What Is A Repo?
A repo agreement is a contract between two parties, which says that one party will buy assets from the other, and the other will then repurchase them at a given point in time for slightly more. This is an easy way for a firm to use its assets as funding for money for more investments.
The firm lending the money is paid for accepting the risk by receiving slightly more money than they lent, similar to an interest payment.
During the height of the 2004-2007 financial boom, it is estimated that some firms were financing up to 25% of their balance sheet in extremely short term (overnight to a week) repo agreements, and as soon as their assets started to devalue they were unable to receive enough funding, hence the ‘credit crunch’.