Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!
This was what Bernanke said:
"We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos."
Louis Crandall, economist at Wrightson ICAP observed:
"The vulnerability of the tri-party repo system has been a recurring theme among Federal Reserve and Treasury officials in recent weeks."
The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Federal Bank of New York and JP Morgan Chase.
Yet, way back then, they were held up as rock solid. It is almost hilarious to read the then advert of the Federal Bank of New York as to their expertise and service:
"Sophisticated collateral selection: enforce diversification and credit quality; control adequacy, volatility & liquidity.
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