Alea

sammy,

I take it you’ve never heard of Drysdale Securities?

Dysdale was 1982, I believe.

Don’t forget 1974 that Franklin National Banks also had similar problems and failed (even after the Fed tried and rescue them, a pre-historic Northern Rock).

And in February 1985, Gold shot up $40 in a day (back when it was under $300 so it would be equivalent to nearly $150 move today). That blew up a gold trading firm called Volume investors. They engaged in a strategy called “rolling for credit” and were short about 12,000 call options when gold surged. Volume had repos with ESM Government securities. Volume took down ESM. ESM’s failure caused a S&L in Cincy called Home State Savings to go insolvent. Before Home State closed, they all but depleted the Ohio S&L emergency fund. When word of this running out of cash was made public, all the Ohio S&Ls had a bank run. Pictures of the event look exactly like Nrthern Rock today, people were standing in line in front of dozens of Ohio S&Ls demanding their money back. Evantually the old FSLIC came to the rescue (not before few Maryland S&Ls also had runs). Finally, on May 31, 1985 seven S&Ls were declared insolvent in one day. This is the all-time record for a number in one day. This did not even happen in the great depression.

So, who cares about Repo? It’s all collateralized and can never lead to problems, right?

Hmmm…so, we have the US Treasury blowing the bond markets’ collective minds by announcing massively higher auctions than previously announced, causing yields to spike.

Then, on the other side of the table, we have the Fed telling all comers that they’ll swap them their MBS’s and associated paper for good ol’ US T-Bills at 2.6%, draining their own balance sheet to the tune of $260bn since Xmas.

What a mess!!

At this rate, will there be any official US institution solvent by the end of the year?

http://www.ny.frb.org/research/epr/06v12n1/0605garb.pdf

i am not sure what the etiquette is on self promotion but if i have crossed the line I apologize. i wrote on this topic at my blog today. Here is a link to one of the posts.

http://acrossthecurve.com/?p=545

Separately, I chatted with a friend who is a salesman for a large primary dealer and he suggested that there has been a structural change in the repo market in that sec lenders have changed there modus operandi and that fear has made them much more circumscribed in their lending practices.

i called one sec lender with whom i had a relationship in a former incarnation but he refused to comment in a meanigful way.

I wonder if anyone has any info or that topic.

Thanks.

JJJ

I’m no expert in the govvies market, but I can add that any corporation that has formerly “safe”, but now illiquid, short-term investments is facing at minimum severe embarrassment and at worst genuine liquidity problems. All this aggravation to get an extra 50 bps return on cash when this type of risk assessment isn’t your primary business.

It leads to a preference for the genuine safe article, and the return be damned, which is why t-bills are in demand at quarter end.

john jansen:
if there is a link in your comment, it won’t appear immediately. Other than that if the comment is pertinent you can self-promote as you please.
I will put some data on treasuries supply and that shows that supply is tight mostly because of “foreign” hoarding.