tag:blogger.com,1999:blog-3782644139927778760.post-55994505569373295012007-12-13T07:00:00.000-05:002007-12-13T07:00:00.000-05:002007-12-13T07:00:00.000-05:00Repo leaves repo-ed security on the loan's recipient balance sheet - so whatever gets repoed doesn't help the balance sheet much (that's despite the fact that the legal ownership changes).<BR/>At least in the UK.<BR/><BR/>I also doubt very stronly about the flooring - you cannot really argue that the value (on the market of something) is x because fed is happy to take it for x (and get you to pay x+y at the end of the term) - mostly becasue no-one in the market would buy it from you for x, as the only thing they could do with it is to repo it to Fed, but ultimately they would get it back (and have to repay the pile of cash, so all that would happen is that they would get a very shorttime infusion of cash, which they would have to repay rather quickly). <BR/><BR/>Note also that if the asset collapses while Fed holds it (and, if it indeed is a repo), two things happen: cpty will have to supply a new collateral (for which they don't get anything), and they still have to pay x+y as agreed before. So, Fed carries no loss unless cpty goes bust, and all loses are still carried by the cpties. This is one of the reasons why the price doesn't get necessarily floored. If you have an asset and expect to receive 20p in a pound, repoing it doesn't help, it's still worth 20p to a pound even if Fed's willing to (technically) pretend it's worth more. I think that CBs are using this as a technicality to allow them effectively unsecured lending (which they can't do otherwise).<BR/><BR/>Above of course assumes that the repo facility will not keep rolling - if it would, then Fed indeed effectively "buys" the asset, and the flooring will come. So, I will wait and see whether Fed will do only the four auctions it promised, and what it will do when the maturity comes.vladenoreply@blogger.com