Comments on: The Miller-Moore amendment’s not that bad! A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: brad miller Sun, 22 Nov 2009 15:27:24 +0000 It’s not even that bad. Secured creditors would lose nothing until shareholders and unsecured creditors had lost everything. So the haircut provision wouldn’t apply when a systemically significant financial firm teeters over into insolvency, it will only apply in spectacular, catastrophic collapses. Think of the Hindenberg.

It wouldn’t take a lot of underwriting to see something like that coming. The most likely candidates for the haircut would be existing creditors who demanded more and more collateral as the firm collapsed, jumping queue and exacerbating the liquidity crisis at the collapsing firm.

Also, the haircut would be discretionary. The FDIC could allow secured creditors who had taken collateral when the firm was solvent their full security interest, and just impose the haircut on creditors who had grabbed collateral from a firm that should already have been in receivorship.

I liked your calling the amendment a “spectaculary good idea” more than “not that bad,” but I’ll take it.

By: jck Fri, 20 Nov 2009 23:18:48 +0000 the legal title is transferred in a repo but this is to facilitate liquidation if cash is not returned (default) at the repo maturity, it’s not enough to make it a “perfected security interest” and doesn’t mean the buyer has control, that depends on clearing/custodian arrangements.
for ex. repos don’t have a “perfected security interest” if the collateral can be substituted because a specific security has to be identified and under the control of the cash provider, so some repos would be 80% secured 20% unsecured if they represent a “perfected security interest” and the bulk of them that aren’t, would be 100% unsecured.
making repos compatible with the fdic view of “perfected security interest” would disrupt (i.e. slow down velocity) money markets and likely require massive reserves injection by the fed to compensate.

By: JH Fri, 20 Nov 2009 22:00:23 +0000 I am not a lawyer and I think I am getting confused here:

Economically repos are just secured debt, but aren’t repos usually done by transfers of legal title to the collateral rather than creating a equitable interest in the collateral?

I thought the whole point of the way repos were set up is that the legal documentation to perfect a security interest ‘in equity’ while leaving legal title with the borrower was too long and potentially complex to be of any use for short-term money-market operations. Instead there is a straightforward ‘sale’ of collateral with transfer of legal title to the lender and another pre-arranged sale at the end of the repo term (assuming the borrower has not collapsed during the repo).

Would such transactions count as ‘a claim under a security interest’ for the purposes of the amendment? I must be missing something here. Surely it is the borrower who has the equitable interest in the collateral, if for some strange reason the lender refused to honour the second sale?

By: jck Fri, 20 Nov 2009 20:42:38 +0000 “they” haven’t misread at all. repos are a form of super senior secured debt and where there is a “perfected security interest” would be subject to the 20% haircut, but that’s not always the case. so some changes will be needed in the repo market as this definition increases uncertainty (for the repo market) more then anything else. it’s not the 20% haircut that’s the problem, you can price that, it’s the uncertainty over what is a “perfected security interest” and what is not.