Erm, what?

As for Worstall, I am a little surprised by his comment. He should know how the repo market works and that this involves the technical sale to banks of gilts overnight and their repurchase with what appears to be interest credited in the morning, in this way providing the large customers making use of this facility for their cash piles with the deposit guarantee that they crave and which the government will not itself supply. The gilts remain legally in the possession of the banks and many of them will be in nominee names and some will be borrowed (this being a feature of euro repos now, I believe) but the fact that nominal ownership does not reflect beneficial ownership of use of an asset was something I thought he would be familiar with. Apparently not.

Umm, repo is selling gilts to banks? Rilly? Why would that help someone park money overnight?

Walk through it. I’m a corporate treasurer with a pile of cash. I want a safe home for it in the short term. I could, of course, just stick in the bank. But, hhmm, no. Not safe perhaps, interest too low maybe.

So, instead, I go sell a gilt to a bank and get a bigger pile of cash that I’ve got to put somewhere.

That doesn’t work, does it?


I might go and buy a gilt of course. But if I did that I’d probably not be buying it from a bank but from a hedge fund, securities dealer, pension or insurance fund.

Do note that it’s not me teaching economics at a British university.

16 thoughts on “Erm, what?”

  1. ISTM that one thing Murphalot has not done is demonstrate that a) his alleged use of gilts by Company Treasuries actually exists, or b) that the oodles of extra demand he assumes exists outside his own imagination.

  2. I know little enough about the repo market, but enough to know the big players are banks and custodians dealing with each other, not non-banks. And anyway his description reeks of flannel steeped in bullshit. He imagines large customers which are also small enough to benefit from a deposit guarantee (isn’t that limited to100k or so?), selling govies to banks overnight and then getting them back, with ownership staying in the bank’s name somehow throughout. It’s a blag.

  3. @napsjam: it must be the other way around surely – the whole point is that companies aren’t showing up as gilt owners in the stats, and have large piles of cash to hide overnight. So they must be lending the cash to banks backed by the banks holdings of gilts, if it was the other way around the gilt holdings they are lending would show up on the ownership stats.

    But you’re right, what Spud has written makes no sense at all, in a pure logic sense, regardless of any knowledge (or lack of) of the repo market. I reckon he’s been caught bullshitting as usual and is flailing around to try and bluster his way out.

  4. Serious question: do corporations still have piles of cash lying around? Why? Even consumer transactions are mostly credit card or cheques or maybe even something fancy like NFC. I would think that by now most of the corporate “cash” is actually money in the bank.

    They still might want to invest it overnight, maybe in gilts, but I don’t think they have actual piles of cash.

  5. Plus, an awful lot of businesses are rather tight on the cashflow. Try getting an invoice paid “on receipt” and not at 30 days or whatever.

  6. Reverse repos are a standard corporate treasury investment tool.
    It’s the opposite, the bank sells the bond to the corporate treasury who holds it overnight and then sells it back to the bank. It’s effectively a collatelarized loan, where the bond/gilt functions as security on the loan. This can be good for the bank as it lets them carry the risk on the bond (either interest rate or credit). The corporate gets a completely safe deposit (since they can sell the bond if the bank fails).

  7. Acarraro, thanks for this. Do you have any insight about how much of this activity is happening? I am struggling to see it in BoE stats

  8. I think we need a different approach here to dealing with the learned Professor.

    Perhaps complex arguments about economies and the financial system could be framed in analogies based on the movements of trains round a model railway? Taking on and unloading restaurant stock and passengers, parking up overnight, passing other trains en route, refuelling, points failures, drivers going sick, flying pickets assaulting scab drivers during strikes etc etc?

    Perhaps such an approach could assist the good Professor’s understanding?

  9. Eh?

    Apart from the fact that things post is totally muddled what thing says is completely backwards unless he is referring to what accaro says.

    My brain hurts

  10. @diogenes. Loads. There is some publication somewhere of repo data.

    Corporate treasury is usually to money market funds as deposit guarantees are way way too low for them. They also spread funds around banks just in case. They have access to term deposit liquidity funds and a whole range of more conventional vehicles. The infrastructure for repo is much more complex and would require the corporate to be able to value the bond they get in return, have a route other than the bank for sale in case of default, have a custodian involved for tri-party stuff and be big enough for the bank to go to for funds. Most firms don’t fit in this category but those that do have the cash.

  11. Synp, corporations don’t have “cash in hand” but they do have “cash at bank”. Bank Underground had an excellent report a few years ago about the growing cash piles in UK companies because it was almost impossible for them to obtain finance from commercial institutions. The situation is different for large corporates who can tap the money and capital markets of the world. They tend to run their cash balances as low as possible to keep down their interest costs. This is why I questioned Snippa’s assertion that they are major players in reverse repos. Andrew’s reply suggests that they have a marginal role

  12. The Repo market is short-term borrowing by holders of gilt-edged stocks using those gilt-edged as collateral.
    It is not used (except in Murphy’s alternate universe) by those who have surplus cash looking for a home.

  13. Pingback: No you didn’t actually, no you didn’t | Tim Worstall

  14. @BraveFart

    Good idea.

    However, for spud to understand they will need to be steam trains with a coal wagon & water tank, stoker, footplateman etc

    Must also be post-nationalisation, so no LNER etc.

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