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Think “Lehman crisis” multiplied by a factor of four.

Posted by Richard640 @ 20:28 on January 11, 2020  
You really have to ask what is going on here. Wall Street veteran Caitlin Long provided a clue.
U.S. Treasuries are the most rehypothecated asset in financial markets, and the big banks know this. [They] are the core asset used by every financial institution to satisfy its capital and liquidity requirements, which means that no one really knows how big the hole is at a system-wide level.
This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs – no one knows how many players will be without a chair until the music stops.
As ZeroHedge noted, this isn’t just a bank issue.
Hedge funds are the most heavily leveraged multi-strategy funds in the world, taking something like $20 billion to $30 billion in net assets under management and levering it up to $200 billion. As noted by The Financial Times:
“Some hedge funds take the Treasury security they have just bought and use it to secure cash loans in the repo market. They then use this fresh cash to increase the size of the trade, repeating the process over and over and ratcheting up the potential returns.”
So….it’s a hedge fund problem, right?
Probably.
“The repo-funded [arbitrage] was (ab)used by most multi-strat funds, and the Federal Reserve was suddenly facing multiple LTCM (Long-Term Capital Management) blow-ups which could have started an avalanche. Such would have resulted in trillions of assets being forcefully liquidated as a tsunami of margin calls hit the hedge funds world.”
Think “Lehman crisis” multiplied by a factor of four.

 

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Post by the Golden Rule. Oasis not responsible for content/accuracy of posts. DYODD.