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THE MORTGAGE MACHINE 

Repo Borrowing
Broker-dealers’ use of repo borrowing rose sharply before the crisis.
IN BILLIONS OF DOLLARS

$1,500

1,200
900

600
300
$396
0
–300
1980 1985 1990 1995 2000 2005 2010

NOTE: Net borrowing by broker-dealers.
SOURCE: Federal Reserve Flow of Funds Report

Figure .

Our sample deal, CMLTI -NC, shows how these funding and securitization
markets worked in practice. Eight banks and securities firms provided most of the
money New Century needed to make the , mortgages it would sell to Citigroup.
Most of the funds came through repo agreements from a set of banks—including
Morgan Stanley ( million); Barclays Capital, a division of a U.K.-based bank

( million); Bank of America ( million); and Bear Stearns ( million). The
financing was provided when New Century originated these mortgages; so for about
two months, New Century owed these banks approximately  million secured by
the mortgages. Another  million in funding came from New Century itself, includ-
ing million through its own commercial paper program. On August , , Citi-
group paid New Century  million for the mortgages (and accrued interest), and
New Century repaid the repo lenders after keeping a  million (.) premium. 

The investors in the deal

Investors for mortgage-backed securities came from all over the globe; what made se-
curitization work were the customized tranches catering to every one of them.
CMLTI -NC had  tranches, whose investors are shown in figure .. Fannie
Mae bought the entire  million triple-A-rated A tranche, which paid a better

return than super-safe U.S. Treasuries. The other triple-A-rated tranches, worth