One can imagine the trillion-dollar pension market as the world`s largest pawnbroker, which provides secured short-term loans. Pension agreements can be as short as overnight, although in the securitized debt market, one to three months are more common. In this sector, there is usually an asset manager who puts in place high-quality liquidity or guarantees, such as treasury bills, to buy an underlying loan or a portfolio of securities from a bank broker`s inventory. The important thing is that the bank clings to the securities, but the hedge fund will benefit from coupons on the bonds during the term of the repo. The Fund undertakes to fully acquire the securities at the end of the period or to renew the pension lines. „Everyone knows you`re playing with fire with leverage,“ says Michael Terwilliger, portfolio manager at the Resource Income Fund. „The reaction to the last panic created a new panic.“ In the $3.9 trillion municipal bond market, large municipal debt funds from Nuveen, BlackRock Inc., Pacific Investment Management Co. and Invesco Ltd. developed an investment strategy that soared last month as short-term borrowing costs rose. CMBS is also expected to play a leading role in disputes related to real estate investment funds („REIT“) and their repurchase contracts („Repo“). REITs are often trained to acquire real estate debts – including investing in CMBS – and often finance these investments through reaner agreements in which they borrow short-term money from banks using the CMBS as collateral for the pension loan. However, reaner [xxxiv] agreements generally grant lending banks the right to make „margin calls“, i.e. to require REITs to reserve additional guarantees in the event of a loss of value of the secured collateral.
In light of recent events in the CMBS market and the fact that reassiting agreements have become a common instrument for investments in CMBS, margin-call disputes have already emerged. Not exactly. While the level of leverage used in recent years to buy these very complex and risky securities through repurchase agreements is perhaps surprising, this time it is a little different: the current dislocation is usually a liquidity problem, not necessarily credit risk as in 2008 (with current defaults on subprimes). The coming weeks will be eloquent. Unlike a decade ago, when regulatory statements gave the public an overview of the types of bank risk-taking that led to the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc., it is more difficult to see this time how much leverage has happened or which investment firms might be most exposed.