Latest / Financial Survival Network / The Book on Repo-Madness -- Mary Ellen Tuthill #5912

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The Book on Repo-Madness -- Mary Ellen Tuthill #5912 · Financial Survival Network

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  The whole thing with Repo is their facility. They are you know, accessible
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  liquidity, you know cash equivalent almost and it's look super important that that element
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  stay in place or that wouldn't work. So this is just for people to
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  know about stuff that isn't normally written about in the main stream. You're listening
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  to Carrie Lutz's Financial Survival Network, where you get valuable information you just can't
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  find anywhere else to thrive in today's trying times. You need the Financial Survival
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  Network now more than ever. Go to Financial Survival and Network dot com and
• 0:35
  get your free newsletter and gift. Financial Survival Network now more than ever,
• 0:45
  and welcome. You are listening to watching the Financial Survival Network. I'm your
• 0:49
  host, Carrie loves you know. September is the month of crashes. September
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  and October there's going to be a crash. It's going to happen then or
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  the runner up is March. For some reason, these three months where most
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  of the crashes of recently have taken place and very well might take place again.
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  You never know. So there's a book that you gotta get. I'm
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  about to interview the author. It's called Repo Madness. And Wall Street's Wicked
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  Ways, which kind of is redundant if you ask me. But she wrote
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  the book and her name is Mary Ellen Tuttle. Mary Ellen, You're been
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  a financial journalist for decades. You basically found yourself out of a job but
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  not too long ago, and you wrote to started writing this book. We're
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  really thrilled to have you on. Hey, so system out of control.
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  It's kind of like imagine you had five engineers running one locomotive and everybody was
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  kind of trying to go their own way. What's going to happen? The
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  train's going to come off the tracks? Right? Yeah, And basically the
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  book is not haimed at people who normally read finance books. One of the
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  one of the takeaways from the recent forum Better Markets did on the anniversary Lehman
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  was that, you know, reforms need to be put in place. Everybody
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  was shaking their head. I was really kind of amazed, and how you
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  know, all these people were experts and they all came to the same conclusion
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  that there's no political will, We're stuck with it and it's unsustainable. So
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  that was really encouraged. So unsustainability, all right, I guess the first
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  thing is to say, we're highly critical as system. Tell us what this
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  system is, how it works, and why it's unsustainable. Well, because
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  we just keep you know, you can't keep doing trillion dollars. Baila.
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  I'm not like I said, I'm not any well, I don't know.
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  I just think that, you know, I don't think it could go on
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  forever. And you know, this this thing ordered it sure is good while
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  it until it stops, everything's fine, right, No, it's not fine
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  obviously. But my book has aimed at looking at even you know, even
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  if it were sustainable, it's completely you know, unjust, an unjust system,
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  an undemocratic system. It's a club you know, a clubby system,
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  and it has and there are studies that show obviously that it has had a
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  huge negative impact on the real economy. And but what I like to put
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  in the reader's mind is that when someone says, you know, we spend
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  eight trillion dollars on forever wars, you know, you can imagine what we're
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  spending that money on weapons and contracts and so on and so forth, But
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  people aren't really aware. I mean, it's sort of like a monolo it,
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  you know, the the shadow banking system and all that people aren't taught
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  about it or and it's not written about the mechanics of it. So what
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  I tried to do in the book is to aim this as a person who
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  doesn't normally read financial books, and when they finished reading my book, they
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  have an idea of how the repo markets started and what the mechanics are.
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  I cover rebo in one chapter, the short term collateralized loans that provide liquidity
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  I like to call liquidity at the altar of arbitrage and securities lending is another
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  arm and the collateral that's a big business, you know, getting collateral for
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  all these rebos and the how they you know, they basically are the lifeblood
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  of the financial system. So they'll have a basic understanding, a rudimentary,
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  I'm sure, because but at least it will open their eyes, you know,
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  how it evolved and how it evolved without any regulation, and that in
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  the nineteen eighties they was a bankruptcy where they seal security when bankrupt. And
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  we don't have a lot of time, so I'm just going to you know,
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  basically, the papers of the day wrote that this would destabilize the entire
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  government securities market because of this bankruptcy, and so they bailed it out.
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  But my point was when this repos started really growing in the eighties, flooding
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  the markets with like again no regulation. So why didn't the regulators when they
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  saw that this was a threat to the freasury markets step up and take a
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  look. But they didn't, and then another bankruptcy occurred in a couple of
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  months later, where repos are. The whole thing with rebo is their facility.
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  They are you know, accessible liquidity, you know cash equivalent almost and
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  it looks super important that that element stay in place or that wouldn't work.
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  So this is just for people to know about stuff that isn't normally written about
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  in the main stream. And this is another bankruptcy might be familiar with Lombard
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  Wall and when that occurred, it was disruptive Juripo because the judge determined that
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  it was a secured loan and that it would be subject to the automatic stay
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  in bankruptcy law, which is really bad because because you got the counterparty risk
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  and these are supposed to be as supposed to risk free as you can get.
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  So a repo is I'm holding securities, I want to get cash for
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  the securities but still earn a return. So I effectively sell it to you
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  for a fixed amount with a fixed return for X number of days. Generally
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  these are really short terms, right overnight, and then and then I agreed
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  to repurchase it from you to buy it back. At the end of that
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  time, you made your return, which is higher than the Fed funds rate,
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  which is why people do these things, because they're at search of yield.
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  So a reverse repo just tell us how's that work? Well? In
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  the reversary volume and securities for cash and the cash is the collateral, and
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  you know that's a reversary call. Right. So one of our favorite people,
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  who was the former governor of the state of New Jersey, Core Design,
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  had a zillion of these. I can't even remember the name of his
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  company now, but I'm sure you do nothing global, Yeah, MFS global,
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  And they had billions and billions and they did. And there's hypothecation.
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  That's where you put the security, and they do. And if that's when
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  you have the collateral and you use the same collateral for different transactions, which
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  is you know hypothecation, yes, yeah, and and and there you know,
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  against studies and observations that you know, when a crash occurs there,
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  like with Lehman, you know, you don't know who has what collateral,
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  where it is. It's not trackable, so that leads to a lot of
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  confusion. And then liquidation of Lehman yielded hundreds of billions of dollars in dividends
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  payouts to the creditors of the company. I'm not even sure that the creditors
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  were net negative at the end of the Lehman liquidation, but it was years
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  and years later. So that uncertainty really undermined the faith in markets. And
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  we started seeing like municipalities where they put tens of millions of dollars on deposit
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  with a bank and they get a letter of credit from a third party bank,
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  believing that these letters of credits are similar to a repo in many respects,
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  letter of credit has no value anymore, and it really completely undermined faith,
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  whatever faith there was prior in the financial system. Right. Yeah,
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  Well, it's interesting that you brought up Lehman because back to the Lombard Wild
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  bankruptcy, so the judge grows the collateral and this caused a human to cry,
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  obviously, and the financial industry prevailed and Congress past a regulation that would
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  exempt collateral in REPO from the automatic stay. But it was fun to book
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  collateral like CDs and conservative so that went on. So they were saved.
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  Repo went on to live another day. By nineteen eighty six, the market
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  was two hundred billion and it was the largest securities market in the world and
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  nobody knows about it. Well, that's another point your base. That's really
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  funny is like, you know, the biggest and the brightest at these banks
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  are not at the repo desk. It's a sleepy or used to be a
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  sleepy backwater where you put the not even the B grade executive, you put
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  the C and D guys running the repo desk because it's basically idiot proof.
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  It's kind of like it's somebody's brother in law. You can't fire this guy,
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  you know, because then your sister going to hate your guts, or
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  it's somebody's sister in law. Your brother in law is going to hate you.
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  So you got to give him a job somewhere. Oh, I know
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  what, We'll stick him at the REPO desk. You can't do any damage
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  there, right. Well, interesting, you brought up Leaman because I found
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  in my research that the attorney who oversaw the Lehman bankruptcy underscored that the exemption
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  from the automatic stay caused massive destruction, in his words, of the unwinding
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  of everything, because in two thousand and five, Congress decided that they would
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  exempt all collateral from the automatic stay. So the scholar who writes about this,
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  Jane Cecicco, said, basically, the US Congress, if they think
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  it's okay to tell the financial services industry that they can exempt any transaction and
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  they want from bankruptcy, it's okay with Congress. And she didn't say that
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  in an approving way, you know. And I can't help but think this
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  exemption from bankruptcy. I'm not an expert on flows and shifts in trading strategies,
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  but it seems not too much of a reach to think that more of
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  the investments would go towards collateralized structure just for that reason alone. So then
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  can cause for a major shift in how the markets behave I gotcha, And
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  well, but the thing is okay, Harry Allen, like, as a
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  recovering attorney myself, I can tell you that these bankruptcy attorneys and judges are
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  not suited really to be running a bank and receivership all right, in conservatorship.
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  The bankruptcy systems not designed to ensure the smooth functioning of the financial system.
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  Its purpose, purportedly, and granted it's corrupted like everything else. I
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  have personal experience, is to gather up the assets of the bankrupt a state
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  as they call it, and gather up the liabilities the money owed, figure
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  out what gets paid within the framework of bankruptcy and what gets discarded, and
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  then the balance will go to freditors first, and then if there's anything left
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  over, the shareholders get it. So that system is really poorly adapted to
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  mass financial calamities that potentially could disrupt the system. But we're in a position
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  where these things happen more and more and we got like one person running the
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  show. That's not a good thing either. We need a system for unwinding
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  these things without bringing the whole system down right, Well, I would disagree
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  and say we just need a whole new system, period. And there are
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  there are footprints out there blueprints I shouldn't say footprints blueprints, but people that
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  whole better markets for them. Like I said before, didn't have one reformer
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  on the panel. Yeah, it was like the idea. And I found
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  out in my research that anyone who who writes about these reforms, you know,
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  in a sincere way to supplant the entire system and make it work,
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  like you know, putting glass, stiegeling stuff like that, they are they
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  are silenced by their peers, Academics disinvite them to conferences, They're not allowed
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  to get their word out. So I have a new blueprint and I just
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  discover that I'm very enthusiastic about. So I would like to share my emails
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  do it. It's author M. E. Toud Hill at gmail dot com,
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  and anyone interested in reading it can email me and I'll send that.
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  And I have another paper on financialization in the economy which is very quick.
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  It's not too complicated, but it makes really good points. So I'd be
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  happy to mix. But but you know, and this has come to me
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  kind of recently. I mean, I was shocked at that at that forum,
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  and it stuck with me because I thought, all these people are,
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  you know, plugging a leaky boat. If it doesn't if it's sustainable,
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  like you saying we can keep doing the bailouts, it's not sustainable. From
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  from a sociological point of view that still some point people are going to just
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  say enough. But my book's aim is to open the door to people who
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  do not read finance books. It's only one hundred and forty nine pages.
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  It really just you know, goes in. It's it's basically a relation of
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  fifteen years of me working as a financial writer, and when I'd come across
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  interesting quotes and stuff, I put him in boxes. And then after I
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  put my job, I went through all the boxes and pulled the most compelling
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  quotes. So I have great testimony in the second half of the book Professor
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  Edward Kine, he recently passed away, a well respected fellow. His testimony
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  before the Senate Committee in twenty sixteen is unequivocal and not disputable in any way,
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  and it's so cogent and clear that it's wonderful, I think, for
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  people to see it because he outlines very specifically, it's brilliant, you know,
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  all of the flaws and the unfairness of the program of the of the
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  financial system. But he does it, you know, and it's not a
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  lung chat. You know, I take excerpts obviously, but you know,
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  it's I want people to see this because I want them to know that this
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  pro this financial system is insane. You know, it's nuts, and that
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  if you think it's nuts, you're not the crazy one. And once you
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  read my book, you'll know that you're not the crazy one. And people
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  with a lot of esteem economists agree with you and me. They're just not
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  their voices just aren't heard. I mean, Kane is the one. Luigi's
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  and Galis from the University of Chicago wrote a paper then I stumbled on,
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  called does finance benefit society? And he basically said, there is no evidence
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  that it has for the last fourteen years. What are we doing with it
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  if it doesn't benefit society? I mean that's the bottom line, all right,
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  So and totally agree with you on that financialization is a net negative,
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  gross negative, because he got people pushing around paper, both figuratively and literally,
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  who really contribute zero to society. And and you know, if you
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  ever saw that movie Margin call right, you got a guy who figures out
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  all the mortgage backed securities are worthless ergo where your repos are kind of worthless.
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  And he's an aerospace engineer who should be designing airplanes. But the Muddy
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  was on Wall streets and he finds himself on Wall Street and he unleashes all
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  this and then supposedly this was if you had to pick a bank that it
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  was, it was Goldman. They discover it before anyone else, They sell
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  out all their position, they take their hits, and then the crash results
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  from it. I don't know how much of it was fictional and how much
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  of it was real, but it definitely struck a note with me. Yeah,
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  I like that movie. That's what I also would like to point out.
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  The brain drain is really sad. I mean when you think of all
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  the smart people who were in finance. I mean I read a recent I
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  can't remember, maybe it was mid two thousands or earlier, but the average
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  salary for someone in financial services was six thousand a week. And at the
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  time the average salary for the average American was eight hundred and eighty four dollars,
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  and in New York it was sixteen thousand a week. So there's another
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  that's another aspect of it, the brain drain. I mean, I wrote
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  about money market funds for a long time, and I did a lot of
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  research. Again, most of my book comes from those years. But what
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  I what I also was very familiarized with are the ancillary companies that are out
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  there just service you know, collateral collateralization optimization companies. Yeah, algorithms doing
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  all oh yeah, yeah, the collateral Highway. And there's a there's a
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  really kind of funny segment in the book where I just lived. I stumbled
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  on this meeting among financial institution fellow with software fellow I can't remember, but
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  it was like four or five people, and they were all different roles,
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  and they were talking about collateralization and the challenges and I just excerpted at the
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  end of the collateral chapter and just throw it on the pages because it's funny.
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  I mean, it's so ridiculous the way they're talking you can't even understand
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  it. And the massive education and people are going to need for this,
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  and it's really complicated, and the dialogue amogenum is just kind of hilarious because
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  it just shows you how completely nuts this whole thing is. Yeah, totally
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  all right, So all of you out there, the book is Repo Badness,
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  A Simpleton's Guide to the Street's Wicked Ways. Do I have time for
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  a quote or are we're running out? Yeah? We got one more quote,
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  sure, okay, this is what I really like. It's by economist
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  John Kay, and he writes, we need a finance sector to manage our
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  payments, finance our housing stock, restore our infrastructure, fun retirement, and
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  support new business. But very little of the expertise that exists in the finance
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  industry today relates to the facilitation of payments, the provision of housing, the
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  management of large construction projects, the needs of the elderly, or the nurturing
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  of small businesses. The process of financial intermediation has become an end in itself.
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  Okay, So if I can sum up and interpret what that says,
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  Once upon a time, the financial sector's purpose was allocation of capital, and
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  they were an They were a middleman, and they got capital from deposits from
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  banks and all. And then they found worthy borrowers who who could take that
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  money and help the economy grow. And now it's just a giant sino and
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  the only ones benefiting from it, or the interested parties. Hence why they're
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  probably if there's two lobbyists, two industries that lobby the most, it's big
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  pharmat and big wall sting, And the public needs to get involved because that
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  was the takeaway from better markets. Until the public is more knowledgeable and active
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  in fighting this and so you know, I'll send you this new blueprint for
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  a complete up change, pulling the tree from the roots, and you can
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  send it to your congressman and congresswoman. You know. Hey, do you
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  have a website Mariel Hotel, but I want to wreak involved one. But
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  I've got you. We're on LinkedIn of course. Yeah, your LinkedIn.
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  We'll throw your LinkedIn. We'll throw the Amazon link so you can buy the
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  book. And hey, if you've got a question for Mariel and you can
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  just or from myself for that matter, just send me an email kl at
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  carry Lutz dot com. We'll get you an answer on the site. To
• 22:07
  show notes this interview on Financial Survival Network dot com. Just click through the
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  Amazon link is there, the LinkedIn link is there, and send us any
• 22:15
  questions while you're there. Sign up for your free newsletter. Mary Ellen.
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  Had been an absolute pleasure. Great luck you. Thank you very much for
• 22:23
  having me. I appreciate it. Thanks for listening to carry Lutz's Financial Survival
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  Network your solution to today's trying times. For the latest go to Financial Survival
• 22:34
  Network dot com Financial Survival Network now more than ever,