London’s Financial Times is key to understanding repo and U.S. default

NewsEarly next year, when Congress once again threatens to default on U.S. debt, you will need to have a subscription to the Financial Times to get timely information about conditions in the repo market, which is where the danger lies.

During the last round of brinksmanship, which ended October 16 with a four-month ceasefire, the only media that reported regularly on developing conditions in that market – and this includes RepoWatch, which does not do daily reporting – was the Financial Times.

To fully understand what’s at stake and to prepare for the next round, RepoWatch recommends:

— Read the Financial Times and RepoWatch articles below.
— Subscribe to the Financial Times, at least the online version, and set up an email alert so you’ll know when the Times publishes something about the repurchase market.
— Sign up for email alerts from Securities Finance Monitor, Scott Skyrm and Google.

It’s true that repo has lately been seen drifting out into the general U.S. business press.  This is gratifying.

In the past two months the New York Times,  NYT’s Dealbook blog, and the Associated Press have discovered repo, although AP waited until the 32nd paragraph of a 34-paragraph story to actually use the r-word.  Reuters had a story. Bloomberg had an editorial. The Wall Street Journal  had three stories in less than a week, here, here and here.

A good technical discussion of the repo market and U.S. debt default was on Oct. 15 by blogger Scott Skyrm.

But the daily granular reporting was done by the Financial Times. Here are some of their repo stories beginning in September, presented chronologically:

Regulators take aim at recycled securities, by Brooke Masters and Philip Stafford, Financial Times, Sept. 5, 2013:

The widespread practice of using the same securities over and over again is back under the microscope as global regulators seek to prevent a repeat of the 2008 financial crisis and get more control over sources of credit outside the regular banking system.

Insane financial system lives post-Lehman, by Gillian Tett, Financial Times, Sept. 12, 2013:

Five years ago, the markets plunged into an Alice-in-Wonderland world. For when Lehman Brothers collapsed, the repercussions were so violent investors were faced with confronting “six impossible things before breakfast” each day, to paraphrase Lewis Carroll.

So, as markets mark the anniversary of that Lehman collapse, is the system any safer or saner?

Repo ‘fire sale’ risk worries regulators, by Michael Mackenzie and Tracy Alloway, Financial Times, Oct. 2, 2013:

The prospect of financial assets being dumped in a “fire sale” has re-emerged as a substantial risk in a crucial $2tn funding market used by US banks, despite changes since the financial crisis to reduce risk.

Hedge funds step into the shadows, by Tracy Alloway and Arash Massoudi, Financial Times, Oct. 3, 2013:

Some of the world’s best-known hedge funds have stepped into the shoes of Wall Street banks and expanded into the $5tn “repo” market, where financial companies lend out their assets in exchange for short-term loans.

US regulators threaten new repo rules, by Tracy Alloway and Michael Mackenzie, Financial Times, Oct. 4, 2013:

US regulators have threatened to introduce new reforms of one of the banks’ main funding markets, if the industry cannot find ways to reduce the risk of future ‘fire sales’ of assets.

US regulators look at ‘time out’ for repo, by Tracy Alloway and Michael Mackenzie, Financial Times, Oct. 8, 2013:

Faced with an unruly child, an exasperated parent will often impose a “time out”.

That is one strategy some think could help calm the next major episode of a bank running into trouble in the “repo market”, where financial institutions pawn their assets in exchange for trillions of dollars’ worth of short-term loans.

Breaking the full faith and credit, vs breaking the buck, by Joseph Cotterill, Financial Times, Oct. 9, 2013:

Just for the record, FT Alphaville thinks of ‘technical’ default as one of those weasel words.

Still, some interesting comment from Fitch on Wednesday, on whether defaulted US Treasuries could still call the $2.694trn money market fund industry a home:

“Importantly, MMFs would not be required to sell U.S. Treasury securities in the event of a technical short-term default under Rule 2a-7 of the 1940 Investment Act and under Fitch’s MMF rating criteria. Thus, any liquidity pressures would more likely arise from increased redemption activity.”

Collateral crunch feared as T-bill yields leap, by Michael Mackenzie, Tracy Alloway and Stephen Foley, Financial Times, Oct. 9, 2013:

Halloween has taken on a new meaning for US Treasury bills: the threat of a debt default now looms as the ultimate “trick” for financial markets.

The humble short-term Treasury bill occupies a pivotal place in the infrastructure of financial markets. But its “risk free” status is at risk as politicians in Washington squabble over raising the $16.7tn debt ceiling.

The story ends with this quote from a State Street economist:

If you play with matches in an ammo dump for long enough, something is going to go boom.

Big banks make contingency plans for US default, by Tracy Alloway, Michael Mackenzie and Gina Chon, Financial Times Oct. 10, 2013:

Big banks and investors are preparing contingency plans to deal with the potential impact on the $5tn “repo market” of the US government missing a payment on its bonds, even as Republicans propose a six-week reprieve for the debt ceiling limit.

The shadow banking system, crunched one way or another, by Cardiff Garcia, Financial Times, Oct. 10, 2013:

Here’s a useful assessment of both shadow banking’s relationship to the real economy and how it will be affected by forthcoming regulatory reforms, by strategists at Barclays. …

These trends are still in progress and have many moving parts — and right now the very safety, or information-insensitivity, of this same collateral is being threatened by squabbling idiots.

But if indeed these trends continue, then we’ll end up with a financial system where money-like assets are provided a little more generously to the non-banks, and in exchange those non-banks are more heavily regulated.

A setup that’s positively Gorton-ian.

Debt impasse exposes Achilles’ heel of finance, Risk of an accident in $2tn tri-party repo market is rising, by Gillian Tett, Financial Times, Oct. 20, 2013:

Who is getting spooked by Halloween bonds? That is a question which many traders are wondering. Little wonder. A week ago, I (like most people) blithely assumed that Congress would find a way to resolve the budget and debt ceiling impasse before the crucial October 17 deadline, when the Treasury claims it will start running out of funds.

Now I am less sure.

Misunderstanding Financial Crises, a Q&A with Gary Gorton, by Cardiff Garcia, Financial Times, Oct. 25, 2013:

Read enough books and economics papers about the recent US financial crisis, and at some point you might notice something odd.

Most of them are about the factors that made the crisis and subsequent recession so profound and enduring — excess leverage, deregulation, lax lending standards, the rise of securitisation, blindness of the rating agencies, fraudulent bankers — but very few of them are about what actually started the crisis.

Gary Gorton’s work is different.

Fed probes banks’ exposure to mortgage vehicles, by Tracy Alloway, Arash Massoudi and Michael Mackenzie, Financial Times, Oct. 27, 2013:

Regulators at the New York Fed have been probing banks’ exposure to a type of mortgage investment vehicle that has proliferated since the financial crisis amid concerns that a rapid rise in interest rates could trigger a sell-off. …

MReits finance their purchases of long-term mortgages with short-term borrowings, known as repo, secured from dealer banks.

Matched-book repo and the continued shadow crunch, by Cardiff Garcia, Financial Times, Oct. 30, 2013:

We’ve been paying attention to the various ways in which oncoming regulations are likely to crunch parts of the shadow banking system.

Shadow banks reap Fed rate reward, by Tracy Alloway and Sam Fleming, Financial Times, Nov. 11, 2013:

Loosely regulated non-bank lenders have emerged as among the biggest beneficiaries of the Federal Reserve’s ultra-low interest rates with three specialist categories increasing their assets by almost 60 per cent since the height of the financial crisis.

Such lenders, widely considered part of the “shadow banking” system, have expanded rapidly on the back of investors who are clamouring for the higher returns on offer from financing riskier types of lending.

To show how little has changed, following are some reporting by RepoWatch in 2011, during the last round of default threats.

U.S. debt default could freeze repo market, May 20, 2011:

When Treasury Secretary Tim Geithner says a U.S. default on its debt “would inflict catastrophic, far-reaching damage on our Nation’s economy,” one of his key worries is the repurchase market.

FT: A U.S. default could threaten world’s ‘plumbing system,’ July 17, 2011:

Finally we have a news story from the mainstream business press that explains the potential dangers of a U.S. default.

Congratulations to the Financial Times for its consistent, clear reporting on the repurchase market and for not being afraid to use the r-word (repo).

Fitch: Repo could be ‘serious’ threat to money market funds if U.S. defaults, July 21, 2011:

If the U.S. defaults on its debt payments, a key danger to U.S. money market funds lies on the repurchase market, Fitch Ratings said in a special report July 18.

JP Morgan: Repos will transmit the shockwave of a U.S. default, July 21, 2011:

Money market funds, repos and foreign investors will transmit the shockwave of a U.S. default throughout the economy and the government, according to a JP Morgan report.


4 responses to “London’s Financial Times is key to understanding repo and U.S. default

  1. Hello there,
    Not sure that the Fed has any idea of what to do to control repos when it all goes pear-shaped next year:
    I can’t afford a Times sub, any other places like Zero Hedge perhaps?

  2. Hi, Peter,
    Good to hear from you. A digital subscription to the Financial Times would be good enough. Mine costs $28 a month. Securities Finance Monitor ( and Scott Skyrm ( don’t do daily reporting, but they do understand the repurchase market and track it closely.

    • Hi Mary,
      Many thanks for your advice – I will use those you suggest. It is sad that so few people understand the essence of Repo at the fundamental core of the system. I am writing a book about the global financial system in terms simple enough for the average person to understand. However it is uncertain whether they will be interested enough to read it in between their time limited daily lives!
      Staying on watch
      Best regards

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