Skating on the Edge

“Absent a debt ceiling, the repurchase market—known as 'repo'—would undergo another deep freeze as it did in 2008 when Lehman Brothers defaulted, triggering a run on the Reserve Primary Fund, which had been exposed to Lehman’s short-term debt.”

In the quote above from 2013 on?www.truthdig.com, Mark Whitney sized up the debt ceiling situation in his piece “A Repo Implosion.”

With the debt ceiling in the news, I thought I would share his observation. While default is unlikely, it is interesting to note how close we are skating on the razor’s edge. US Treasuries account for most repo collateral. Whitney cut to the chase when he wrote about what is at stake. What those on the inside really care about, he wrote is “…the looming massacre in shadow banking where USTs are used as collateral to secure short-term loans by the banks so they can increase their leverage by many orders of magnitude. In other words, the banks are using USTs to borrow gobs of money from money markets and financial institutions so they can finance their other dodgy investments, derivatives contracts, and ancillary casino-type operations.”

This was true in 2013 and it is true today. To mess with the debt ceiling is unthinkable for many reasons, not the least of which is directing the world’s attention to the dysfunctional, insular monetary system that is one congressional vote away from imploding, once again.

To learn more about repo and the shadow banking system, read my book, "Repo Madness: A Simpleton's Guide to the Street's Wicked Ways." It's available on?Amazon?and?Barnes & Noble.