NEW YORK (TheStreet) -- Wall Street is jumping back into the risky $1.6 trillion "repo" market with some of the biggest U.S. banks -- including Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) -- leading the charge.
Shunned after the 2008 financial crisis after killing Lehman Brothers -- and nearly cutting General Electric's (GE) financial throat -- repos, or repurchase agreements, are enjoying a Wall Street renaissance, according to a report released Friday by Fitch Ratings.
"Since the peak of the U.S. financial crisis, risk appetite in the [repo] market is gradually recovering," Fitch said in its report. "Repo markets, once viewed as a relatively mundane utility within the financial system architecture, are the subject of growing public interest in "shadow" banking."
A repurchase agreement is the practice of lending a stock or bond to another party with a promise to buy it back. Banks and asset managers sell repos to increase returns on the securities they hold, while money market funds buy them as another source of fixed income and cash investment.Relatively low yields on U.S. Treasury and corporate bonds are pushing investors back into the market, Fitch says, adding that money market fund buyers enjoy the higher yields paid on nongovernment repos while banks are looking to "finance lower-quality securities inventories" that have built up through years of capital building since the crisis. Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) currently rank in the top 10 of repo users, or "counterparties," in the current market according to Fitch. Repos were a primary source of pain for the financial industry during the 2008 financial crisis. Lehman Brothers declared bankruptcy after it was cut off from the short-term debt market when repos began to fail. General Electric (GE) faced its own near-death experience when, following the Lehman bankruptcy, it was shut out of the repo market. In fact, some of the same issues that caused problems in the repo market in 2008 remain today, the Fitch report says. The 10 largest repo counterparties account for nearly 80% of transactions, meaning if one bank were to face a liquidity event the problems could quickly spread through the rest of the system. Fitch, however, did add that counterparty concentration has declined since 2008.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV