Grim Repos

--Repo market has not recoverd yet, especially Tri-party repos It’s crunch time – again. Thursday marks the deadline for the first round of subscriptions for the term asset-backed securities loan facility, the programme designed to kickstart consumer lending. Do not expect a rush of applications, however. Although the government’s support of borrowers should eventually attract investors back into, for example, packaged car or consumer loans, that is only half a solution. To fully revive the asset-backed security market also requires the rebirth of repos. Few understand this market’s central role in the credit crunch story, let alone what a “tri-party repo” actually is. But it is simpler than it sounds. In a normal repo, yield-hungry investors such as money market funds lend money to, say, a bank. In return, collateral is put up. That is no problem when Treasuries are thrown on the table. Over time, however, any old rubbish was used as collateral. But the returns were attractive, especially for those investors who were not allowed to invest directly in, say, subprime loans. Tri-party repos are simply when a custodian bank sits in the middle of the two parties.