Can someone explain why the broker-dealer model is facing trouble in today's markets? Everyone's saying that it's because these banks use overnight funding to finance their operations, their balance sheets are not large enough. Can someone working on the markets side of the business provide an explanation for this. I work on the advisory side so I don't have much insights in this.
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Hey, I work at a GSE. You won't read about this in the papers, but on Friday night, my GSE gave an overnight loan to Lehman Brothers in the amount of $1.2 billion that was due at 10 am on Monday morning. Lehman declared chapter 11 and defaulted on the OVERNIGHT LOAN as the note is unsecured and subordinate. While a default on overnight lending is almost unheard of, the major overnight lenders are now pulling back this type of lending. Going forward, its doubtful that this model will continue in its present form.
back in the good days, short term funding was cheap. one reason was that there was a general theory that short term loan had no or little default risk. so what BS and Lehman etc. did was to keep rolling over short term loans to finance operation. since the credit crisis hit, no one want to lend out money! therefore no short term loan for the banks, therefore etc...
over general view i know... and many other good reason y the world is screwed, but that is pretty much the very general big picture.
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