robert2032
New member
Okay, it's become apparent that the vast majority of you don't know what a repo is. That's fine, you can largely live your life and invest successfully without this knowledge. But it is the topic du jour so let's see if I can't offer the most simplistic of explanations here to help provide some context of today's events.
Lets say you have 10 brothers and sisters. You're all young adults and have been quite successful in life. Your father is pretty conservative and asks that you keep your savings primarily in treasuries so you do.
Right now you have 1MM in 10yr treasuries saved up but you don't have a lot of cash on hand. The cable bill is due today and you get paid tomorrow. Wat do? You can of course liquidate some of your million worth of bonds but that's silly right? Your brother has 500k of cash sitting in his weed box. So you waltz over to his room and ask for $100 to cover the cable and promise to pay him back tomorrow. He thinks you're a bit of an asshole so he says no because he doesn't trust you. So you offer him this: you sell him $100 worth of your treasury bonds and he tells you he'll sell it back to you tomorrow for $100.01. Congrats you've funded your need for cash today while preserving your balance sheet. That's a repurchase agreement or repo.
So now you and your siblings have a thriving market of trading these overnight promises back and forth all while your dad is slowly selling more bonds to you and taking your cash. Eventually you run in to a problem where there just ain't enough cash right? Your brother the dick decides to still offer the same agreement but tomorrow instead of you buying your $100 worth of bonds for $100.01 he tells you he needs $105. That's a huge difference but given how little cash everyone has you might need to pay it. Enter your mom, she keeps the family in order but doesn't normally like to step in to the finances. She tells you she'll start buying your bonds and selling them back tomorrow at the aforementioned $100.01. That's what the Fed has been doing lately.
Takeaway: nobody here is bankrupt or insolvent. You've all got millions of dollars worth of bonds but you need cash to fund short term obligations and there just isn't much going around.
Obviously the real world is significantly more complex but this should serve as a very basic framework of understanding for what repos are and what some of the news you've been reading means.
E: I want to be clear: this is nothing short of the most dumbed down explanation possible. If you're looking to further explore this topic it's best to abandon the analogies and dive right in. I generally don't love analogies in thus world because at some point someone's trying to argue if the FDIC is your uncle roofus who vouches for you or your dads side chick that slips you money to not fuck up. That doesn't help anyone. So once you get a grasp on the basic framework you should either decide if that's good enough for you or expect a much steeper learning curve from there.
Lets say you have 10 brothers and sisters. You're all young adults and have been quite successful in life. Your father is pretty conservative and asks that you keep your savings primarily in treasuries so you do.
Right now you have 1MM in 10yr treasuries saved up but you don't have a lot of cash on hand. The cable bill is due today and you get paid tomorrow. Wat do? You can of course liquidate some of your million worth of bonds but that's silly right? Your brother has 500k of cash sitting in his weed box. So you waltz over to his room and ask for $100 to cover the cable and promise to pay him back tomorrow. He thinks you're a bit of an asshole so he says no because he doesn't trust you. So you offer him this: you sell him $100 worth of your treasury bonds and he tells you he'll sell it back to you tomorrow for $100.01. Congrats you've funded your need for cash today while preserving your balance sheet. That's a repurchase agreement or repo.
So now you and your siblings have a thriving market of trading these overnight promises back and forth all while your dad is slowly selling more bonds to you and taking your cash. Eventually you run in to a problem where there just ain't enough cash right? Your brother the dick decides to still offer the same agreement but tomorrow instead of you buying your $100 worth of bonds for $100.01 he tells you he needs $105. That's a huge difference but given how little cash everyone has you might need to pay it. Enter your mom, she keeps the family in order but doesn't normally like to step in to the finances. She tells you she'll start buying your bonds and selling them back tomorrow at the aforementioned $100.01. That's what the Fed has been doing lately.
Takeaway: nobody here is bankrupt or insolvent. You've all got millions of dollars worth of bonds but you need cash to fund short term obligations and there just isn't much going around.
Obviously the real world is significantly more complex but this should serve as a very basic framework of understanding for what repos are and what some of the news you've been reading means.
E: I want to be clear: this is nothing short of the most dumbed down explanation possible. If you're looking to further explore this topic it's best to abandon the analogies and dive right in. I generally don't love analogies in thus world because at some point someone's trying to argue if the FDIC is your uncle roofus who vouches for you or your dads side chick that slips you money to not fuck up. That doesn't help anyone. So once you get a grasp on the basic framework you should either decide if that's good enough for you or expect a much steeper learning curve from there.