Because repo collateral is often resold or re-pledged, it can be difficult for borrowers to retrieve. That led to widespread uncertainty in 2008 and could drive hedge funds and other investors to pull assets from banks in another crisis.
“The bonds they financed most likely won’t be at the place they actually repoed them to, they’ll be two or three or four places down the line,” said Larry Tabb, CEO of New York-based research firm Tabb Group LLC. “So getting those bonds back will be a challenge.”
JPMorgan, Goldman Sachs and Morgan Stanley had sold or re- pledged $1.5 trillion of collateral as of June 30, the highest amount since 2008.
Obama’s Order
Realizing that Dodd-Frank and new international capital rules haven’t made the system safe enough or kept banks from being too big to fail, U.S. regulators including Fed Governor Daniel Tarullo and FDIC Vice Chairman Thomas Hoenig have pushed for tougher standards. In July, they proposed a cap on leverage tighter than the one adopted by the Basel committee. They’re also working to increase capital surcharges for banks relying on short-term funding.
Last month, President Barack Obama, who made Dodd-Frank a centerpiece of his first term, told Lew, Fed Chairman Ben S. Bernanke and other regulators it was time to get around to fully implementing the law, according to a White House statement.
If the president needed prodding, the Fed announced hours before the meeting that each of the nation’s 18 largest banks still falls short in risk management.
For John Reed, a former Citigroup co-CEO who helped engineer the merger that created the third-largest U.S. bank, Wall Street hasn’t changed as dramatically as it should have. He said he worries that a recovering economy, record stock prices and hefty bank profits might lull people into complacency.
“There are some banks that would believe the longer the delay the better,” Reed said. “The world looks pretty benign right now. But it always does until it isn’t.”