The political backlash that followed crisis-era bank rescues hangs over policy makers’ approach to the current problem, analysts said, even as officials work to ensure the smooth functioning of a key piece of the infrastructure underpinning financial markets. Some fear that lending directly to hedge funds could lead to the perception the Fed is fueling risky bets.
“There’s a strong aversion to fat cat bailouts,” said Glenn Havlicek, chief executive of GLMX, which provides technology to repo trading desks.
Many hedge funds trade in the cash market through sponsored repos. The clearinghouse sits between buyers and sellers to ensure that neither party backs out of the transaction. Records of cleared trades also are publicly available, improving the market’s transparency.
The idea of using the clearinghouse appeals to some investors and analysts because the Fed has had trouble getting cash into the hands of the smaller banks, securities dealers and investors who need it the most.
That is because the Fed trades exclusively with a small group of large banks and securities firms, known as primary dealers. Even among these firms, activity is tightly concentrated. A study recently published by the Bank for International Settlements said that liquidity in the repo market rests in the hands of the four largest banks in the U.S. system.
Every time a central bank reduces interest rates, holds them down for a prolonged period and increases the size of its balance sheet, part of the rationale is to support the kind of speculative activity which can get the growth multiplier moving again. The side effect is to encourage simultaneous financial market speculative activity in both public and private assets.Click HERE to subscribe to Fuller Treacy Money Back to top