Repos seem secret because U.S. reporters rarely cover them

Reporter Bob Ivry at Bloomberg told his readers May 26 that leading bank companies borrowed $80 billion at sweetheart rates during the financial crisis from an emergency Federal Reserve lending program that has not been fully disclosed.

Not so fast, shot back David E. Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta. The $80 billion program was not secret, unprecedented or special in any way, he said.

By now, RepoWatch readers may have guessed that the lending program was repos, which the Fed used to the max to keep money flowing during the crisis. Altig is right that repos aren’t secret.  But Ivry is right that they don’t disclose enough.

Ivry finally mentions the R-word (repos) in the 23rd paragraph of his 37-paragraph story … but at least he mentions it, which is pretty rare for U.S. reporters.

RepoWatch looks forward to the day when U.S. reporters will write about repurchase agreements as fluently and as easily as they write about derivatives, when activity on the repurchase market will become too well known to be thought secret, and when reporters will routinely demand more accountability from the repurchase market.

The financial market that brought the economy to its knees in 2008 is too important for reporters to continue to ignore.

From Ivry’s story:

Credit Suisse Group AG (CS), Goldman Sachs Group Inc. (GS) and Royal Bank of Scotland Group Plc (RBS) each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. …

Records of the 2008 lending, released in March under court orders, show how the central bank adapted an existing tool for adjusting the U.S. money supply into an emergency source of cash.

Here’s the 23rd paragraph:

Under ST OMO, cash changed hands through repos, or repurchase agreements, which the central bank has used to move money in and out of the banking system for at least 60 years. In a repo, the dealer sells securities to the Fed and agrees to buy them back for a higher price after a set period of time. …

Using repos to provide emergency cash, a step the Fed announced on March 7, 2008, was a departure from that process, said John H. Cochrane, a finance professor at the University of Chicago Booth School of Business.

“The Fed was slamming the pedal to the metal in the lender-of-last-resort category,” Cochrane said. “What they did was so far from what we conventionally think of as monetary policy.”

From Altig’s blog at the Atlanta Fed:

I think a couple of clarifying points are in order. First, these transactions were hardly, in my view, “secretive.” On March 7, 2008, the following was posted on the New York Fed’s website (with similar information provided by the Board of Governors):

“The Federal Reserve has announced that the Open Market Trading Desk will conduct a series of term repurchase (RP) transactions that are expected to cumulate to $100 billion outstanding. This initiative is intended to address heightened pressures in term funding markets. These transactions will be conducted as 28-day term RP agreements in which primary dealers may elect to deliver as collateral any of the types of securities—Treasury, agency debt, or agency mortgage-backed securities—that are eligible as collateral in its conventional RP operations.”

Altig summarizes:

I have a hard time with the notion that publicly announcing the program, offering details on size and prices in each day’s transactions, and providing general information about the entities in the game constitutes “secretive.”

(Editor’s note: Altig’s “entities in the game” are the Fed’s primary dealers, who are listed by name on the New York Fed’s web site.)

Using repos this way was “not unprecedented,” Altig wrote:

As the New York Fed’s public notice made clear at the time, this was not outside of the Fed’s standard authorities—and not unprecedented:

“When the Desk arranges its conventional RPs, it accepts propositions from dealers in three collateral ‘tranches.’ In the first tranche, dealers may pledge only Treasury securities. In the second tranche, dealers have the option to pledge federal agency debt in addition to Treasury securities. In the third tranche, dealers have the option to pledge mortgage-backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities. With the special ‘single-tranche’ RPs announced today, dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. The Desk has arranged single-tranche transactions from time to time in the past.”