Nobody Wants a Margin Call Right Now

The point of repo lending is that it’s very safe. In a repo, one party (call it the “lender”) buys a security from another party (the “borrower”) for less than it’s worth (the “haircut”), with a promise to sell it back for an ever-so-slightly higher price (the “interest”) at some point in the near future. If the borrower pays back the money, the lender gives back the security and collects its interest. If the borrower doesn’t have the money, the lender gets to sell the security—which should be worth more than it paid, since it “bought” it at a discount—and so is made whole. This all happens over a short term; much repo is done on an overnight basis, and even term repo tends to be for a matter of months, so the lender can always get its money back in fairly short order. During the term of the repo, the lender can generally issue margin calls: If the security loses value, the lender can demand more money (or securities) to protect its investment. If it demands more money and the borrower doesn’t come up with it, the lender can sell the security to get its money back.

As loan terms go, these are all pretty draconian. There are other kinds of loans, in the world. Many loans do not allow margin calls: If you have a mortgage on your house and house prices go down, the bank can’t just call you up and ask for more money. Many loans are unsecured: If you don’t pay your credit card bill, the bank can’t just grab your stuff and sell it the same day; there’s a long and complicated default process. Even many secured loans are harder to enforce than repo: In many secured loans the lender will have some sort of lien on collateral that will be complicated and costly to enforce, but in repo the lender just owns the collateral—it bought it!—and can sell it without much process.