Why the Repo Market is such a Big Deal—and Why Its $400 Billion Bailout is so Unnerving

One of the most vital pieces of plumbing that powers the global financial system usually runs so smoothly that it gets overlooked by market watchers. It’s the “repo market,” comprising the short-term funding that banks and financial counter-parties regularly tap to lend each other trillions.

It’s suddenly in the news again, and for all the wrong reasons. The repo market is looking a lot like it did on the precipice of the 2007 housing market crash.

But what is the repo market, anyway, and why has the Federal Reserve Bank this week injected hundreds of billions of dollars into the financial system to stabilize it?

Repos (short for repurchase agreements) are short-term borrowing transactions, often made overnight. Think of them as trades of cash for some kind of collateral.

In a repo transaction, the borrower will sell certain securities in their possession with the agreement to buy them back the next day. If the transaction is not rolled over, then the trade has to be settled the following day, with the borrower repurchasing the collateral from the lender for slightly more than it had previously sold it for, compensating the lender with interest for taking on the risk.

A $1 trillion market springs a leak

Large corporations and banks typically hold vast quantities of highly liquid financial assets, and so they like using these markets as a means of quick and easy financing. In fact, there are more than $1 trillion worth of overnight repo transactions collateralized with US government debt occurring every day. Banks frequently go to these markets to fund the loans they issue, and to finance the trades they execute.

That’s when it’s working smoothly.

The repo market seized up last week, with median repurchase rates skyrocketing from their usual band of 2.00-2.25% to 2.46% on Monday, and 5.25% on Tuesday. Keep in mind, that’s the median rate. Some repo rates were as high as 9%, more than quadruple the Federal Reserve’s own target rate, which usually puts a cap on how high Treasury repo rates could climb.

An unlucky confluence of events, including an exceptionally large demand for cash from U.S. companies that needed to pay their corporate tax bills, sucked a lot of the available cash out of the financial markets. What happened last week was any counter-party in need of cash, and only holding collateral like Treasuries, agreed to pay the much higher going repo rates. That’s supply and demand, plain

Read more: https://fortune.com/2019/09/23/repo-market-big-deal-400-billion-bailout-unnerving/

Most Powerful Women: CEO Daily

Good morning.

Fortune’s Most Powerful Women list is out this morning, and the top five are (drumroll please):

1) Marillyn Hewson, CEO of Lockheed Martin

2) Mary Barra, CEO of GM

3) Abigail Johnson, CEO of Fidelity Investments

4) Ginni Rometty, CEO of IBM

5) Gail Boudreaux, CEO of Anthem

Okay, we didn’t really need the drumroll, because those are the same top five as last year. But it’s hard to argue those powerhouse players don’t deserve to be on top. And there are some other interesting movers (and shakers) on this year’s list. Among them:

Julie Sweet, whose promotion to global CEO of Accenture bumped her to #9 from #32 last year; Shari Redstone, vice-chair of CBS and Viacom, who has shown her clout over both companies in the last year, earning her a place on the list for the first time, at #14; Corie Barry became CEO of Best Buy, a job that earned her #18 on the list; And three other CEOs who are new to the list, Lisa Su of AMD, Penny Pennington of Edward Jones, and Christine Leahy of CDW, clocked in at #44, #45 and #46, respectively.

You can find the full list here. More news below.

Alan Murray
This email address is being protected from spambots. You need JavaScript enabled to view it.
@alansmurray

Read more: https://fortune.com/2019/09/23/most-powerful-women-ceo-daily/

WeWork Board Members Want to Kick Founder Adam Neumann Out of the Corner Office

Adam Neumann has said his mission as WeWork’s chief executive is to elevate the world’s consciousness. Members of his board are now discussing a plan to elevate someone else to run the company and salvage its troubled initial public offering.

The board plans to meet on Monday, people familiar with the situation said. There, some directors are expected to raise the prospect of Neumann stepping down as CEO and becoming non-executive chairman, said the people, who asked not to be identified because the discussions are private.

With the drama of a palace coup, Neumann has found himself at odds with WeWork’s largest investor, SoftBank Group Corp. Masayoshi Son, founder of the Japanese conglomerate, is among those pushing for Neumann to resign, a person familiar with the situation said, after widespread criticisms of the company’s governance and spending. The choice is ultimately Neumann’s, though, as the 40-year-old CEO maintains effective control of management decisions.

The boardroom infighting not only imperils the IPO but also a $6 billion loan contingent on the deal. The unprofitable company must complete a successful stock offering before the end of the year to keep access to the credit facility.

WeWork conceded last week that its plans for going public would have to wait after talks with potential investors lowered expectations for the company’s planned IPO valuation to $15 billion or less, after a previous valuation of $47 billion. Among the concerns they voiced: Neumann’s controversial style and control of the company.

Rarely has so much gone so wrong so fast for a young company in the spotlight.

“It’s Uber-scale mess,” said Kellie McElhaney, a professor at the University of California Berkeley’s Haas School of Business, who blames both the board and Neumann for not learning from that company’s earlier mistakes. “He’s really taken a first-mover advantage that WeWork had in the space and blown it in a big way.”

The WeWork story is beginning to fit squarely into the era of unicorn capitalism: A young and charismatic entrepreneur disrupts an industry, runs afoul of elders and investors, sometimes winning but sometimes failing to live up to their own hype.

Institutions including Benchmark Capital, one of WeWork’s investors, pushed out Uber Technologies’ Travis Kalanick before the ride-hailing company went public.

Still, even if some directors want to oust Neumann,

Read more: https://fortune.com/2019/09/23/wework-board-adam-neumann-ceo/

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