"What was different about this crisis was that the institutional structure was different. It wasn't banks and depositors. It was broker-dealers and repo markets. It was money market funds and commercial paper ...," --Federal Reserve Chairman Ben Bernanke, March 27, 2012.
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"The Federal Reserve was forced to take extraordinary policy actions beginning in 2008 to counteract the effect of (tri-party repo) flaws and avert a collapse of confidence in this critical financing market. These structural weaknesses are unacceptable and must be eliminated." --Federal Reserve Bank of New York, February 15, 2012.
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"Despite the Dodd-Frank financial reform bill and its directive to address this issue, the problem of bank runs in the shadow system -- a key factor in the financial sector collapse -- has not yet been solved." --Mark Thoma, Professor of Economics, University of Oregon, February 13, 2012.
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"Repurchase agreements (repo) are the largest part of the 'shadow' banking system: a network of demand deposits that, despite its size, maturity, and general stability, remains vulnerable to investor panic." --Jeff Penney, senior advisor, McKinsey & Company, June 2011.
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"What happened in September 2008 was a kind of bank run. Creditors lost confidence in the ability of investment banks to redeem short-term loans, leading to a precipitous decline in lending in the repurchase agreements (repo) market." --Robert E. Lucas, Jr., Nancy L. Stokey, visiting scholars, Federal Reserve Bank of Minneapolis, May 2011.
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"The really interesting thing that happened in September 2008 was the worldwide panic in the banking system – financial institutions running on each other behind the scenes." –-David Warsh, economic journalist, Feb. 6, 2011.
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"Since repo financing was the basis of most of the leveraged positions of the shadow banks, a large part of the run occurred in the repo market." --Viral V. Acharya and T. Sabri Öncü, professors, Stern School of Business, New York University, 2011.
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"Housing policies alone, however, would not have led to the near insolvency of many banks and to the credit-market freeze. The key to these effects was the excessive leverage that pervaded, and continues to pervade, the financial industry." --Anat R. Admati, Professor of Finance and Economics, Graduate School of Business, Stanford University. January 30, 2011.
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"Without some repo reform, we are at risk for another panic." --Gary B. Gorton, Professor of Management and Finance, Yale School of Management, November 16, 2010.
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"While it may be well and good for the Dodd-Frank Act to demand more oversight of mortgages and derivatives, that won’t stop the next run on repo if lenders panic over a different kind of collateral or hear a false rumor and panic for no reason at all." --About Repo, RepoWatch.
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The repurchase market is “the deepest, darkest least noticed part of the market’s plumbing.” --Bethany McLean and Joe Nocera, "All the Devils are Here," November 2010.
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“So far, all of this has gone largely unnoticed by the public, and that gives shadow banks the opportunity to make their case unopposed." --Mark Thoma, Professor of Economics, University of Oregon, September 28, 2010.
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"... the structure of the tri-party market is so closely entwined that it creates a contagion risk as bad as anything seen in the derivatives world." --Gillian Tett, U.S. managing editor, Financial Times, September 23, 2010.
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"The collapse in CDO valuations and the resulting inability to use CDOs as collateral for repo was a major, if not the major, cause of dealer illiquidity and insolvency which resulted in massive bailouts and backdoor subsidies." --Yves Smith, Naked Capitalism blog, August 20, 2010.
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"Repo has a flaw: It is vulnerable to panic, that is, 'depositors' may 'withdraw' their money at any time, forcing the system into massive deleveraging. We saw this over and over again with demand deposits in all of U.S. history prior to deposit insurance. This problem has not been addressed by the Dodd-Frank legislation. So, it could happen again. The next shock could be a sovereign default, a crash of some important market -- who knows what it might be?" --Gary B. Gorton, Professor of Management and Finance, Yale School of Management, August 14, 2010.
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"Leaving the repo market as it currently functions is not an alternative; if this market is not reformed and their participants not made to internatlize the liquidity risk, runs on the repo will occur in the future, potentially leading to systemic crises." --T. Sabri Öncü and Viral V. Acharya, professors, Stern School of Business, New York University, July 16, 2010.
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"It is disconcerting that that the Act is completely silent about how to reform one of the systemically most important corners of Wall Street: the repo market, whose size based on daily amount outstanding now surpasses the total GDP of China and Germany combined." --Viral V. Acharya and T. Sabri Öncü, professors, Stern School of Business, New York University, July 16, 2010.
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"... it is imperative for policymakers to assess whether shadow banks should have access to official backstops permanently, or be regulated out of existence." --Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, Hayley Boesky, Federal Reserve Bank of New York, July 2010.
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“The potential for the tri-party repo market to cease functioning, with impacts to securities firms, money market mutual funds, major banks involved in payment and settlements globally, and even to the liquidity of the U.S. Treasury and Agency securities, has been cited by policy makers as a key concern behind aggressive interventions to contain the financial crisis.” --Task Force on Tri-Party Repo Infrastructure, May 17, 2010.
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"Banks should have learned by now it's dangerous to rely on overnight lending." --Allan Meltzer, Professor of Political Economy, Carnegie Mellon University, March 28, 2010.
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"This banking system ‐‐ repo based on securitization ‐‐ is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy." --Gary B. Gorton, Professor of Management and Finance, Yale School of Management, February 20, 2010.
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"I think we were primarily focused on the potential collapse of the short-term funding markets, particularly the overnight repo markets and tri-party repo markets, which would have created a contagion to many other firms."--Federal Reserve Chairman Ben Bernanke, November 17, 2009.
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"The best thing to do with the shattered Humpty-Dumpty of mortgage securitization would be to toss the broken pieces into the garbage." --Arnold Kling, Mercatus Center, George Mason University, September 28, 2009.
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"Given its size and importance, it is surprising that repo has such a low profile; for example, there is little discussion of it in the financial press." -- Moorad Choudhry, Head of Treasury, Europe Arab Bank plc, London, "The REPO Handbook," September 2009.
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“Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the ‘repo’ system - one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome.” --Charles T. Munger, chairman Berkshire Hathaway Inc., Spring 2009.
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"Repo borrowing is now by far and away the most important form of short-term finance in modern financial markets.." -- Alistair Milne, Reader in Banking and Finance, City University, London, "The Fall of the House of Credit," March 2009.
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“This helps explain how a relatively small quantity of risky assets was able to undermine the confidence of investors and other market participants across a much broader range of assets and markets.” --Timothy Geithner, president, Federal Reserve Bank of New York, June 9, 2008.
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"Until recently, short-term repos had always been regarded as virtually risk-free instruments." Federal Reserve Board Chairman Ben Bernanke, May 13, 2008.
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"The repo market is as complex as it is crucial. It is built upon transactions that are highly interrelated. A collapse of one institution involved in repo transactions could start a chain reaction, putting at risk hundreds of billions of dollars and threatening the solvency of many additional institutions." --U.S. Senate report, 1983.
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"Because of this widespread use in very large amounts, it is important that the repo market be protected from unnecessary disruption." --Paul A. Volcker, Chairman, Federal Reserve Board, September 29, 1982,
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"With a repo loan, financial institutions could make or buy more home loans, to pool and produce more securities, to use as collateral for more repo loans. It was a neat, self-sustaining cycle of profitability and a serious growth machine." --About Repo, RepoWatch.
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"Surprisingly, financial institutions that said they used securitization to offload risk had actually done just the opposite. Instead, it was the repo lenders who had no skin in the game." --About Repo, RepoWatch.
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"Repo, then, was the main way that defaults in the housing market became a full blown credit panic. It was the key transmitter that carried the shock wave from the defaulting homeowner through the canyons of Wall Street to the American taxpayer." --About Repo, RepoWatch.
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"In the savings and loan days, we called it Cash for Trash. In those days, thrifts lent borrowers more money than they needed and required the borrower to use it to buy a troubled property on the thrift’s books. Today, banks make repo loans to borrowers who use the money to buy troubled mortgage securities on the banks’ books, and then they use the troubled securities to collateralize the original repo loan from the bank." --Inside Jobs, RepoWatch.
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