The U.S. Federal Reserve, after pushing Wall Street firms since the financial crisis to reduce risk in the $2-trillion-plus short-term lending arena known as repo, has quietly become the market’s biggest player.
Repo loans, technically called repurchase agreements, have been used for more than a century by Wall Street firms and traders to buy bonds with borrowed money, under a strategy designed to multiply returns. The market is so vital that Lehman Brothers’ loss of repo financing in 2008 helped drive that firm into bankruptcy.
Now, the Fed has moved in, using a two-year-old program that allows it to borrow cash through repos from money-market fund operators like Fidelity and BlackRock (BLK) . Last month, the central bank’s repo borrowings shot up to almost $600 billion, a 14-fold increase from September 2008.
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