Not very long ago, when the market in Fannie and Freddie debt went pear-shaped, I tried to look on the bright side, saying that at this point we’d pretty much run out of formerly-liquid securities which have now gotten credit-crunched: what other fixed-income markets were left to suffer a sudden liquidity crunch?
Today the WSJ tells me the answer: I’d forgotten about the repo markets. "In normal times, these loans are inexpensive and roll over easily," write Serena Ng and Randall Smith. "As with other kinds of short-term financing recently, the money is drying up."
Most investors don’t rely overmuch on repo-market liquidity. But Bear Stearns did, and investment banks in general do, and insofar as Lehman Brothers is going to be attacked today, repo-market weakness is going to get a large share of the blame. Mortgage-backed bonds account for 29% of Lehman’s total assets. Lehman might have been able to repo those assets out last week, but today the only entity willing to lend against them is likely to be the Fed, at 3.25%. Which admittedly is hardly punitive.