Friday, May 31, 2013

"...Someone Could Get Hurt in Repo Market"

From MoneyBeat:
The repo market is among the least glamorous businesses on Wall Street.

There aren’t any hot new offerings like the equity guys get. There aren’t any splashy deals like the investment bankers get. The repo guys look down the hall at the fixed-income guys and envy their exciting lives of long-term interest-rate worry and credit-rating anxiety.

Overnight loans might be the world’s dullest one-night stand. Yet these short-term loans are the lifeblood of credit, keeping companies and banks flush and giving investors a place to park their cash and make a few bucks.

Repos are a more-than-$2 trillion-a-month market. And when the financial crisis exploded in 2008, the repo market froze, cutting off credit across the economy and partly setting the stage for the Great Recession.
A study on repo markets published in 2009 by Gary B. Gorton and Andrew Metrick of the National Bureau of Economic Research concluded that “ultimately it was the loss of liquidity at the firms that were the biggest players in the securitized banking system that led to the financial crisis.”

In other words, the repo market wasn’t just a part of the meltdown. It was the meltdown.
Given the history, you would think regulators would have considered how this market was set up and how it could be made a little safer. But for the most part, the repo market is running pretty much as it was precrisis.
This is especially true for the triparty repo market, a premium form of the repo in which an intermediary manages the collateral backing the loans. That part of the market is especially susceptible to panics. It took a beating in 2008.

Another issue: After the crisis laid waste to multiple banks, there are now only two primary places where triparty repos, are cleared and settled: J.P. Morgan Chase JPM +1.71% & Co. and Bank of New York Mellon Corp. BK +1.53%...MORE
HT: The Reformed Broker