E Repo Watch Looking For The Next Economic Crisis

Repo watching is an important economic indicator. If repos don't roll over, credit freezes up. It is sort of like looking at a giant glacier, waiting for the big collapse on the edges. You watch and watch and watch until you are bleary-eyed, but then the action happens in a split second. 

There are a couple of websites that deal with repo watching, including here at Talkmarkets. Jeffrey Snider, a contributor to this website, is a serious repo watcher. Looking into how the system works in simple terms can help understand the economic indicator effect of repo rollovers. There are comments below about how Steve Mnuchin fits into this process.

Trump Secretary of Treasury Steven Mnuchin

But briefly, we can look at the history of repo watching, as Bear Stearns was the ultimate victim of not rolling over repos. From repo watchers Cecchetti and Schoenholtz we can learn a lot:

Recent developments again highlighted the importance and fragility of funding liquidity. Documents released last month—five years after the Financial Crisis Inquiry Reportsubstantiatedthe Report’s account of the origins of the March 2008 run on Bear Stearns (then the fifth largest U.S. investment bank). According to the Report, the run began with the efforts of Bear’s clients to “novate” derivatives contracts—that is, to transfer exposure to Bear from one counterparty to another. In normal times, derivatives novation is routine, but (absent perfect multilateral netting) it is not feasible for everyone to escape contractual exposure to a specific counterparty, let alone to do so quickly. And, as the opening quote of this note indicates, as of March 11, 2008, Goldman Sachs no longer wished to accept novations or other contractual assignments from others that would cause it “to face Bear” as a counterparty.
The news that one investment bank no longer wished to accept the risk of dealing with Bear spread almost instantly, so that within a few days Bear’s funding dried up completely.
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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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