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Liberty Street Economics
25 posts on "Dealers"July 17, 2020
MBS Market Dysfunctions in the Time of COVID-19
The COVID-19 pandemic elevated financial market illiquidity and volatility, especially in March 2020. The mortgage-backed securities (MBS) market, which plays a critical role in the housing market by funding the vast majority of U.S. residential mortgages, also suffered a period of dysfunction. In this post, we study a particular aspect of MBS market disruptions by showing how a long-standing relationship between cash and forward markets broke down, in spite of MBS dealers increasing the provision of liquidity. (See our related staff report for greater detail.) We also highlight an innovative response by the Federal Reserve that seemed to have helped to normalize market functioning.
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Posted by Blog Author at 7:00 AM in Dealers, Federal Reserve, Financial Institutions, Financial Markets, Fire Sale | Permalink | Comments (2)July 16, 2020
Federal Reserve Agency CMBS Purchases
On March 23, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York initiated plans to purchase agency commercial mortgage-backed securities (agency CMBS) at the direction of the FOMC in order to support smooth market functioning of the markets for these securities. This post describes the deterioration in market conditions that led to agency CMBS purchases, how the Desk conducts these operations, and how market functioning has improved since the start of the purchase operations.
Posted by Blog Author at 9:38 AM in Dealers, Federal Reserve, Financial Intermediation, Financial Markets, Fire Sale | Permalink | Comments (1)July 01, 2020
How Liquid Is the New 20-Year Treasury Bond?
On May 20, the U.S. Department of the Treasury sold a 20-year bond for the first time since 1986. In announcing the reintroduction, Treasury said it would issue the bond in a regular and predictable manner and in benchmark size, thereby creating an additional liquidity point along the Treasury yield curve. But just how liquid is the new bond? In this post, we take a first look at the bond’s behavior, evaluating its trading activity and liquidity using a short sample of data since the bond’s introduction.
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Posted by Blog Author at 7:00 AM in Dealers, Financial Markets, Pandemic, Treasury | Permalink | Comments (0)January 13, 2020
How Does Information Affect Liquidity in Over-the-Counter Markets?
A large volume of financial transactions occur in decentralized markets that commonly depend on a network of dealers. Dealers face two impediments to providing liquidity in these markets. First, dealers may face informed traders. Second, they may face costs associated with maintaining large balance sheets, either due to inventory or liquidity costs. In a recent paper, we study a model of over-the-counter (OTC) markets in which liquidity is endogenously determined by dealers who must contend with both asymmetric information and liquidity costs. This post provides an intuitive explanation of our model and the dynamics of interdealer liquidity.
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October 15, 2019
From the Vault: A Look Back at the October 15, 2014, Flash Rally
Five years ago today, U.S. Treasury yields plunged and then quickly rebounded for no apparent reason amid high volatility, strained liquidity conditions, and record trading volume in the market. Federal Reserve Chair Jerome Powell, then a Board governor, noted that such episodes, “threaten to erode investor confidence” and that investors need “to have full faith in the structure and functioning of Treasury markets themselves.” The October 15, 2014, “flash rally” led to an interagency staff report on the events of that day, an annual series of Treasury market conferences, additional study of clearing and settlement practices, and the introduction of a new transactions reporting scheme. Many of these developments are discussed in posts (see, for example, here and here) in the Liberty Street Economics archive.
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June 26, 2019
How Large Are Default Spillovers in the U.S. Financial System?
Second of two posts
When a financial firm suffers sufficiently high losses, it might default on its counterparties, who may in turn become unable to pay their own creditors, and so on. This “domino” or “cascade” effect can quickly propagate through the financial system, creating undesirable spillovers and unnecessary defaults. In this post, we use the framework that we discussed in “Assessing Contagion Risk in a Financial Network,” the first part of this two-part series, to answer the question: How vulnerable is the U.S. financial system to default spillovers?
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Posted by Blog Author at 7:00 AM in Banks, Crisis, Dealers, Financial Institutions, Financial Intermediation, Systemic Risk | Permalink | Comments (1)April 03, 2019
Are New Repo Participants Gaining Ground?
Following the 2007-09 financial crisis, regulations were introduced that increased the cost of entering into repurchase agreements (repo) for bank holding companies (BHC). As a consequence, banks and securities dealers associated with BHCs, a set of firms which dominates the repo market, were predicted to pull back from the market. In this blog post, we examine whether this changed environment allowed new participants, particularly those not subject to the new regulations, to emerge. We find that although new participants have come on the scene and made gains, they remain a small part of the overall repo market.
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January 16, 2019
Customer and Employee Losses in Lehman’s Bankruptcy
Fourth of five posts
In our second post on the Lehman bankruptcy, we discussed the cost to Lehman’s creditors from having their funds tied up in bankruptcy proceedings. In this post, we focus on losses to Lehman’s customers and employees from the destruction of firm-specific assets that could not be deployed as productively with other firms. Our conclusions are based in part on what happened after bankruptcy—whether, for example, customer accounts moved to other firms or employees found jobs elsewhere. While these costs are difficult to pin down, the analysis suggests that the most notable losses were borne by mutual funds that relied on Lehman’s specialized brokerage advice and firms that employed Lehman for its equity underwriting services.
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Posted by Blog Author at 7:00 AM in Banks, Crisis, Dealers, Employment, Financial Intermediation | Permalink | Comments (0)January 15, 2019
Lehman’s Bankruptcy Expenses
Third of five posts
In bankruptcy, firms incur expenses for services provided by lawyers, accountants, and other professionals. Such expenses can be quite high, especially for complex resolutions. These direct costs of bankruptcy proceedings reduce a firm’s value below its fundamental level, thus constituting a “deadweight loss.” Bankruptcy also carries indirect costs, such as the loss in value of assets trapped in bankruptcy—a subject discussed in our previous post. In this post, we provide the first comprehensive estimates of the direct costs of resolving Lehman Brothers’ holding company (LBHI) and its affiliates under Chapter 11 of the U.S. Bankruptcy Code, and of Lehman’s broker-dealer (LBI) under the Securities Investor Protection Act (SIPA).
Posted by Blog Author at 7:00 AM in Crisis, Dealers, Financial Intermediation | Permalink | Comments (0)January 14, 2019
How Much Value Was Destroyed by the Lehman Bankruptcy?
First of five posts
Lehman Brothers Holdings Inc. (LBHI) filed for Chapter 11 bankruptcy protection on September 15, 2008, initiating one of the largest and most complex bankruptcy proceedings in history. Recovery prospects for creditors, who submitted about $1.2 trillion of claims against the Lehman estate, were quite bleak. This week, we will publish a series of four posts that provide an assessment of the value lost to Lehman, its creditors, and other stakeholders now that the bankruptcy proceedings are winding down. Where appropriate, we also consider the liquidation of Lehman’s investment banking affiliate, which occurred in separate proceedings under the Securities Investor Protection Act (SIPA).
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Posted by Blog Author at 7:00 AM in Banks, Crisis, Dealers, Financial Intermediation | Permalink | Comments (2)About the BlogLiberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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