Peter Eavis, who often has insights on banking in the Wall Street Journal feature Heard on the Street, has this to say March 12, about the repurchase market:
The dark irony of all this is that banks have long argued that repo financing – which allows banks to borrow for a short-period against collateral – is one of the safest parts of a bank’s liabilities. However, it is highly vulnerable in times of panic, as the credit crisis showed.
In addition, it provided cover for banks to dangerously ramp up their short-term borrowing to fund longer-term assets.
The (Lehman bankruptcy) examiner now appears to show that it also lends itself to accounting gimmickry (Repo 105).
All these reasons justify strict, defined limits on repo. Oddly, the financial overhaul plans proposed by Congress and the Treasury don’t demand that. But someone needs to tame repo on Wall Street.