Somehow I feel bitter about this round of LTRO. Something about LTRO2 really strikes me as obscene. The only person who know without a doubt must be foaming at the mouth is Jon Corzine. His trade is not only encouraged by everyone, it is fully supported, and the participants don’t even have to wait for the carry to come in to be rewarded by the markets.
So why can’t I borrow from the LTRO and go long some debt that matures in less than 3 years. Seriously, how much leverage can I get on this trade? Why wouldn’t I put up the tiniest bit of capital and lever it up massively? I don’t even have to like the bonds. At some amount of leverage with no mark to market risk, why wouldn’t I put the trade on? Well, I can’t because I’m not a bank. But what if anything about the latest LTRO has to do with banking?
Why can’t companies just go directly to the ECB? Sovereigns? It is because of the rules that only an exclusive club gets to benefit from the free money. Only banks get direct benefit. Until now, many of the policies seemed to require being a bank.
The policies had generally been short dated so risk that the program wouldn’t be around when you needed to roll your debt was a risk – which at least banks are used to dealing with. Policy makers often encouraged the recipients to make loans – to individuals and small corporations. Whether the banks did or didn’t make those loans, you could see why the policy makers needed banks. But what is so special about borrowing as much as you want at incredibly cheap rates for term and then using that money to buy very liquid very transparent bonds?
Why can’t my pension fund get that right? Why not my insurance company? Nothing about LTRO requires special knowledge or skills or products that are special to banks. It just happens other industries weren’t smart enough to create an entity that had the right to create money, set interest rates, and use those tools in almost any way possible.
Maybe there was a time when central banks were “lenders of last resort”. But that is now over. Even on the original LTRO there were some elements of being lender of last resort – namely that no one else was lending to banks. But the rate was “punitive” it wasn’t an “exhaust all other options and then come here for this high rate emergency loan” it was a dirt cheap loan too attractive to pass up. At least there was still some sense of a stigma attached to using it. Now, no stigma at all, heck, banks were probably told to participate.
The LTRO2 program is the lender of FIRST call, rather than last resort.
Occupy wall street had trouble directing its focus. Somehow it got mixed up with the whole 1% vs 99% crud. Maybe all prior policies were too hard, too mixed together, at some level required skills banks had to work, but this one is too obviously a gift and virtually ensures that if any sovereign goes down, all the banks in that country will go down, including the ECB if it is a big enough country. So they have infinite leverage. If the bank cannot survive the collapse of its biggest holdings then it has made an all-in bet. Is that really much different from letting me have 1,000:1 leverage or even 100,000:1 leverage.
Maybe I’m wrong, but once a central bank has gone from being a bona fide lender of last resort to a gift giving enterprise, shouldn’t it become part of the government? They aren’t likely to use the tools any better, but there is a higher probability of me getting a cut of the gift (and since Tom, Dick, and Harry are all nicer and better known than me, they would almost certainly be able to get some of the gift money). Though if someone would give me a banking license in Europe I would take back all those nasty things I just wrote 🙂 But seriously, this program seems so over the top it will be interesting to see what backlash occurs.