Would for an overnight loan. there are trillions of these things, trillions, 'kay. The, the, the flow is amazing and we're going to see why. What are they used for? The, the language of repo is a little. Odd. you'll, you'll see where its like doing repo, or reversing insecurities, or repoing securities. And it's not standardized across countries either. you, when you go to London, they have different language. They have the same instruments, but, they, the person who is doing repo in, in the United States is the person who is lending money. In London it's the reverse. The person who is doing repo is borrowing money. So, the, the language is not standardized okay, but the balance sheets will tell you and keep you straight. So, let's start with that. It's important to appreciate that almost all repo transactions have a dealer on one side or the other of them, a security dealer on one side or other, that will help you. Stabilize that the language as well to have that in mind. So let's have a security dealer here in the middle, assets and liabilities and then on one side doing business with with with a. With him is pension fund. Just as an example. And on the other side is, let us say, a bank. I'm going to always book [NOISE] when I put repo loan here, okay? Like that. If it's a liability, that means that you have borrowed money. Follow the money. That's my, that's my my view on this, okay? Money is better than securities. So pay attention to them, to what's. Happening to the money in order to know which side of the balance sheet it should be on, okay. So a repo loan is borrowing money from a pension fund, okay, these are the two sides of that transaction. Okay, the pension fund is, is lending money overnight get some, get some interest. But this is like a deposit account practically. You know, it's an overnight, it's an over night loan that's fully secured so it's a way of basically holding your cash balances instead of holding them in little piece of, green pieces of paper you hold them in these repo loans to security dealers. And they're fully collateralized, you know, there's a treasury security or something that the pension fund has, as collateral for this, for this loan. So it's completely secure it's in fact better than the deposit account in the point of view of a, of a pension fund. Because large, large deposits are not insured, okay. So if you're, if this, if this pension fund put, put their excess cash balances in the bank. Okay and that bank failed, end of cash balances, okay? Whereas if they put them in repo, they have a Treasury Bill as a collateral in case it doesn't get paid. So it's actually a better store of cash for a large, a large pension fund. Okay. That's one side. On the other side, security dealer sometimes instead of borrowing money lends money and takes in securities. that's often called a reverse. Stigham calls it a reverse. Okay. Because it's in the reverse direction of a repo [LAUGH] okay? Meaning that the money is going this way and the collateral is going that way okay. and in fact throughout this diagram it's helpful just to have in mind the collateral which is to say the securities is sort of moving in this direction. Okay? And the money is moving in this direction. Okay? So the security dealer is lending money to the bank, and the, and the bank is, is sending a security over to the security dealer. As collateral. The bank is doing, why is the bank doing this? Banks hold securities as part as their, as part of their assets over here. And one way to fund that holding of securities is is to repo those securities out overnight. So you don't have to fund them by having deposit accounts against them. You're using the repo market, essentially, as the liability. That is funding that asset. Okay? So, this is there's a lot of modern finance in the repo market even though it's very ancient as a matter of fact. And particularly in the United States the, this sort of thing existed before the Fed. Okay, and it was the way that banks traded with each other before the Feds funds market. the corresponding banking I told you, was one thing. But repo was another, if you're trading with a stranger, okay, not a correspondent, you want collateral, okay. And so the repo market will give you that. You, you, just have a bond. And if you want and, and you, you say, I'll lend you money but you give me this bond to hold until you repay me, and then I don't have to worry. I do a credit check with you. I just make sure the bond is good. That's, that's the key. And there were these big volumes of bond measures. You know, this is where Moody's came from and everything. It was, it was to figure out, which bonds are good or. What, how much money should you lend against these bonds? That's where the whole thing got started. Alright. I wrote down reserve here, okay? But really a repo, right? You know the, this, the relationship between the bank and security dealer here, is exactly the same as the relationship between the security dealer and the pension fund here. These are the same instrument. Okay. but they come to be called different things. And that just tells you that the security dealers in the middle of this market. And, and they're different things because from the security dealers point of view that's one thing and that's the other thing. You know they're, they are, one is an asset and one is a liability. So they are very different things. From the point of view of the security dealer but they are the same instrument once you are standing outside. This leads to confusion so that sometimes the Fed talks about itself being a bank and doing reverse repo, okay, here and, and we're going to come to that. What they mean is a liabi, a liability they are going to be borrowing from the security dealer. Okay. But they also, they also actually lend. All, all open market operations are here and they call that a repo as if they were as if they were here so they don't there they they use the language in exactly the opposite way as a security dealer, right? A security dealer when there when they have reversed there, there, there a a they have an asset when the fed has it reversed when they had a liability so it's important to. [LAUGH] You, you can get a little confused about this when you're listening to street lingo, but not confused if you just always try to translate it into balance sheets and figure out, well, what are we talking about here? Are you borrowing money, or are you lending money? Okay? And the fact that you say reverse doesn't help you to know that. You, you, or the fact that you say repo doesn't necessarily help you. You have to know who they are, and, and follow the The tune a bit, a bit more than that.
