Emergency Fed Repo Fiasco: Funding Markets Remain Frozen After Dealers Balk At $500BN Operation

Less than an hour ago, when previewing today's emergency repo operation which the fed announced ad hoc on Monday morning in response to the latest credit market turmoil, this time affecting the GC repo rate, we said that "we don't even need to wait until 1:45 pm to tell you what will happen: "uptake on today's half a trillion repo will be tiny, probably around $15BN-$20BN."

The result? $19.4BN, precisely as we expected - a non-existent uptake of an overnight operation that allowed as much as half a trillion dollars in securities to be tendered to the Fed.

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We also said that today's repo operation "will do absolutely nothing to fix the broken credit and funding markets", because the Fed no longer knows what is and what isn't broken, and merely is throwing trillions in liquidity at anything that vaguely looks like a crisis. In some ways we sympathize - as we explained earlier, every day something new breaks:

• One day it is ETF NAV discounts blowing out;
• The next day the treasury Treasury Cash/Swap basis surges and funds suffer a historic VaR crash amid forced liquidations;
• Day three sees the FRA/OIS explode higher as a massive dollar funding margin call strikes;
• Then, day four sees the same repo crisis that was supposed to be fixed back in September return with a vengeance, as banks freak out about counterparty risk.

As we further said, "what the Fed needs is the monetary equivalent of Dr. House: someone who can diagnose what is actually wrong with the monetary plumbing, instead of using the same old shotgun approach of shoveling trillions in blunt liquidity into the market, which clearly is not working anymore."

And sure enough, that's precisely what happened, because, after the massive, $500BN facility came and went, the GC repo rate actually rose from 0.30% to 0.425% after the operation, the Global Basis Swap explosion continues...

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... as nothing the Fed has done so far - not the rate cuts, not the QE, not the $5TN in repos, not the enhanced FX swap lines - has succeeded in unlocking any of the liquidity that remains frozen deep inside America's increasingly broken financial system.