Daily Archives: August 18, 2014

Regulators Punting on “Too Big to Fail” Problem of Repo, Looking to Install Yet Another Bailout Vehicle

Naked Capitalism has the article Regulators Punting on “Too Big to Fail” Problem of Repo, Looking to Install Yet Another Bailout Vehicle.

The post-crisis era is rife with band-aid-over-gunshot-wound approaches to deep-seated weakness in the financial system. Perversely, because the authorities were able to keep the system from falling apart, albeit via a raft of overt and covert subsidies to the perps, they’ve reacted as if all that needs to be done is a series of fixes rather than more fundamental interventions. One glaring example is a critically important funding mechanism, repo, for firms that hold large inventories of securities and/or enter into derivative positions, such as major capital markets firms like Goldman, Deutsche Bank, and Barclays, as well as hedge funds. Here, the authorities have been giving way to industry demands that will assure that repo, which was bailed out in the crisis, will be bailed out again.

It was hard for me to pick a short excerpt that would give you the gist of the problem. The above will have to do. I found the article quite fascinating.

To give you an idea of how seriously I treat this issue, I have decided that any large cash holdings in my investment portfolio will be in short term Treasuries rather than in Money Market funds. The interest is so low in either one of these vehicles, that the safety of Treasuries far outweighs any extra money (if there even is any) that I could earn in a money market fund.

This decision is not just hypothetical. Quite a while ago, I sold a stock position, and could not find a suitable stock investment to replace it. I put the money in Treasuries. About nine or so months later, I am still waiting for a stock investment that is worth the risk. What I don’t lose in the money held in Treasuries will more than make up for the dividends I didn’t earn from an investment in a stock.