Securities dealers becoming borrowers against repo

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The Shadow banking System (gov. securities dealers becoming borrowers against repo- bank deposits backed up by repos) Business started with securities that were repoed as treasury securities Issue is that the derivatives market is growing- must put up margin, which if you’re a large trader you can put up gov. securities. This made gov. securities scarce because they were in high demand (scarce). So, the natural thing to use MBS for repos; in doing so; adjustable MBS are good. Made even more profitable when SEC cut how much you had to put up for margin in securities Which led to SPVs
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o Everything above is a result of capital requirements which still isn’t bad, what makes it safe is the MBS o Gov. intervention in housing market- campaign to increase home ownership (not obvious that this is something we want to do to help people Ninja loans. We are now feeding these very unsafe mortgages o Was there a housing bubble? o Big mistake by rating agency Huge demand for triple A mortgages o Whole event has exacerbated by “stupid money”- largely a result of gov. regulation Depositor money has sense of stupid money Depositor insurance o Institutional investors with no skin in the game- pension funds, No worried about taking risk so long as they have good cover, it’s to their money Real agency issues o Hedge funds did much better during crises Progression: o Things worsened by the way gov. handled the crisis 2006 prices increased o market for asset back paper began to get nervous o run on shadowed bank o Bailouts (AIG) led to bad cover ups o Collapse of MS market- created constant nervousness in interbank market Response: o Starting new cycle o Expansion of gov. securities Lessons o Basic problem- deep government involvement in financial system Expressed, as gov. is more involved crowning capitalism because more predominant Corruption in US is credit based o Whole idea of regulating safety- profoundly wrong Assumes that regulators know how to make the system fake
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  • Fall '19
  • Finance, Fractional-reserve banking, Subprime mortgage crisis

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