The repo market: a faultline waiting for a crisis?

A source of vast leveraging.

In 1987, having been swept from the Oxford University metallurgy department to Wall Street, I was given a grim warning at a meeting. “We have exacting standards. Only the very best will succeed on our graduate training program. For those of you who do not make it, your fate lies here…” at which our eyes were directed towards a row of desk-bound troglodytes feasting upon pizza at seven in the morning. It was the Repo desk.

If capitalism really is doomed to go through periodic crises then you are well advised to look for the next problem in the place where you previously thought inconsequential. In the 1990’s a curiosity evolved that allowed investors to insure against a company going bust these days known as credit default swaps.  Eighteen years later, after the hilarity had died down and we’d all wiped a collective tear from our eye, credit default swaps brought down AIG, caused the biggest bankruptcy in corporate history and contributed to the near-vaporization of the global financial system.

The same can be said of the repo market – on the face of it, it looks like nothing but has an underlying menace we should take notice of.  Repo stands for repurchase and it works the same way as pawnbroking. You take a watch to a pawnbroker and borrow money against it. A week later you have to pay back the money plus interest to get the watch back, or repurchase it. The repo market merely uses financial securities, such as government bonds, for collateral, instead of watches. It sounds like a simple and safe thing to do but in the wrong hands it can be deadly.

The danger comes from the fact that it allows people with no money to access vast amounts of securities. A hedge fund or bank can buy securities THEN go looking for the money to pay for them through the repo market. All is well as long as you are earning more on the securities than you are paying in interest for the repo market loan that pays for them. But if the market value of the securities begins to fall you are in real trouble.

Nobody knows how large the repo market actually is. Estimates range between ten to fifteen trillion dollars or bigger than the annual income of the entire United States. But what we do know is that the process of quantitative easing has pumped the system up with lots of cheap money. At the same time our central banks have given those who use the repo market the confidence that their securities (bonds and equities) won’t fall in value. It’s a poisonous combination: a rise in borrowing costs combined with a decline in the value of securities would lead to a stampede for the door and someone will get trampled on. Federal Reserve chairman Ben Bernanke in a recent, seemingly innocuous, speech let the cat out of the bag when he said that “More work is needed to better prepare investors and other market participants to deal with the potential consequences of a default by a large participant in the repo market.” In other words, it’s coming. Low interest rates and stable securities values won’t last forever. Someone is going out of business.

Psychologists put our periodic crises down to people’s inability to self-limit. Anthropologists put it down to western culture’s inability to join up the various silos in society to reveal the whole, faulted, picture. In reality, to spot the next crisis all you have to do is follow the money: it’s with the troglodytes on the Repo desk.

Head of Fixed Income and Macro, Old Mutual Global Investors

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“I felt very lonely”: addressing the untold story of isolation among young mothers

With one in five young mothers lonely “all the time”, it’s time for employers and services to step up.

“Despite having my child with me all the time, I felt very lonely,” says Laura Davies. A member of an advisory panel for the Young Women’s Trust, she had her son age 20. Now, with a new report suggesting that one in five young mums “feels lonely all the time”, she’s sharing her story.

Polling commissioned by the Young Women’s Trust has highlighted the isolation that young motherhood can bring. Of course, getting out and about the same as you did before is never easy once there’s a young child in the picture. For young mothers, however, the situation can be particularly difficult.

According to the report, over a quarter of young mothers leave the house just once a week or less, with some leaving just once a month.

Aside from all the usual challenges – like wrestling a colicky infant into their jacket, or pumping milk for the trip with one hand while making sure no-one is crawling into anything dangerous with the other – young mothers are more likely to suffer from a lack of support network, or to lack the confidence to approach mother-baby groups and other organisations designed to help. In fact, some 68 per cent of young mothers said they had felt unwelcome in a parent and toddler group.

Davies paints what research suggests is a common picture.

“Motherhood had alienated me from my past. While all my friends were off forging a future for themselves, I was under a mountain of baby clothes trying to navigate my new life. Our schedules were different and it became hard to find the time.”

“No one ever tells you that when you have a child you will feel an overwhelming sense of love that you cannot describe, but also an overwhelming sense of loneliness when you realise that your life won’t be the same again.

More than half of 16 to 24-year-olds surveyed said that they felt lonelier since becoming a mother, with more than two-thirds saying they had fewer friends than before. Yet making new friends can be hard, too, especially given the judgement young mothers can face. In fact, 73 per cent of young mothers polled said they’d experienced rudeness or unpleasant behaviour when out with their children in public.

As Davies puts it, “Trying to find mum friends when your self-confidence is at rock bottom is daunting. I found it easier to reach out for support online than meet people face to face. Knowing they couldn’t judge me on my age gave me comfort.”

While online support can help, however, loneliness can still become a problem without friends to visit or a workplace to go to. Many young mothers said they would be pleased to go back to work – and would prefer to earn money rather than rely on benefits. After all, typing some invoices, or getting back on the tills, doesn’t just mean a paycheck – it’s also a change to speak to someone old enough to understand the words “type”, “invoice” and “till”.

As Young Women’s Trust chief executive Dr Carole Easton explains, “More support is needed for young mothers who want to work. This could include mentoring to help ease women’s move back into education or employment.”

But mothers going back to work don’t only have to grapple with childcare arrangements, time management and their own self-confidence – they also have to negotiate with employers. Although the 2003 Employment Act introduced the right for parents of young children to apply to work flexibly, there is no obligation for their employer to agree. (Even though 83 per cent of women surveyed by the Young Women’s Trust said flexible hours would help them find secure work, 26 per cent said they had had a request turned down.)

Dr Easton concludes: “The report recommends access to affordable childcare, better support for young women at job centres and advertising jobs on a flexible, part-time or job share basis by default.”

Stephanie Boland is digital assistant at the New Statesman. She tweets at @stephanieboland