Fed releases names of tri-party repo borrowers at height of crisis

Bloomberg and Fox News began reporting March 31 the names of the financial institutions that got emergency repurchase loans from the Federal Reserve during the financial crisis.

The names became public when the Fed released to the two news groups the reports they requested more than two years ago through the Freedom of Information Act.

In the early coverage of the release, reporters are rarely mentioning repurchase agreements. They talk about the Fed’s discount window, where the loans are made. They talk about emergency lending arrangements to keep financial markets from collapsing. They talk about Federal Reserve lending. They talk about banks borrowing. They tell that the loans were backed by collateral. But from RepoWatch’s view, that leaves a lot unsaid.

It ignores that a panicked Fed had to feed the repurchase market because major financial institutions could no longer renew their overnight repurchase loans with each other. Here was the heart of the credit crisis. Not mortgages sold to investors. Not credit-default-swap bets against the mortgages. It was repos.

In March 2008 as Bear Stearns imploded, a frightened Federal Reserve began making repurchase loans to a broad range of broker-dealers in order to keep money flowing through the tri-party repurchase market. Spooked repo lenders were withdrawing from that important corner of the repurchase market, and their run on tri-party repo threatened the financial stability of the two tri-party clearing banks, JP Morgan and Bank of New York Mellon.

The Fed set up the Primary Dealer Credit Facility to conduct these emergency repo transactions and keep the tri-party market from collapsing. The Facility operated from March 2008 to February 2010. Its peak transaction day was October 29, 2008, six weeks after Lehman Brothers Holdings Inc. filed bankruptcy, according to Bloomberg.

The Fed conducted the repo transactions through its discount window, where commercial banks traditionally can get low-cost loans as needed. The Primary Dealer Credit Facility opened this window to broker-dealers for the first time in history. Until Bloomberg and Fox News got U.S. Supreme Court support for their FOIA request, the Fed would not release the names of the repo borrowers.

Many were foreign banks, according to Bloomberg.

In Bloomberg’s first look at the material, reporters noted that the Federal Reserve accepted collateral of much lower quality that it usually requires at the discount window, including junk bonds, defaulted debt, stocks and securities of unknown ratings.

The Fed says all the loans have been repaid with interest, Bloomberg reported.

Some analysts believe the solution to future repo crises will be a Primary Dealer Credit Facility. They believe financial institutions that repo should have to pay a fee to cover the costs of the facility, as commercial banks pay a fee for FDIC insurance.