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MARCH TO AUGUST : SYSTEMIC RISK CONCERNS
after April and ceased completely by late July. Because the dealers feared that mar-
kets would see reliance on the PDCF as an indication of severe distress, the facility
carried a stigma similar to the Fed’s discount window. “Paradoxically, while the
PDCF was created to mitigate the liquidity flight caused by the loss of confidence in
an investment bank, use of the PDCF was seen both within Lehman, and possibly by
the broader market, as an event that could trigger a loss of confidence,” noted the
Lehman bankruptcy examiner.
On May , the Fed broadened the kinds of collateral allowed in the TSLF to in-
clude other triple-A-rated asset-backed securities, such as auto and credit card loans.
In June, the Fed’s Dudley urged in an internal email that both programs be extended
at least through the end of the year. “PDCF remains critical to the stability of some of
the [investment banks],” he wrote. “Amounts don’t matter here, it is the fact that the
PDCF underpins the tri-party repo system.” On July , the Fed extended both pro-
grams through January , .
JP MORGAN: “REFUSING TO UNWIND . . .
WOULD BE UNFORGIVABLE”
The repo run on Bear also alerted the two repo clearing banks—JP Morgan, the main
clearing bank for Lehman and Merrill Lynch, as it had been for Bear Stearns, and
BNY Mellon, the main clearing bank for Goldman Sachs and Morgan Stanley—to the
risks they were taking.
Before Bear’s collapse, the market had not really understood the colossal expo-
sures that the tri-party repo market created for these clearing banks. As explained
earlier, the “unwind/rewind” mechanism could leave JP Morgan and BNY Mellon
with an enormous “intraday” exposure—an interim exposure, but no less real for its
brevity. In an interview with the FCIC, Dimon said that he had not become fully
aware of the risks stemming from his bank’s tri-party repo clearing business until the
Bear crisis in . A clearing bank had two concerns: First, if repo lenders aban-
doned an investment bank, it could be pressured into taking over the role of the
lenders. Second, and worse—if the investment bank defaulted, it could be stuck with
unwanted securities. “If they defaulted intraday, we own the securities and we have to
liquidate them. That’s a huge risk to us,” Dimon explained.
To address those risks in , for the first time both JP Morgan and BNY Mellon
started to demand that intraday loans to tri-party repo borrowers—mostly the large
investment banks—be overcollateralized.
The Fed increasingly focused on the systemic risk posed by the two repo clearing
banks. In the chain-reaction scenario that it envisioned, if either JP Morgan or BNY
Mellon chose not to unwind its trades one morning, the money funds and other repo
lenders could be stuck with billions of dollars in repo collateral. Those lenders would
then be in the difficult position of having to sell off large amounts of collateral in or-
der to meet their own cash needs, an action that in turn might lead to widespread fire
sales of repo collateral and runs by lenders.
The PDCF provided overnight funding, in case money market funds and other
