Lehman and Bear Stearns-styled Repo Market Risks Remain In Banking

The more eye rollingly obscure and outright boring the financial concept or instrument, the faster most people tune out from its discussions anywhere.  ‘Just leave it to those trained to deal with that stuff’, right?  Yeah, ok, but that’s how we all get into continuous trouble, and possibly how big banks, hedge funds & so-called regulators prefer it.  Because eye rolls lead to skipped institutional oversights, regulations, and eventually, collective conceding to the levels of speculation which lead to flash crashes in markets at the least, or at worst, whole crises like what happened in 2007-2008.

One particularly arcane, cryptic-sounding financial phenomenon which nonetheless poses continuing systemic risk potential is the repo trade, happening daily across multi-trillion-dollar global repo markets.  “Repos”, or repurchase agreements, are fast means for raising hundreds of millions in cash between institutions and greasing the wheels of high finance.  Yet they mix seemingly safe government securities with institutions and trading approaches which can sow instability.  The government’s approaches to mitigate said risks have feasibly fanned risks, yet under the government’s auspices, which could on its own render repo dangers as moot anyway, as was the actual case with failing mega-banks Bear Stearns and Lehman Brothers over a decade ago.

This 37th episode of Money & Fear will discuss repo trades, the repo markets, steps taken to protect against their dangers, how banks have shied away from repo clearances due to those steps, how the US Fed has then stepped in for said banks, and what the Fed & Treasury actually did in supposedly cleaning up repo messes during the 2008 Financial Crisis.  We’re not out of the woods yet on repos, but more importantly it all could perchance not even matter in the end, considering what the Fed even is.

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Show Notes

Money Market: Repos

The Role of "Repo" in the Financial Crisis

Repurchase Agreements, Repo Market Risks, and Their Regulations

Everything You Wanted to Know about the Tri-Party Repo Market, but Didn't Know to Ask

Decade After Repos Hastened Lehman’s Fall, the Coast Isn’t Clear

Pressure in Repo Market Spreads: Stresses amplify price swings in government bonds

Reverse Repo Counterparties

Elsewhere in unusual interest-rate moves...

M3 definition

The Repo Market

New Worry in 'Repo': Just One Bank for $3.5 Trillion Market

JPMorgan to stop settling government securities for dealers

Reverse Repo Risks

Fed Funds Rate definition

Bank of England: Basel III regulation hurts repo for smaller asset managers

Fixing the Repo Market: The Piece Regulators Missed When Reforming the Financial Markets

New York Fed Says Repo Fire Sale Risks Not Being Addressed

Time to Reduce Repo Run Risk

How The Fed Could Have Saved Lehman With Just Repo Market Intervention

Did Fed Really Lend $9 Trillion Under Its Primary Dealer Credit Facility?

Term Securities Lending Facility – Fed Board of Governors

What happens to repo transactions when interest rates go negative?

SOFR Is A Bad Idea, So Is Repo

World unprepared for slowdown, says IMF’s Lipton - Fund official warns on trade tensions, policy flaws and weakness in China

Papers

The Run on Repo and the Fed's Response by Gary Gorton, Toomas Laarits, Andrew Metrick

Implications of repo markets for central banks – Bank for International Settlements

Videos

The Fed and Lehman Brothers – Address by Prof. Laurence Ball at Duke University

The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster – podcast interview

Books

The Fed and Lehman Brothers:  Setting the Record Straight on a Financial Disaster by Laurence M. Ball

Alchemists of Loss:  How modern finance and government intervention crashed the financial system by Kevin Dowd and Martin Hutchinson

*For additional footnotes and links refer to the Newsbud article link above

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Comments

  1. Jon L Curran says:

    Thanks, yes my eyes were rolling. The whole system is designed to confuse as many people as possible while they are being ripped-off.
    Sometimes I wish that I had been born Amish…to late now. Hopefully, I will not have to live out my last days living in a van down by the river or under a bridge.

  2. James Williamson says:

    As always, Pye, thanks for a great report. One more murky dimension to the engulfing monstrosity that is collapsing before our very eyes. Repo “messes,” those “esoteric pieces of financial plumbing” (“secure” or “esoteric”?) together with the dubious Fed’s and Treasury’s nefarious manipulations, add more and more deceptive complexity and inevitable sabotage to an already moribund US economy.

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