“A handful of Wall Street firms are much more vulnerable than their peers to a type of bank run (repo runs) seen during the financial crisis. Unfortunately for investors, the identity of these firms is a mystery…
…It isn’t as if this is a trivial matter: Repo runs played a role in the demise of Bear Stearns and Lehman Brothers. So the extent of a firm’s vulnerability to such a scenario shouldn’t be kept hidden. What’s more, these known unknowns can become dangerous if markets come under stress. Another lesson from the crisis is that when markets suspect that some financial institutions are critically weak but can’t identify which ones, liquidity dries up for everyone.” John Carney, “Wall Street’s Reason to Fear the Repo”, Wall Street Journal
“This continued non-disclosure (to investors) of material repo exposures/maturities, after the 2008 financial crisis and after all these years, is absolutely outrageous!!! Where is the SEC? As I have said before on this blog, I think the SEC’s lawyer-driven (prosecutor-like) culture likes the headlines of suing people and companies for securities fraud, when they should be more focused on the “meat and potatoes” business of mandating key industry and company disclosures like this and making markets more transparent and fair for all investors. Also, while I am glad to see news reports that they are finally discussing it, the idea that the SEC has allowed corporate and municipal bonds to trade in non-transparent marketplaces (for average investors) for decades is outrageous. This practice clearly benefits Wall Street over main street investors and is wrong. The idea that the SEC has not resolved this relatively easy issue is another example of their priorities being misplaced for far too long and/or their lack of ability to execute on much beyond litigation matters.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Wall Street’s Reason to Fear the Repo
By John Carney
A handful of Wall Street firms are much more vulnerable than their peers to a type of bank run seen during the financial crisis. Unfortunately for investors, the identity of these firms is a mystery.
One lesson from the financial crisis was that a little known but important source of funding, the repo market, can freeze up in times of stress. That is because cash investors, such as money-market funds, can suddenly stop making the short-term loans collateralized by securities, known as repurchase agreements, or repos, that help finance Wall Street’s securities portfolios. The shorter the maturity of a firm’s repo financing arrangements, the quicker they can come due and the more vulnerable it is to a repo run.
That is why the repo market, and reducing firms’ reliance on it, has come into focus with regulators. Officials such as Federal Reserve governor Daniel Tarullo, the central bank’s point person on regulation, have repeatedly spoken of the need for overhauls of this market, along with that of money-market funds.
Against that backdrop, a new study by the Federal Reserve Bank of New York of repo financing for riskier, less-liquid assets, such as corporate bonds, offers some potentially encouraging news. It found that Wall Street as a whole appears less vulnerable to repo runs. The average maturity of these trades, weighted by the value of collateral, was nearly 80 days in the first quarter, up from just 40 days in 2011.
But not all firms are so well placed. At a quarter of the 15 firms with the largest positions in this market, the weighted-average maturity was 26 days or less, according to the Fed researchers.
So which firms are the weakest in this regard? That’s the rub: The New York Fed study used confidential information that investors can’t access. And because most firms don’t disclose the maturity of their repo trades, there is no way to tell which is most vulnerable to a repo run. Citigroup, Morgan Stanley and Goldman Sachs Group are the exceptions: Each discloses that its risk assets have secured financing with a weighted average maturity of more than 100 days. For the rest of Wall Street, the weakness detected by the Fed is cloaked in opacity.
It isn’t as if this is a trivial matter: Repo runs played a role in the demise of Bear Stearns and Lehman Brothers. So the extent of a firm’s vulnerability to such a scenario shouldn’t be kept hidden. What’s more, these known unknowns can become dangerous if markets come under stress. Another lesson from the crisis is that when markets suspect that some financial institutions are critically weak but can’t identify which ones, liquidity dries up for everyone.
Hopefully, this study is a sign that regulators, who have made clear that the repo market can contribute to systemic risk, are moving toward requiring greater transparency. An added benefit: Banks made to disclose repo vulnerability would likely move to reduce it. It is time to shed light on the repo market’s darkness.