claim, is Banxico’s $194 billion of foreign currency reserves — and they are mostly assets in electronic form, such as US Treasury securities, that can be easily sold globally.
The government, they say, has already exhausted most of its financial buffers during this year’s virus crisis. Yet it needs to find more money to maintain its social welfare programs and continue supporting struggling state-owned oil giant Pemex. And the last thing it wants to do is to significantly increase Mexico’s public debt load, which would make the economy more vulnerable to macroeconomic risks. Hence the move by the government on Banxico’s reserves.
The dollar’s share of global reserve currencies declined again. But other options are also shaky. Central banks are leery of the Chinese RMB, and its share is still irrelevant. The euro’s share is stuck. But the yen’s share has been rising.