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Friday, August 10, 2007

3-Day Repos and "Crumbling Bonds"

by Calculated Risk on 8/10/2007 05:39:00 PM

From MSNBC: Fed takes action, but was it soon enough? (hat tip ac)

On Friday, as Bernanke faced the first big crisis of his 18-month tenure, the central bank was forced into action, buying up billions of dollars worth of crumbling bonds in an effort to stabilize financial markets that appeared to be coming unglued.

Update: Technically the legal ownership of the collateral apparently does change hands, so saying the Fed is "buying" is not completely inaccurate - just misleading. It's been some time since I've looked at how a Repo works, so this has been an interesting exercise for me.

The Fed engaged in fairly ordinary 3-day repo activity (calender days) as detailed at the NY Fed: Temporary Open Market Operations

These Repos were all for MBS; usually they accept more Treasury and Agency collateral. And the size was a little larger then recent Repo activity.

What was unusual today was the Fed statement: The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

But the Fed didn't buy "billions of dollars worth of crumbling bonds". The MBS is just put up as collateral, and unless the banks go under in 3 calendar days, they will pay the loan back with 3 days of 5.25% interest. No big deal.