By Mary Fricker
What types of stories emerge from covering the repo market that are interesting? What stories are not being covered that should be covered?
Let me answer these questions with real examples. I’ll show some stories that are being written and some that aren’t.
Examples of stories that are being written:
- “Innovative ways of making lenders feel more secure” by The Economist, Feb. 25, 2012. We need to watch for new ways borrowers and lenders will try to game the repurchase market.
- “Key repo contracts market falls 14%” by Mary Watkins, Financial Times, Aug. 5, 2012. For years the Financial Times did the only repo reporting, and it still does the most and the best. These reporters understand credit markets.
- “Russian Banks More Than Doubled Repo Borrowing In Second Quarter” by Artyom Danielyan and Stepan Kravchenko, Bloomberg News, Aug. 31, 2012. Repos are a worldwide financial market.
- “Fed said to press BNY Mellon to speed repo market change” by Bradley Keoun, Bloomberg News, Sept. 25, 2012. Federal Reserve officials have said that their biggest fear during the financial crisis was for the tri-party repurchase market and its two clearing banks, BNY Mellon and JP Morgan Chase.
- “As Fed focuses long term, high short-term rates weigh on lending” by Karen Brettell, Reuters, Nov. 6, 2012. I wish the Associated Press would send out stories like this.
- “FSB seeks to tame shadow banking” by Brooke Masters, Financial Times, Nov. 18, 2012. Finally, a regulator proposes repo reform.
- “Fed’s Dudley Calls for Wholesale Funding Market ‘Reform’” by Caroline Salas Gage, Bloomberg News, Feb 1, 2013. This speech by William Dudley, president of the New York Fed, was a unusually straightforward explanation of the panic in 2007-2008. It also was a stunning rebuttal to Treasury Secretary Timothy Geithner’s claim two week earlier, in an interview with the Wall Street Journal, that the financial markets are much safer today.
Some stories that aren’t being written:
Once we understand the danger of short-term borrowing, and once we start looking, we’ll see stories everywhere.
Personal finance: I wish mainstream reporters were writing personal finance stories like this: “How American Capital Agency makes money” by BDC Review, Seeking Alpha, July 3, 2012.
Student loans: This New York Times story cries out for a sidebar on where lenders are getting the money to make these student loans and how repo and securitization drove the student loan bubble, like they drove the housing bubble. “Child’s education, but parents’ crushing loan” by Tamar Lewin, The New York Times, Nov. 11, 2012.
Big-box banks: We should never write a story like this one from the New York Times without telling where the money is coming from to make these loans. “On the new shopping list: Milk, bread, eggs and a mortgage” by Stephanie Clifford and Jessica Silver-Greenberg, The New York Times, Nov. 13, 2012.
Money market funds: I wish personal finance reporters would write that Prime Money Market Funds are greatly expanding their repo lending and explain what that means to depositors, for example as Fitch Ratings does in this report: “Repos: A Deep Dive in the Collateral Pool” by Martin Hansen, Robert Grossman, Kevin D’Albert, and Viktoria Baklanova, Fitch Ratings, Aug. 1, 2012. Our readers also need to understand that money market funds were leaders in triggering the financial crisis when they stopped making repo loans in 2007 and 2008. Money market funds can be very destabilizing to the credit markets.
Tight credit: An important reason it’s harder to get credit these days is that many repo lenders, stung by mortgage securities, will no longer accept securities as collateral if they’re backed by consumer or business loans. Reporters usually let experts blame today’s tight credit on lack of demand caused by the bad economy, or on stingy big banks, but a big part of the problem is the disruption of repo, securitization and shadow banking.
Ag loans: Farmers get much of their financing from the Farm Credit System. Ag loans can be vulnerable to a credit crisis just as mortgages were, probably driven by short-term discount notes instead of securitization and repo. I wish anyone who has an agriculture bank in their community, as I do, would do a story on this report: “Farm Credit System Liquidity and Access to a Lender of Last Resort”by Donald Kohn, Brookings, Nov. 6, 2012.
European crisis: Financial institutions in Europe are having a financial crisis partly for the same reason financial institutions had a crisis in the U.S. They depend on being able to borrow on the repurchase market, but lenders won’t take their collateral any more (Greek and other European government debt). I wish reporters would include this context in every story about the EU crisis.
U.S. deficit: For organizations to get repo loans, they need to have securities to put up as collateral. They usually use U.S. Treasuries and mortgage securities backed by Fannie Mae and Freddie Mac, because repo lenders view these securities as safe.
But what will happen to the repo market – and to the creation and distribution of credit in this country – if (1) the U.S. pays down its debt so there are fewer Treasuries, or (2) the U.S. defaults on its debt and Treasuries no longer seem safe, or (3) Congress abolishes Freddie and Fannie and their securities disappear? Asked another way, is it realistic to expect that the U.S. will dramatically pay down its debt, or default on its debt as Congress has threatened, or abolish Fannie and Freddie?
Clearinghouses: The Dodd-Frank Act said traders must start putting most of their derivative trades known as swaps through clearinghouses, rather than make the trades privately among themselves. I’ve seen some fine reporting on the dangers that this concentration of risk could pose. The unreported story is how the clearinghouses use the cash and securities that traders have to post as security before they can trade: Clearinghouses use it to do their own shadow banking, including repurchase lending and borrowing, securities lending and rehypothecation. Their own industry thinks this is dangerous.
Fraud: In the U .S., the highest-profile conviction of a top executive for fraud relating to the financial crisis was repo fraud (although to my knowledge it was always reported as mortgage fraud – reporters never mentioned repos), and the convicted banker said repo fraud “happens all the time.” The executive, Lee Farkas, is imprisoned at the Butner Federal Correctional Complex in Butner, N.C. If I were a reporter in North Carolina, I’d sure want to talk to him.