April 7, 2011 (last updated June 23, 2017)
On February 27, 2009, The Audit blog at Columbia Journalism Review interviewed Bloomberg reporter Mark Pittman:
The Audit: “I’ve said before that a part of why the business press failed here was that it has so many times more people covering equities than debt. And debt markets are many, many times the size of the equity markets. That’s kind of a major problem right there, right?”
Pittman: “It is huge. Most reporters, it’s shocking how few of them actually understand the difference between price and yield. Hardly any business journalist actually covers the financing.”
Some press critics have criticized U.S. journalists for not warning Americans in the mid-2000s that a financial crisis was coming.
I am one of those who believe we blew it.
Personally, I don’t ever again want to feel the way I felt that day in September 2008 when Treasury Secretary Henry Paulson made his frantic plea to Congress for $700 billion to save the world’s financial system from collapse and I realized how fundamentally I had failed my readers.
Sure, I had warned about the housing bubble, dangerous derivatives, off-balance-sheet entities and rating agency conflicts. Who hadn’t? But I had no idea that defaults in a niche segment of the housing market could cause a nationwide – almost worldwide – credit crisis. It was my job to know. I should have known. But I didn’t.
I fear many of us still don’t.
Federal Reserve Chairman Ben Bernanke told the Financial Crisis Inquiry Commission, “As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period . . . only one . . . was not at serious risk of failure. . . . So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
The instruments that created that panic were not mortgages. They were repurchase (repo) agreements, asset-backed commercial paper, and credit default swaps.
At the heart of the panic were repos.
They are the story the U.S. press has not told.
I hope RepoWatch can help.
At the “About Repo” tab on the RepoWatch home page, I pose three questions and answers. Here I add thoughts for journalists to consider:
(1) Where did lenders get the money to pump up the housing bubble and make such a mess?
-Much of it came from the repurchase market. I wish more of us business reporters had remembered to Follow the Money.
(2) Where did the systemic risk and credit crisis come from that forced the taxpayer bailout?
-Much of it came from the repurchase market. I wish more of us had understood how the credit markets work.
(3) More than two years later, what’s been done to corral the repurchase market?
-Very little. I wish more of us were writing about that.
How many of you have reported on the repo market lately?
From RepoWatch, journalists will learn:
–At repo’s peak in early 2008, daily outstanding repo loans in the U.S. totaled $6 trillion to $10 trillion. It was one of the biggest financial markets in the world. We need to be tracking repo volumes.
–JP Morgan Chase is the bank most at risk in the repo market. We need to be writing about the systemic risk centered at 270 Park Avenue, New York. (Update June 23, 2017: JP Morgan Chase is giving up its role as one of the nation’s two clearing banks for the tri-party market. The other is Bank of New York Mellon.)
–Repo is the main way money flows on the shadow banking system and the main way leverage is created. Coverage of shadow banking starts with repo. We need to be scanning 10-Ks and peppering the new Office of Financial Research with FOIAs for data. Just like reporters of the S&L crisis learned to watch and write about brokered deposits, we need to watch and write about repos.
–Nationwide, many banks, businesses, states, municipalities, pension plans, money market funds and large investors borrow and lend on the repo market. We need to understand why this matters, cover it and be sure to mention it in earnings reports.
–The financial crisis was primarily a run on repo, the first systemic bank run in the United States since the 1930s. We need to be tracking repo quality.
–A key reason credit isn’t flowing well today is that repo borrowers need securities to collateralize their repo loans and securitization is struggling. We need to be tracking securitization volumes and quality.
–Banks said they pooled loans and sold securities to investors to offload risk. Not true. They kept one-fourth of the securities and used many of them as collateral for repo loans. Let’s stop repeating the originate-to-distribute canard.
–Overturning The Glass-Steagall Act in 1999 did not lead to the run on repo. Banks have been allowed to repo and securitize for years. We need to be clear that avoiding the next crisis is not as easy as simply bringing back Glass-Steagall.
–The crisis happened in 2007 and 2008 because between 2000 and 2005 regulators approved new rules that inflated a repo and securitization bubble. Regulation can be as dangerous as deregulation, and we need to report on it.
–Repo is coming back. In the U.S. it’s up more than 20 percent from its September 2009 bottom, and in Europe repo was higher in 2010 than it was in 2008. We need to cultivate sources who can help us get behind the scenes on this market.
–The debt crisis in Europe today is also a repo crisis. We need to be explaining this and how the danger can be transmitted worldwide.
–Efforts by the Dodd-Frank Act to fix mortgages and derivatives will not fix repo. The Act mostly ignores repos. We need to be making that point.
–One of the most critical questions of the crisis is whether bankers and taxpayers should guarantee repos, or repo collateral, like the FDIC guarantees deposits, to stop repo runs on the banks. We need to be writing about this.
–Experts have suggested ways to fix the repo market. We need to be evaluating these proposals and tracking their reception at the Fed and the Financial Stability Oversight Council.
We can do this.