
Repo Blowup Was Fueled by Big Banks and Hedge Funds, BIS Says - aazaa
https://www.bloomberg.com/news/articles/2019-12-08/repo-blowup-was-fueled-by-big-banks-and-hedge-funds-bis-says
======
yardie
For those that had no idea what repo is because finance isn't in your DSL:

> Repo rate is the rate at which the central bank of a country lends money to
> commercial banks in the event of any shortfall of funds. Repo rate is used
> by monetary authorities to control inflation.

Also, I just got back from an art show where a real banana and duck tape sold
for $120,000, 3 times. I'm not making this up. Apparently, money is
meaningless.

~~~
wcoenen
That definition doesn't seem right. The repo rate is just the rate paid on
repurchase agreements, a type of risk free, short term loan where collateral
is exchanged for cash, then exchanged back again. Central banks shouldn't be
involved. The Fed is only involved now as an emergency provider of liquidity.

[https://en.wikipedia.org/wiki/Repurchase_agreement?wprov=sfl...](https://en.wikipedia.org/wiki/Repurchase_agreement?wprov=sfla1)

~~~
twic
Confirmed, yardie's definition is straight up wrong.

EDIT:

It's worth noting that the collateral is usually government bonds (this is
called "general collateral", or GC), with bonds from quasi-government bodies
like Fannie Mae or the World Bank being the second most common kind.

One way to look at repo is that it's a way for companies with a big stock of
bonds (eg banks) to pawn them to borrow money. This is usually the cheapest
option for them to borrow money at scale, and so the repo rate is seen as an
indication of banks' financing costs.

Another way to look at it is that it's a way to buy government bonds on credit
- you can buy a bond and then immediately repo it, using the money you've
borrowed to pay for the bond. You have to pay the interest on the repo until
you sell the bond and pay it back, but you never have to come up with a big
pile of cash.

I have no idea which use case is more common.

~~~
core-e
> _Another way to look at it is that it 's a way to buy government bonds on
> credit - you can buy a bond and then immediately repo it, using the money
> you've borrowed to pay for the bond. You have to pay the interest on the
> repo until you sell the bond and pay it back, but you never have to come up
> with a big pile of cash._

And the reason you'd do this is... to lock in yield in a declining interest
rate environment?

~~~
avvt4avaw
For example, if the yield on a long-term bond is 3% and repo rates are only
2%, you might buy the bond, financed with a repo transaction, and bet that
over the term of the repo, the bond’s price will hold up enough to allow you
to profit from the transaction. If it is a one year repo, the bond could
decline in price by 1% and you would still make a profit because its yield is
higher than the cost to finance the purchase.

A more relevant example is if futures are trading rich relative to bonds - say
they are too expensive by 1/32th (about 0.03%). In this case you buy the bonds
on repo and sell futures against them, expecting to profit when the price gap
closes. Of course, 0.03% is not much profit, so you use 50x leverage (which
you can easily do on repo, because it is secured borrowing) turning it into a
1.5% profit.

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gimmeThaBeet
This problem has sort of been visible for a bit, the first time I remember it
was toward that latter half of 2018. I felt this was sort of an even-handed
pondering of the ramifications.

[https://ftalphaville.ft.com/2019/01/29/1548762302000/Don-
t-f...](https://ftalphaville.ft.com/2019/01/29/1548762302000/Don-t-fear-the-
year-end-funding-squeeze/)

One bit in there is this:

>Second, as a result of the above, nobody really knows what the true cost of
regulating the system is, or to what degree Basel III has changed the market
in terms of elasticity.

In the OP article, this was the thing where I have mixed feelings:

>JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on
regulators themselves. He said in October that his firm had the cash and
willingness to calm short-term funding markets but liquidity rules for banks
held it back.

On the one hand, I think it reasonable to sprinkle a little salt over anything
coming from the global banks, especially when they are telling you they want
to be regulated less. But on the other hand, JPMorgan for whatever reason
really _does_ seem to want to be that quasi-lender of last resort at the right
price. They did it last year. I think Kaminska in my linked article has a
pretty fair view that post-crisis regulation changed the game in ways we might
not fully acknowledge or be aware of.

~~~
joncrane
_The original_ JP Morgan essentially "saved" the US Financial system in
1907.[1]

Jamie Dimon would probably love to get credit for duplicating that feat.

[1][https://en.wikipedia.org/wiki/J._P._Morgan#Panic_of_1907](https://en.wikipedia.org/wiki/J._P._Morgan#Panic_of_1907)

~~~
o-__-o
Mr Morgan put up his own money in the Panic of 1907. Mr Dimon would not have
that kind of cash today.

------
Merrill
"Economics of Money and Banking" \- [https://www.coursera.org/learn/money-
banking](https://www.coursera.org/learn/money-banking) is a great course on
the structure and operation of the money market, including repos. It's way
more complicated that I ever imagined.

The BIS report "September stress in dollar repo markets: passing or
structural?"
[https://www.bis.org/publ/qtrpdf/r_qt1912v.htm](https://www.bis.org/publ/qtrpdf/r_qt1912v.htm)

------
simula67
Scott Nelson, who studies the history of American financial collapses, has an
interesting story on how he managed to avoid a financial collapse in 2008 by
noticing that 'when rates go up and no one knows why it is time to be
concerned' :
[https://m.youtube.com/watch?v=S-_pNxlbz8w&t=50m59s](https://m.youtube.com/watch?v=S-_pNxlbz8w&t=50m59s)

~~~
paulpauper
wow a single data point. how convincing. the market has already risen
substantially since the repo spike so had you sold you would need the market
to fall 8% just to be vindicated

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jandrese
It seems like global capital has been all about running as close to the edge
as possible in the past couple of decades. More money in good times, but if
something happens there's little cushion to fall back on and it turns into a
huge mess. I'm worried that the system is becoming too fragile and the people
who are going to be most affected are those looking to buy their first home or
who want to go to college.

------
rb808
I suspect this is news only because of the financial crisis last decade,
otherwise it would be a footnote in the financial pages. I dont see why people
should care. Presumably if it continues the main players will find a way to
arb out the spread.

If you downvote me at least list why this repo problem affects anyone.

~~~
joobus
This "blowup" is the reason the Federal Reserve has printed $415 billion
dollars since mid September.

reference: [https://wallstreetexaminer.com/2019/12/chart-shows-fed-
not-q...](https://wallstreetexaminer.com/2019/12/chart-shows-fed-not-qe-aka-
qe-new-catching-up-funding-almost-all-treasury-issuance/)

~~~
Analemma_
Saying the Federal Reserve has "printed $415 billion" without qualification is
dishonest. It has created $415 billion worth of liquidity for short-term
operations of solvent banks, essentially printing money and then destroying it
the next day. It has not added $415 billion to the money circulation.

~~~
SkyBelow
>It has not added $415 billion to the money circulation.

But it did, even if for just a day.

~~~
chaorace
Not all in the same day. If you loan $30, then take it back the next day for
10 days in a row, you're still just moving around $30, not $300

~~~
NovemberWhiskey
There are two separate things going on here; although both of them intended to
relieve pressure in the money markets.

Firstly, there's a so-called "reserve management operation" which is intended
to increase reserves held at the Fed by purchasing Treasury bills. Increases
in reserves implies greater liquidity to support money market activities. This
definitely shows up as a growth in the Fed balance sheet, as the policy is to
roll into new Treasury bills at maturity.

Secondly, there's an ongoing campaign of overnight and term repo operations
where necessary to achieve the policy target rates. These are short-term, and
do not result in a significant balance sheet growth.

See the statement from the NY Fed:
[https://www.newyorkfed.org/markets/opolicy/operating_policy_...](https://www.newyorkfed.org/markets/opolicy/operating_policy_191011)

------
undersuit
Stealing my comment from the last discussion:

The explanation for the FEDs doing the lending is it will spike short term
rates or something. Why can't we be mad that the Fed is willing to do this?
Like what if I'm one of the institutions waiting on the sidelines to make some
money off of short term lending and the Fed keeps tamping down on what could
be a source of profit?

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divbyzer0
A too-big-too-fail bank is using cheap short-term funding (from repos) to
invest in long term assets, bonds.

The magnitude is concerning.

When confidence in overnight lending between banks reduces (because the other
banks realise what this funding is for), the interest rate (measure of risk)
rises.

For repo rates: 2.5% is high, 10% brings the house down, and has a blast
radius that impacts the entire system.

~~~
joobus
No, that is not what is happening. The too-big-to-fail banks were _lending_ to
the repo market, and hedge funds were taking the cash to buy more assets. Then
the tbtf banks decided to buy treasuries instead of lending in the repo market
and the hedge funds were SOL. It's the hedge funds that were the problem. When
your fund relies on overnight funding for its existence, you won't last long.

From the article:

This [repo] market, which relies heavily on just four big U.S. banks for
funding, was upended in part because those firms now hold more of their liquid
assets in Treasuries relative to what they park at the Federal Reserve,
officials at the Basel-based institution concluded in a report released
Sunday. That meant “their ability to supply funding at short notice in repo
markets was diminished.”

~~~
CriticalCathed
I don't understand why we put up with these parasites on the economy. It seems
too often we find out that well heeled bad actors in finance end up causing
damage to the people who actually create wealth and prosperity in this
country: the ordinary laborer.

~~~
tenebrisalietum
Because everyone likes and uses credit. Including the ordinary laborer that
takes on a car note so he/she can get to his/her worksite.

------
foxhop
Please don't downvote, I'm simply linking to another resource which I have
been watching lately to try to wrap my head around what quantitative easing
is, and why we are currently in QE4.

[https://www.youtube.com/watch?v=outb-2Msd14](https://www.youtube.com/watch?v=outb-2Msd14)

------
chadlavi
as a developer, the use of `repo` in the title confused me for a bit

~~~
arthurcolle
In the financial domain, repo refers to repurchase agreements. You pledge some
bit of collateral to receive a short-term loan that is cheaper than other
forms of short-term lending, (usually as a funding mechanism for your daily
trading activity, at least for bulge bracket investment banks), and then you
pay back what you borrowed and you receive your collateral back.

The opposite is captured with “reverse repurchase agreements” which is exactly
what I described, with the roles inversed.

It is actually quite interesting, but doesn’t come up frequently in daily
personal finance much at all.

------
qaq
Can this basically be a sign there are not enough buyers for the treasuries
volume that is being issued?

~~~
gbasin
Good question. Maybe to some degree -- specifically participants getting
exposure in other ways (like futures) over the cash market

