7 ms·

> considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ri

> considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.

whatok 7y ago
Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.
SilasX 7y ago
Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1]. Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway... [1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1
- whatok 7y ago
  No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.
- teej 7y ago
  Very few things can survive a 10x increase in costs.
- JackFr 7y ago
  They're financing on the order of a trillion dollars. It makes a difference.
- ivalm 7y ago
  because with ~1e12 in financing this ends up being a cool $209.7M.
  - SilasX 7y ago
    Distributed over numerous billion-dollar businesses will annual profits in billions.
- nickles 7y ago
  > Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% As a rates trader, your positions are denominated in the millions of dollars. Some back of the envelope math: 1mm of 10y treasuries (repo'd at EOD) is roughly $1k of risk (dv01 -- if rates move by 1bp, your pnl fluctuates by $1k). To finance that position, you're paying $236 at 9% vs $27 at 1%. Now say you've got 1mm of 2y treasuries. That's roughly $0.2k dv01. Unless 2y rates move 1.25bp overnight, you're losing money just financing the position. In short, there's a massive difference between paying 2.3bps and paying 0.27bps.
  - SilasX 7y ago
    So your business collapses when you have to temporarily pay $236 for something that normally costs $27?
    - nickles 7y ago
      > So your business collapses when you have to temporarily pay $236 for something that normally costs $27? No, think of it as paying $236,000 for something that normally costs $27,000. You can think of this business as providing banking services to large corporations, who aren't able to simply put money in a savings account at their local credit union. It's doesn't collapse in the short run, but it can harm the ability of these corporations to access their funds. Short term financing disruptions can have major impacts across all markets. Show me a business where a sudden 10x increase in costs isn't painful...
      - SilasX 7y ago
        >No, think of it as paying $236,000 for something that normally costs $27,000. While dealing with assets in the billions and lending out at higher interest all the time. >Show me a business where a sudden 10x increase in costs isn't painful... All the ones where one input went up 10x temporarily and survived, or just the most characteristic examples?

> considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.

whatok 7y ago

Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.

SilasX 7y ago

Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1]. Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway... [1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1

whatok 7y ago
No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.
teej 7y ago
Very few things can survive a 10x increase in costs.
JackFr 7y ago
They're financing on the order of a trillion dollars. It makes a difference.
ivalm 7y ago
because with ~1e12 in financing this ends up being a cool $209.7M.
- SilasX 7y ago
  Distributed over numerous billion-dollar businesses will annual profits in billions.
nickles 7y ago
> Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% As a rates trader, your positions are denominated in the millions of dollars. Some back of the envelope math: 1mm of 10y treasuries (repo'd at EOD) is roughly $1k of risk (dv01 -- if rates move by 1bp, your pnl fluctuates by $1k). To finance that position, you're paying $236 at 9% vs $27 at 1%. Now say you've got 1mm of 2y treasuries. That's roughly $0.2k dv01. Unless 2y rates move 1.25bp overnight, you're losing money just financing the position. In short, there's a massive difference between paying 2.3bps and paying 0.27bps.
- SilasX 7y ago
  So your business collapses when you have to temporarily pay $236 for something that normally costs $27?
  - nickles 7y ago
    > So your business collapses when you have to temporarily pay $236 for something that normally costs $27? No, think of it as paying $236,000 for something that normally costs $27,000. You can think of this business as providing banking services to large corporations, who aren't able to simply put money in a savings account at their local credit union. It's doesn't collapse in the short run, but it can harm the ability of these corporations to access their funds. Short term financing disruptions can have major impacts across all markets. Show me a business where a sudden 10x increase in costs isn't painful...
    - SilasX 7y ago
      >No, think of it as paying $236,000 for something that normally costs $27,000. While dealing with assets in the billions and lending out at higher interest all the time. >Show me a business where a sudden 10x increase in costs isn't painful... All the ones where one input went up 10x temporarily and survived, or just the most characteristic examples?