Securities Lending Industry

Just wanted to see what everyone’s thoughts were on this industry. It has come under fire recently because what was supposed to be a almost riskless way to gain incremental returns for Mutual funds, Pensions, large corporations has been shown that there is risk after all. Some outfits are getting sued because they invested in ABS and MBS that lost out or maturity mismatch. Even with the over-collateralization that takes place it still ruined results. So do you think this industry will survive? Will clients still want to make that incremental income now that there has been shown to be risky? I feel that it is a necessary part of the street and brokers will always need to borrow securities for whatever reason, but will people want to lend them? Thanks for sharing.

Seclending is pretty much dead right now because no one wants to lend their portfolio to a shaky broker/dealer. On top of it ban on short selling put a nail on the coffin. WSJ had one good article in the last 2 weeks on this industry and it is worth reading… They rightly said you make little, you make little, you make little, you make little and you lose a lot.

The Securities Lending industry took a massive hit when Lehman went down. They were in the Top 5 players in the repo market. Once they failed, counterparties realized that they really weren’t long or short a specific asset and hedge funds who put on relative value trades saw that they only owned one leg of the trade. So there was massive market dislocations everywhere as a result of these Hedge Funds particularly going back into the market to transact or put back on the “missing” leg of their trade. The most extreme example of this was the 30yr EUR swap rate trading through OTR 30yr Bund rate. The repo market will be there, but it won’t be as active as in the past due to the decrease in leverage that is and will continue to take place. Many people right now are very risk-averse after the Lehman BK so repo desks are doing very few transactions. Cash bonds are very hard to short right now as there are much less willing lenders and/or the repo rate is super rich (ie. General Collateral rate is the richest its been in history for every asset class) In short, the repo market acts the same as the CDS market. Yes, you have over-collateralization but your biggest risk is counterparty risk. Everything is about perception that’s why you had idiots during the “booming” years spit out sales pitches for municipal bonds, auction rate securities, money market funds, repo etc… deeming them to be “almost riskless.” It’s a crock of bull. When asset deflation hits all these statements such as these assets being “almost riskless” get exposed as fraud. As Mariner Eccles put it “When their credit runs out the game will stop.”