The FT takes a look at the repo market, saying that the federally-midwifed buyout of Bear Stearns was meant specifically to save JP Morgan and The Bank of New York from a crisis of confidence that could have shattered the repo system. The two banks, the main custodians in the tri-party repo market, would have been left holding most of the bag were Bear unable to fulfill its counterparty obligations.
The FT says of regulators that "the central focus of their fears" were about threats to the two firms' dominant role on the clearing side of tri-party repo; any confidence shocks could have crippled that market for short-term credit. It cites Bernanke and Fed watchers alike in their current vigilance against "vulnerability" in either of BoNY or JPM. Like beer at high school parties, the role of clearing banks is vital and apprehensively monitored, but not subject of a lot of talk.
The "increasingly apparent" motivation of Bernanke and Paulson in orchestrating the buyout was to protect those two banks because of their clearinghouse role. The likely extension of the Fed's credit facility backstopping the repo markets is taken as further evidence. Bernanke's Tuesday speech discussed their efforts in "enhancing the resilience" of tri-party repo, including devising contingencies against a loss of confidence in either clearing bank. For the time being the Fed isn't expected to propose anything, instead considering potential changes and breathing easily.
--Non-rumor mongering senior repo market correspondent Andrew
Posted by onetwo , Jul 09, 2008 5:39PM
Hey, here's a crazy idea, why not force banks to include counter-party risk in their models? If banks feel they aren't being properly compensated for the risk of a counterparty going bust, they should, hmm, charge a higher rate? So long as we keep telling people counter-party risk doesn't exist it will continue to be under priced to the detriment of the financial system and tax payers everywhere.