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HighlyConfidentialNewYorkFedInformation
TimGeithnerJuly
11,2008
FEDERALRESERVEBANKOF
NEW
YORK
OFFICEMEMORANDUM
DATE
July
11,2008
To
TimGeithner
FROM
Brickler.Brodows,McCurdy,Schuermann
SUBJECT
ManagingaLoss
of
ConfidenceinaMajorTri-partvRepoBorrower
RESTRICTEDFR
Objectives
Drawingonthecurrentarrangementfortri-partyrepofinancing,hereisaplanforFederalReservefinancing
of
adealer'spositionsona24-hourbasis.Currently,adealer'spositionsarefinancedovernightbytri-partyrepoinvestorsandduringthedaybyitsclearingbank.Shouldadealerlosetheconfidence
of
itsinvestorsorclearingbank,theireffortstopullawayformprovidingcreditcouldbedisastrousforthefirmandalsocastwidespreaddoubtabouttheinstrumentasanearlyriskfree,liquidovernightinvestment.
In
theeventafirmfacedthissituationtheFederalReservecouldstep-inanprovideovernightfinancingasitdoesnowthroughthePDCF,andbyreplacingthecreditprovidedbytheclearingbankduringtheday.Thekeyelementsareoutlinedinthesecondsection
of
thisnote.Finally,wehaveestimatedwhatitwouldmeanforLehmanBrothers,asoneexample,
if
weweretoapplyourconservativehaircutstothefullrange
of
theirtri-partycollateral.Byallowingadealertoprovideastrongfacetothemarket,thisapproachisintendedtosupportmarketconfidenceinthedealerand,bycontinuingthesmoothfunctioning
of
themarket,inthetri-partyrepoinstrumentitself.Thiscouldbedoneonanannouncedorunannouncedbasis.Providinganunannouncedfinancingback-stoptothefirmwouldpermitittofacethemarketinabusinessasusualmanner,seekingfundsatmarketratesandontermscomparabletootherfirms.Further,the
Fed's
provision
of
fundstotheclearing
FRBNYtoExam.027043
HighlyConfidentialNewYorkFedInformation
o
TimGeithner
July11,2008
banksduringthedaywouldputtheminthepositiontowireoutanyfundsinvestorsmayrequestintra-day.Inthemidst
of
astresssituationthefastreturn
of
fundswouldagainalleviateconcernsaboutmarketfunctioningandfurtherboostconfidenceinthetri-partyinstrument.Providingthefacilityonanannouncedbasis--thatwearewillingtodothisagainstgoodcollateralandwithstronghaircutsmightcausethesamesort
of
speculationaboutuse--butitwouldunderscorethe
Fed's
intentiontosupporttheinstruments.Investorswouldstillneedtomaketheircreditjudgmentsaboutcounterpartiesbuttheywouldknowthattheywillgettheirmoneybackandwillnotgetlockedin
if
theydecidetopullback.
ProposedAction
Topreventaloss
of
confidenceinalargetri-partyrepoborrowerfromtriggeringabroaderloss
of
confidenceinthetri-partyrepomechanism,theFederalReserveshouldstronglyencouragethetri-partyrepoagentbanktoprovideintradayfinancingtothebankandhonorinvestorrequestsforwithdrawalspromptly.
If
theborrowerfailstoattractsufficientfinancingbytheend
of
theday,theborrowercouldtumtothePDCF.
If
thetripartyrepoagentbankcannotbeconvinced,theFederalReservecouldconsiderprovidingthedealerwithintradaycreditinordertoavertawidespreadloss
of
confidenceinthetripartyrepomechanism.•FRBNYcouldenterintoa"conditional"non-recourseloanwiththeclearingbankatthebeginning
of
theday,collateralizedbyacashclaimonthedealerinquestionandtheassociatedcollateral.
If
thedealersurvivestheday,theclearingbankwouldberequiredtorepaytheloanbeforetheend
of
theday(atzeropercentinterest).TheloanwouldnotappearontheirbalancesheetorontheFederalReserve's.ThedealercouldtumtothePDCFforanyresidualfundingneededforthefollowingnight.•
If
thedealerdoesnotsurvivetheday,theclearingbankwouldhavetheoptiontoextinguishtheloanbeforetheend
of
thedaybytransferringtheir
FRBNYtoExam.027044
HighlyConfidentialNewYorkFedInformation
o
TimGeithnerJuly11,2008
cashclaimonthedealerandtheassociatedcollateraltoFRBNY.(Legalanalysispending.)•FRBNYwouldliquidatethedealer'scollateral(potentiallyataloss)intheeventthatthecashclaimwasnotfulfilled.Collateralcouldbeheldinanoff-balancesheetentityduringtheliquidationperiod.
Impact
on
Firm
Tocomputethefinancialimpact,wemakeuse
of
thefirm'sreportedallocatedrepocollateralasperthefirm'sownMISdatedJuly9,2008.Thetotalglobalcollateral
is
$297.7bn,
of
which$1.5bn
is
Asia,$59.8bnEurope,and$236.5bnUS.TheUSbreakdown
is
summarizedinTable1below,withtotalsbytypeindicatedatthetop.Thefirmhad$173bnor73%
of
itscollateralinOMOeligible,another$39.5bn(17%)inPDCFeligible,landaremaining$23.6bn(10%)inothercollateraltypes.
1
All
munisareassumedtobePDCFeligible,thoughonlyinvestmentgradeare.Wedonotknowpreciselywhatproportion
of
themuniportfolio
is
investmentgrade,butaretoldthatit
is
thevastmajority.Thecategory"other"wasleftoutentirely;itmakesuponly$0.1bnand
is
thusnotmaterial.
FRBNYtoExam.027045
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