Originate to Repo

From the FT. An analysis that the banking system is becoming dependent on the TAF facilities (exchange your dead mice for treasuries) and how this situation has not changed in 10 years in Japan. For all the arrogance of the western banks and regulators, we are repeating exactly the same mistakes. The Japanese banking system is a junkie.

But in the meantime I am told that many western banks are becoming increasingly creative about how they repackage their assets to get central bank support. Addiction, in other words, is not disappearing of its own accord. No wonder some bankers now joke that the "originate to distribute" model has quietly morphed into "originate to repo" pattern instead. It is indeed a difficult policy trap. Do not bet on an easy or smooth exit soon.

Originate to distribute was the way the bank created so much leverage. They made a loan, sold it and got the capital back so could make a new loan etc. The distribute market is dead (CDO) because the subprime crisis contaminated all the CDOs. So the central banks takes your illiquid loans and gives you the most liquid security in the world: T-bonds. So now the banks package to please the central banks. Originate to repo, the new socialist scam.


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