Loading ...I remind you that the Valukis Report disclosed that Lehman, about a month before it blew up, did exactly this with a tri-party Repo with Citibank at the NY Fed. They attempted to present collateral, were told to **** off by Citi which didn’t like their collateral, were asked what else they had and their response was NOTHING.
From that INSTANT forward both The NY Fed AND Citibank KNEW, at a matter of fact, that Lehman was insolvent. It did not have good collateral sufficient to back it’s ordinary OVERNIGHT liquidity requirements! Yet that FACT was not disclosed to the general investing public and NOTHING was done about it either, despite that factual knowledge — until Lehman finally collapsed. Well, except for all those who I presume WERE trading on that information.
These Repo transactions are ordinary, every-day commercial balancing transactions — they take place to balance the reserves and free cash among financial institutions in the ordinary course of business. They normally trade right near or at the overnight FFR because the collateral posted consists of either government or agency securities, the term is typically one day and thus the risk is very nearly zero, and the reason they’re undertaken is that funds move from place to place in ordinary commerce and financial institutions must maintain their cash liquidity levels at mandated amounts.