Shortages of Treasury bills pushed AAA mortgage securities into repo collateral.
Evidence
When you and I put our money in a bank, the Federal Deposit Insurance Corporation (FDIC) guarantees it against the failure of the bank: this default risk is covered. But there is no such insurance in the repo markets, so repo-market investors protect their cash by receiving collateral equivalent to the cash lent. If the borrower goes bust, the lender can still get the money back, so long as, and this is critical, the collateral doesn’t lose value. What counts as high-quality collateral? Back in the early 2000s, it included such things as Treasury bills, of course. But increasingly, AAA-rated mortgage-debt securities began to be used as collateral, since T-bills were in short supply, which is how mortgages ended up in the repo markets. — Mark Blyth, Austerity, 81
Categorization
- XREF: Connects to the 2008 financial crisis literature — this exact collateral-shortage mechanism is central to how Gorton and others explain the crisis. — connects to: A repo is a collateralized loan using the security as pledge — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1290; Eurozone sovereign bonds replaced US mortgage securities as the systemic repo collateral — Mark Blyth, Austerity: The History of a Dangerous…, 237; Repo rate runs below Libor because bonds serve as collateral with a haircut. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1298 (+1 more)
- ADDENDUM: Relates to ‘On Sacrifice’ in that both trace how risk management systems convert ordinary assets into systemic lynchpins.
Broader Connections
- A repo is a collateralized loan using the security as pledge
#expands(0.80) — Donald MacKenzie, An Engine, Not a Camera, 1290 - Repo rate runs below Libor because bonds serve as collateral with a haircut.
#corroborates(0.75) — Donald MacKenzie, An Engine, Not a Camera, 1298 - Eurozone sovereign bonds replaced US mortgage securities as the systemic repo collateral
#complicates(0.70) — Mark Blyth, Austerity, 237 - Exploding mortgage-security demand forced lenders to invent worthless borrowers.
#complicates(0.70) — Mark Blyth, Austerity, 94