What happened in the REPO market?

Gary Gorton has written another excellent paper, available here.  It explains one corner of the crisis very well and it is this kind of paper:

Table 1 shows the repo market haircuts for different collateral at different points in time. Of particular relevance are the first two columns of the table. The implications of this are very dramatic. Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 percent haircut. If the haircut rises to 6 percent, at least half the assets will have to be sold.

Recommended for anyone taking a serious interest in contemporary financial markets and the crisis.  On the question of stimulus, I recommend this discussion for anyone looking to understand why the correct multiplier is difficult to calculate.


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