The report doesn’t mention the R-word (repo), even though fear for the repurchase market was driving a lot of the action, but it paints a vivid picture of a financial industry in complete and total disarray.
Especially interesting to RepoWatch are the Fed’s efforts to keep repo credit flowing to Morgan Stanley, after Lehman Brothers failed in 2008.
From the August 22 report, by Bradley Keoun and Phil Kuntz:
Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.
“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”
The Bloomberg articles expand our understanding of an important element of the crisis, that of hedge funds withdrawing their cash and securities from investment banks.
Hedge funds keep cash and securities on deposit at investment banks, and investment banks make loans, including repo loans, to hedge funds. In finance jargon, investment banks are acting as “prime brokers” for hedge funds.
Before the crisis, investment banks typically re-used, or rehypothecated, the securities that hedge funds deposited with them, often using the securities as collateral for repo loans.
Following the Lehman Brothers bankruptcy on Sept. 15, 2008, frightened hedge funds began pulling their money and securities out of investment banks. Within two weeks, they’d pulled more than $100 billion out of Morgan Stanley, according to Bloomberg. This was a run by hedge funds on Morgan Stanley.
Bloomberg shows how the Federal Reserve jumped in to save the day, lending Morgan Stanley billions of dollars, to peak at $107.3 billion on September 29.
Most of these loans, $97.3 trillion, were through two programs the Fed had created to keep credit moving on the repo market, the Primary Dealer Credit Facility and the Term Securities Lending Facility. The Fed lent:
– $61.3 trillion through the Primary Dealer Credit Facility, created by the Fed “largely to ease liquidity pressures in the ‘repo market’—the collateralized funding market in which primary dealers obtain financing for their securities portfolios—after the near-failure of Bear Stearns in March 2008.”
– $36 trillion through the Term Securities Lending Facility, created by the Fed to lend Treasury securities to the primary dealers, so they’d have AAA collateral to get loans on the repo market, “to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.”
The hedge funds’ run on investment banks joins several other runs during the financial panic of 2007-2008: The runs on repo, asset-backed commercial paper (ABCPaper), securities lending, commercial paper, money market funds, and bank deposits. Credit was freezing from every angle.
All of these runs flowed out of the runs on repo and ABCPaper, which triggered the panic.
For its August 22 report, Bloomberg studied five programs that were part of “Bernanke’s unprecedented effort” to keep credit flowing. They were the Primary Dealer Credit Facility, the Term Securities Lending Facility, the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and the Term Auction Facility.
Bloomberg also reviewed the transactions of the discount window and the open market operations, which are usual ways the Fed does its business.