10 ms·

Repo Blowup Was Fueled by Big Banks and Hedge Funds, BIS Says

133 points by aazaa 7y ago

Merrill 7y ago
"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 7y ago
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 7y ago
  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
yardie 7y ago
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.
- Chirael 7y ago
  There was a decent podcast on this about a month back, on Bloomberg "Odd Lots": https://www.bloomberg.com/news/articles/2019-11-11/this-is-why-the-repo-markets-went-crazy-and-why-december-could-be-even-worse https://www.bloomberg.com/news/articles/2019-11-11/this-is-w...
  - snarf21 7y ago
    Everyone should listen to this podcast. It is short and informative. I've learned a lot about the difference between fiscal and monetary policy.
  - ewidar 7y ago
    I listened to this podcast multiple time, and found it quite hard to follow. I don't have a heavy background in finance, but in general I have a good enough understanding of the subject. In this case however the language was somehow making it harder than usual.
    - Bootvis 7y ago
      Any specific parts you’d like to understand better? I’m sure someone here is well versed in this topic.
  - sandstrom 7y ago
    I’ve listened to that episode (after another recommendation here, a few days ago). Didn’t find it very informative or good. The podcast discussion was opinionated and obtuse.
- pjmorris 7y ago
  > 'finance isn't in your DSL' That's a great turn of phrase, and a nice mental model!
- Merrill 7y ago
  Most repos involve banks, investment banks, money dealers and various investors. >What Is a Repurchase Agreement? >A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations. https://www.investopedia.com/terms/r/repurchaseagreement.asp https://www.investopedia.com/terms/r/repurchaseagreement.asp
rb808 7y ago
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 7y ago
  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-qe-aka-qe-new-catching-up-funding-almost-all-treasury-issuance/ https://wallstreetexaminer.com/2019/12/chart-shows-fed-not-q...
  - rb808 7y ago
    Yes I know that, but how does it affect anyone? Worst I can see is that poor quality banks pay a few percent overnight if they need to borrow on bad days. Surely that is temporary with so many players.
  - Analemma_ 7y ago
    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 7y ago
      >It has not added $415 billion to the money circulation. But it did, even if for just a day.
      - chaorace 7y ago
        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
divbyzer0 7y ago
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 7y ago
  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 7y ago
    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 7y ago
      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.
- PeterisP 7y ago
  I don't really see what's the crash mechanism there. From the lender side, repo financing is collateralized so if someone can't pay, then the lender doesn't care because they've got the collateral bonds already; it's not ideal, but it's not a disaster. From the borrower side, if someone really needs short-term liquidity and would have usually used repos but can't get any right now, then they do have available bonds that they've used as collateral for that repo, so if they really need cash then they can sell the same bonds instead of borrowing against them. Again, that's not ideal and they'll probably lose some money on an urgent sale, and their plans to earn some profit on that borrowed money won't materialize, but that shouldn't trigger a crash that would affect the whole system.
gimmeThaBeet 7y ago
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-fear-the-year-end-funding-squeeze/ https://ftalphaville.ft.com/2019/01/29/1548762302000/Don-t-f... 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.
- arkadiyt 7y ago
  > 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. More like, they realize there is too much risk of intraday bankruptcy: https://wallstreetonparade.com/2019/11/intra-day-bankruptcy-a-2008-email-from-the-fed-provides-insight-into-todays-overnight-repo-scare/ https://wallstreetonparade.com/2019/11/intra-day-bankruptcy-...
- joncrane 7y ago
  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
chadlavi 7y ago
as a developer, the use of `repo` in the title confused me for a bit
- arthurcolle 7y ago
  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.
turk73 7y ago
I read the version from Zerohedge last night. I've never been a "prepper" in my life, but I'm starting to come around to the idea that I should have food stocked and a plan for WTF I'm going to do when the the biggest stock bubble in history blows sky high.
jandrese 7y ago
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.
foxhop 7y ago
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
qaq 7y ago
Can this basically be a sign there are not enough buyers for the treasuries volume that is being issued?
- gbasin 7y ago
  Good question. Maybe to some degree -- specifically participants getting exposure in other ways (like futures) over the cash market
undersuit 7y ago
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?

133 points by aazaa 7y ago

"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 7y ago

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 7y ago
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

yardie 7y ago

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.

Chirael 7y ago
There was a decent podcast on this about a month back, on Bloomberg "Odd Lots": https://www.bloomberg.com/news/articles/2019-11-11/this-is-why-the-repo-markets-went-crazy-and-why-december-could-be-even-worse https://www.bloomberg.com/news/articles/2019-11-11/this-is-w...
- snarf21 7y ago
  Everyone should listen to this podcast. It is short and informative. I've learned a lot about the difference between fiscal and monetary policy.
- ewidar 7y ago
  I listened to this podcast multiple time, and found it quite hard to follow. I don't have a heavy background in finance, but in general I have a good enough understanding of the subject. In this case however the language was somehow making it harder than usual.
  - Bootvis 7y ago
    Any specific parts you’d like to understand better? I’m sure someone here is well versed in this topic.
- sandstrom 7y ago
  I’ve listened to that episode (after another recommendation here, a few days ago). Didn’t find it very informative or good. The podcast discussion was opinionated and obtuse.
pjmorris 7y ago
> 'finance isn't in your DSL' That's a great turn of phrase, and a nice mental model!
Merrill 7y ago
Most repos involve banks, investment banks, money dealers and various investors. >What Is a Repurchase Agreement? >A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations. https://www.investopedia.com/terms/r/repurchaseagreement.asp https://www.investopedia.com/terms/r/repurchaseagreement.asp

rb808 7y ago

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 7y ago
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-qe-aka-qe-new-catching-up-funding-almost-all-treasury-issuance/ https://wallstreetexaminer.com/2019/12/chart-shows-fed-not-q...
- rb808 7y ago
  Yes I know that, but how does it affect anyone? Worst I can see is that poor quality banks pay a few percent overnight if they need to borrow on bad days. Surely that is temporary with so many players.
- Analemma_ 7y ago
  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 7y ago
    >It has not added $415 billion to the money circulation. But it did, even if for just a day.
    - chaorace 7y ago
      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

divbyzer0 7y ago

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 7y ago
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 7y ago
  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 7y ago
    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.
PeterisP 7y ago
I don't really see what's the crash mechanism there. From the lender side, repo financing is collateralized so if someone can't pay, then the lender doesn't care because they've got the collateral bonds already; it's not ideal, but it's not a disaster. From the borrower side, if someone really needs short-term liquidity and would have usually used repos but can't get any right now, then they do have available bonds that they've used as collateral for that repo, so if they really need cash then they can sell the same bonds instead of borrowing against them. Again, that's not ideal and they'll probably lose some money on an urgent sale, and their plans to earn some profit on that borrowed money won't materialize, but that shouldn't trigger a crash that would affect the whole system.

gimmeThaBeet 7y ago

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

arkadiyt 7y ago
> 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. More like, they realize there is too much risk of intraday bankruptcy: https://wallstreetonparade.com/2019/11/intra-day-bankruptcy-a-2008-email-from-the-fed-provides-insight-into-todays-overnight-repo-scare/ https://wallstreetonparade.com/2019/11/intra-day-bankruptcy-...
joncrane 7y ago
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

chadlavi 7y ago

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

arthurcolle 7y ago
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.

turk73 7y ago

I read the version from Zerohedge last night. I've never been a "prepper" in my life, but I'm starting to come around to the idea that I should have food stocked and a plan for WTF I'm going to do when the the biggest stock bubble in history blows sky high.

jandrese 7y ago

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.

foxhop 7y ago

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

qaq 7y ago

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

gbasin 7y ago
Good question. Maybe to some degree -- specifically participants getting exposure in other ways (like futures) over the cash market

undersuit 7y ago

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?