JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again)

Readers of ECONned will be very familiar with the name of Gary Gorton, author of ‘Slapped in The Face by the Invisible Hand’, which explores the relation of the so-called shadow banking system to the financial crisis. His work is pretty fundamental to understanding some of the mechanisms which made the crisis so acute. Now he’s done an interview, which I would like to have a growl at; but first, he has some basic points about shadow banking, useful later in this rather long post. Gorton explains repo thus:

You take your $200 million to the bank, to Lehman Brothers, say. You deposit it, so to speak, overnight so you can have access to it the next morning if you want to. They pay you 3 percent. And you want it to be safe, so they give you a bond as collateral. But Lehman earns the interest on the bond, say, 6 percent.

The British Mess (III): Bank of England Tiptoes Around Sovereign Risk Worries

The latest Bank of England Financial Stability Report is worth decoding.

My last post on the UK sketched a scenario in which the very large 2011 funding programme for UK banks, discussed in the June BoE FSR (back issues all available here), could be quite problematic, in adverse markets. I hinted that if there was sufficient disorder, we might find the limits of the Implicit Sovereign Guarantee Moral Hazard Trade.

… Or Maybe the ECB Isn’t the Point at All

Following up on my last, John Dizard takes a different line from Ambrose. What Dizard wants is a sovereign default system, and he wants it now, not in 2013. The starting point is last week’s Eurobungle:

Last week’s crisis in “peripheral” euro area bond markets was the consequence of a series of own goals by the Brussels team. By attempting to postpone critical decisions on bank insolvency resolution, and on euro-area sovereign default procedures, the political leaders and their minions have brought one on.

ECB into the Breach?

Various Eurosceptics are piping up this morning, and no wonder.

Unfortunately some of the interesting stuff is behind the FT’s magnificently unstable subscription firewall, which, in an attack of paranoia, or megalomania, has decided today, as it occasionally does, to deny access to everything, even the free bits, subscriber or not. It is like something off the DiscWorld. Thank goodness it can only wall off the FT, not the entire internet, but I bet it wants to.