The whole thing with Repo is their facility. They are you know, accessible
liquidity, you know cash equivalent almost and it's look super important that that element
stay in place or that wouldn't work. So this is just for people to
know about stuff that isn't normally written about in the main stream. You're listening
to Carrie Lutz's Financial Survival Network, where you get valuable information you just can't
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and welcome. You are listening to watching the Financial Survival Network. I'm your
host, Carrie loves you know. September is the month of crashes. September
and October there's going to be a crash. It's going to happen then or
the runner up is March. For some reason, these three months where most
of the crashes of recently have taken place and very well might take place again.
You never know. So there's a book that you gotta get. I'm
about to interview the author. It's called Repo Madness. And Wall Street's Wicked
Ways, which kind of is redundant if you ask me. But she wrote
the book and her name is Mary Ellen Tuttle. Mary Ellen, You're been
a financial journalist for decades. You basically found yourself out of a job but
not too long ago, and you wrote to started writing this book. We're
really thrilled to have you on. Hey, so system out of control.
It's kind of like imagine you had five engineers running one locomotive and everybody was
kind of trying to go their own way. What's going to happen? The
train's going to come off the tracks? Right? Yeah, And basically the
book is not haimed at people who normally read finance books. One of the
one of the takeaways from the recent forum Better Markets did on the anniversary Lehman
was that, you know, reforms need to be put in place. Everybody
was shaking their head. I was really kind of amazed, and how you
know, all these people were experts and they all came to the same conclusion
that there's no political will, We're stuck with it and it's unsustainable. So
that was really encouraged. So unsustainability, all right, I guess the first
thing is to say, we're highly critical as system. Tell us what this
system is, how it works, and why it's unsustainable. Well, because
we just keep you know, you can't keep doing trillion dollars. Baila.
I'm not like I said, I'm not any well, I don't know.
I just think that, you know, I don't think it could go on
forever. And you know, this this thing ordered it sure is good while
it until it stops, everything's fine, right, No, it's not fine
obviously. But my book has aimed at looking at even you know, even
if it were sustainable, it's completely you know, unjust, an unjust system,
an undemocratic system. It's a club you know, a clubby system,
and it has and there are studies that show obviously that it has had a
huge negative impact on the real economy. And but what I like to put
in the reader's mind is that when someone says, you know, we spend
eight trillion dollars on forever wars, you know, you can imagine what we're
spending that money on weapons and contracts and so on and so forth, But
people aren't really aware. I mean, it's sort of like a monolo it,
you know, the the shadow banking system and all that people aren't taught
about it or and it's not written about the mechanics of it. So what
I tried to do in the book is to aim this as a person who
doesn't normally read financial books, and when they finished reading my book, they
have an idea of how the repo markets started and what the mechanics are.
I cover rebo in one chapter, the short term collateralized loans that provide liquidity
I like to call liquidity at the altar of arbitrage and securities lending is another
arm and the collateral that's a big business, you know, getting collateral for
all these rebos and the how they you know, they basically are the lifeblood
of the financial system. So they'll have a basic understanding, a rudimentary,
I'm sure, because but at least it will open their eyes, you know,
how it evolved and how it evolved without any regulation, and that in
the nineteen eighties they was a bankruptcy where they seal security when bankrupt. And
we don't have a lot of time, so I'm just going to you know,
basically, the papers of the day wrote that this would destabilize the entire
government securities market because of this bankruptcy, and so they bailed it out.
But my point was when this repos started really growing in the eighties, flooding
the markets with like again no regulation. So why didn't the regulators when they
saw that this was a threat to the freasury markets step up and take a
look. But they didn't, and then another bankruptcy occurred in a couple of
months later, where repos are. The whole thing with rebo is their facility.
They are you know, accessible liquidity, you know cash equivalent almost and
it looks super important that that element stay in place or that wouldn't work.
So this is just for people to know about stuff that isn't normally written about
in the main stream. And this is another bankruptcy might be familiar with Lombard
Wall and when that occurred, it was disruptive Juripo because the judge determined that
it was a secured loan and that it would be subject to the automatic stay
in bankruptcy law, which is really bad because because you got the counterparty risk
and these are supposed to be as supposed to risk free as you can get.
So a repo is I'm holding securities, I want to get cash for
the securities but still earn a return. So I effectively sell it to you
for a fixed amount with a fixed return for X number of days. Generally
these are really short terms, right overnight, and then and then I agreed
to repurchase it from you to buy it back. At the end of that
time, you made your return, which is higher than the Fed funds rate,
which is why people do these things, because they're at search of yield.
So a reverse repo just tell us how's that work? Well? In
the reversary volume and securities for cash and the cash is the collateral, and
you know that's a reversary call. Right. So one of our favorite people,
who was the former governor of the state of New Jersey, Core Design,
had a zillion of these. I can't even remember the name of his
company now, but I'm sure you do nothing global, Yeah, MFS global,
And they had billions and billions and they did. And there's hypothecation.
That's where you put the security, and they do. And if that's when
you have the collateral and you use the same collateral for different transactions, which
is you know hypothecation, yes, yeah, and and and there you know,
against studies and observations that you know, when a crash occurs there,
like with Lehman, you know, you don't know who has what collateral,
where it is. It's not trackable, so that leads to a lot of
confusion. And then liquidation of Lehman yielded hundreds of billions of dollars in dividends
payouts to the creditors of the company. I'm not even sure that the creditors
were net negative at the end of the Lehman liquidation, but it was years
and years later. So that uncertainty really undermined the faith in markets. And
we started seeing like municipalities where they put tens of millions of dollars on deposit
with a bank and they get a letter of credit from a third party bank,
believing that these letters of credits are similar to a repo in many respects,
letter of credit has no value anymore, and it really completely undermined faith,
whatever faith there was prior in the financial system. Right. Yeah,
Well, it's interesting that you brought up Lehman because back to the Lombard Wild
bankruptcy, so the judge grows the collateral and this caused a human to cry,
obviously, and the financial industry prevailed and Congress past a regulation that would
exempt collateral in REPO from the automatic stay. But it was fun to book
collateral like CDs and conservative so that went on. So they were saved.
Repo went on to live another day. By nineteen eighty six, the market
was two hundred billion and it was the largest securities market in the world and
nobody knows about it. Well, that's another point your base. That's really
funny is like, you know, the biggest and the brightest at these banks
are not at the repo desk. It's a sleepy or used to be a
sleepy backwater where you put the not even the B grade executive, you put
the C and D guys running the repo desk because it's basically idiot proof.
It's kind of like it's somebody's brother in law. You can't fire this guy,
you know, because then your sister going to hate your guts, or
it's somebody's sister in law. Your brother in law is going to hate you.
So you got to give him a job somewhere. Oh, I know
what, We'll stick him at the REPO desk. You can't do any damage
there, right. Well, interesting, you brought up Leaman because I found
in my research that the attorney who oversaw the Lehman bankruptcy underscored that the exemption
from the automatic stay caused massive destruction, in his words, of the unwinding
of everything, because in two thousand and five, Congress decided that they would
exempt all collateral from the automatic stay. So the scholar who writes about this,
Jane Cecicco, said, basically, the US Congress, if they think
it's okay to tell the financial services industry that they can exempt any transaction and
they want from bankruptcy, it's okay with Congress. And she didn't say that
in an approving way, you know. And I can't help but think this
exemption from bankruptcy. I'm not an expert on flows and shifts in trading strategies,
but it seems not too much of a reach to think that more of
the investments would go towards collateralized structure just for that reason alone. So then
can cause for a major shift in how the markets behave I gotcha, And
well, but the thing is okay, Harry Allen, like, as a
recovering attorney myself, I can tell you that these bankruptcy attorneys and judges are
not suited really to be running a bank and receivership all right, in conservatorship.
The bankruptcy systems not designed to ensure the smooth functioning of the financial system.
Its purpose, purportedly, and granted it's corrupted like everything else. I
have personal experience, is to gather up the assets of the bankrupt a state
as they call it, and gather up the liabilities the money owed, figure
out what gets paid within the framework of bankruptcy and what gets discarded, and
then the balance will go to freditors first, and then if there's anything left
over, the shareholders get it. So that system is really poorly adapted to
mass financial calamities that potentially could disrupt the system. But we're in a position
where these things happen more and more and we got like one person running the
show. That's not a good thing either. We need a system for unwinding
these things without bringing the whole system down right, Well, I would disagree
and say we just need a whole new system, period. And there are
there are footprints out there blueprints I shouldn't say footprints blueprints, but people that
whole better markets for them. Like I said before, didn't have one reformer
on the panel. Yeah, it was like the idea. And I found
out in my research that anyone who who writes about these reforms, you know,
in a sincere way to supplant the entire system and make it work,
like you know, putting glass, stiegeling stuff like that, they are they
are silenced by their peers, Academics disinvite them to conferences, They're not allowed
to get their word out. So I have a new blueprint and I just
discover that I'm very enthusiastic about. So I would like to share my emails
do it. It's author M. E. Toud Hill at gmail dot com,
and anyone interested in reading it can email me and I'll send that.
And I have another paper on financialization in the economy which is very quick.
It's not too complicated, but it makes really good points. So I'd be
happy to mix. But but you know, and this has come to me
kind of recently. I mean, I was shocked at that at that forum,
and it stuck with me because I thought, all these people are,
you know, plugging a leaky boat. If it doesn't if it's sustainable,
like you saying we can keep doing the bailouts, it's not sustainable. From
from a sociological point of view that still some point people are going to just
say enough. But my book's aim is to open the door to people who
do not read finance books. It's only one hundred and forty nine pages.
It really just you know, goes in. It's it's basically a relation of
fifteen years of me working as a financial writer, and when I'd come across
interesting quotes and stuff, I put him in boxes. And then after I
put my job, I went through all the boxes and pulled the most compelling
quotes. So I have great testimony in the second half of the book Professor
Edward Kine, he recently passed away, a well respected fellow. His testimony
before the Senate Committee in twenty sixteen is unequivocal and not disputable in any way,
and it's so cogent and clear that it's wonderful, I think, for
people to see it because he outlines very specifically, it's brilliant, you know,
all of the flaws and the unfairness of the program of the of the
financial system. But he does it, you know, and it's not a
lung chat. You know, I take excerpts obviously, but you know,
it's I want people to see this because I want them to know that this
pro this financial system is insane. You know, it's nuts, and that
if you think it's nuts, you're not the crazy one. And once you
read my book, you'll know that you're not the crazy one. And people
with a lot of esteem economists agree with you and me. They're just not
their voices just aren't heard. I mean, Kane is the one. Luigi's
and Galis from the University of Chicago wrote a paper then I stumbled on,
called does finance benefit society? And he basically said, there is no evidence
that it has for the last fourteen years. What are we doing with it
if it doesn't benefit society? I mean that's the bottom line, all right,
So and totally agree with you on that financialization is a net negative,
gross negative, because he got people pushing around paper, both figuratively and literally,
who really contribute zero to society. And and you know, if you
ever saw that movie Margin call right, you got a guy who figures out
all the mortgage backed securities are worthless ergo where your repos are kind of worthless.
And he's an aerospace engineer who should be designing airplanes. But the Muddy
was on Wall streets and he finds himself on Wall Street and he unleashes all
this and then supposedly this was if you had to pick a bank that it
was, it was Goldman. They discover it before anyone else, They sell
out all their position, they take their hits, and then the crash results
from it. I don't know how much of it was fictional and how much
of it was real, but it definitely struck a note with me. Yeah,
I like that movie. That's what I also would like to point out.
The brain drain is really sad. I mean when you think of all
the smart people who were in finance. I mean I read a recent I
can't remember, maybe it was mid two thousands or earlier, but the average
salary for someone in financial services was six thousand a week. And at the
time the average salary for the average American was eight hundred and eighty four dollars,
and in New York it was sixteen thousand a week. So there's another
that's another aspect of it, the brain drain. I mean, I wrote
about money market funds for a long time, and I did a lot of
research. Again, most of my book comes from those years. But what
I what I also was very familiarized with are the ancillary companies that are out
there just service you know, collateral collateralization optimization companies. Yeah, algorithms doing
all oh yeah, yeah, the collateral Highway. And there's a there's a
really kind of funny segment in the book where I just lived. I stumbled
on this meeting among financial institution fellow with software fellow I can't remember, but
it was like four or five people, and they were all different roles,
and they were talking about collateralization and the challenges and I just excerpted at the
end of the collateral chapter and just throw it on the pages because it's funny.
I mean, it's so ridiculous the way they're talking you can't even understand
it. And the massive education and people are going to need for this,
and it's really complicated, and the dialogue amogenum is just kind of hilarious because
it just shows you how completely nuts this whole thing is. Yeah, totally
all right, So all of you out there, the book is Repo Badness,
A Simpleton's Guide to the Street's Wicked Ways. Do I have time for
a quote or are we're running out? Yeah? We got one more quote,
sure, okay, this is what I really like. It's by economist
John Kay, and he writes, we need a finance sector to manage our
payments, finance our housing stock, restore our infrastructure, fun retirement, and
support new business. But very little of the expertise that exists in the finance
industry today relates to the facilitation of payments, the provision of housing, the
management of large construction projects, the needs of the elderly, or the nurturing
of small businesses. The process of financial intermediation has become an end in itself.
Okay, So if I can sum up and interpret what that says,
Once upon a time, the financial sector's purpose was allocation of capital, and
they were an They were a middleman, and they got capital from deposits from
banks and all. And then they found worthy borrowers who who could take that
money and help the economy grow. And now it's just a giant sino and
the only ones benefiting from it, or the interested parties. Hence why they're
probably if there's two lobbyists, two industries that lobby the most, it's big
pharmat and big wall sting, And the public needs to get involved because that
was the takeaway from better markets. Until the public is more knowledgeable and active
in fighting this and so you know, I'll send you this new blueprint for
a complete up change, pulling the tree from the roots, and you can
send it to your congressman and congresswoman. You know. Hey, do you
have a website Mariel Hotel, but I want to wreak involved one. But
I've got you. We're on LinkedIn of course. Yeah, your LinkedIn.
We'll throw your LinkedIn. We'll throw the Amazon link so you can buy the
book. And hey, if you've got a question for Mariel and you can
just or from myself for that matter, just send me an email kl at
carry Lutz dot com. We'll get you an answer on the site. To
show notes this interview on Financial Survival Network dot com. Just click through the
Amazon link is there, the LinkedIn link is there, and send us any
questions while you're there. Sign up for your free newsletter. Mary Ellen.
Had been an absolute pleasure. Great luck you. Thank you very much for
having me. I appreciate it. Thanks for listening to carry Lutz's Financial Survival
Network your solution to today's trying times. For the latest go to Financial Survival
Network dot com Financial Survival Network now more than ever,