Wall Street on Parade published more evidence that the Fed bailout of the repo market in September 2019 avoided a meltdown and a repetition of the 2008 crisis. A major default in a credit derivatives contract was set off by the bankruptcy of British tour operator Thomas Cook and triggered a general panic, fueled by the fact that nobody knew in detail who was involved and who was not.
Thomas Cook filed for Chapter 15 bankruptcy protection on Sept. 16. The repo market froze, forcing the Fed to intervene the next day. It was eventually learned that Thomas Cook was exposed in a single $2.7 billion credit derivatives contract, whose dealers were the main bank beneficiaries of Fed repo loans in the following days and weeks. Such information was provided by the Credit Default Swaps Determination Committee Sept. 24.
“While Thomas Cook may have been the spark that ignited the inferno in the repo market, there were plenty of other problems contributing to a general distrust of each other among global trading houses,” Pam and Russ Martens wrote. Two of such problems involved two of the large borrowers of Fed repo loans, Nomura Securities International and Deutsche Bank Securities, whose shares had plunged previous to Sept. 17 due to several factors, including scandals.
