Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

As in commercial paper, repo was exposed to serious funding risk. You might not be rolled over. Specifically, the risk was that if an investment bank like Lehman or Bear was thought to have suffered major losses on some big part of its portfolio—whether that was funded by commercial paper, bilateral repo or other types of interbank borrowing—it would suffer a general loss of confidence. It would then be considered ineligible as a counterparty in the triparty market and would find itself shut out from critical funding. The scale of the potential risk was huge. At Lehman at the end of fiscal year 2007, of its balance sheet of $691 billion, 50 percent was funded through repo. At Goldman Sachs, Merrill Lynch and Morgan Stanley, the share was 40 percent.50 If any one of these investment banks was to lose access to the repo markets, at a stroke its business model would collapse, taking its entire balance sheet—not just its MBS business, but its derivatives book, currency and interest swaps—down with it.

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