The repo and swap market (CDS)

I always tell you to study the repo and swap (CDS) market because they are the main forms of liquidity in today's banking system and have been the cause of the last major incidents in the banking system:

- 2008 Lehman Brothers (CDS crisis).

- 2018 crisis in the repo market.

- 2019 crisis in the repo market.

Both instruments affect the liquidity of the banking system, but in different ways. CDS swaps influence the price and demand for bonds, which are assets that banks typically use as collateral to obtain funding. If the risk of default on a bond increases, its price falls and its CDS rises, making it more difficult for the banks that hold it to obtain funding. Repos, on the other hand, are a direct source of liquidity for banks, as they allow them to obtain cash in exchange for assets. However, repos can also create a liquidity shortage if lenders refuse to roll them over or demand higher collateral.

The Fed can adjust the amount of liquidity it provides to the repo market, depending on economic and financial conditions. The Fed can also set the benchmark interest rate for repo transactions, which affects the cost of funding and this in turn affects the price of swaps.

But I don't want to confuse you, summary for lazy people:

The bank doesn't have your money or any client's money, they have it all invested for their own benefit, so much so that they need mechanisms like CDS or the repo market to finance themselves on a daily basis so that the system doesn't collapse. Still they fuck up and need the help of central banks to inject liquidity so the whole fucking system doesn't collapse.

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