Word: bonding
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...Chase Manhattan, the impact of the default was plain enough. After an impressive five-year string of earnings gains, the third largest commercial bank in the U.S. was confronting the biggest single loss in its history. Still unable to explain fully how the bank's bond trading department had stumbled into its costly involvement with the little-known Drysdale in the first place, Chase had no choice but to swallow hard and announce a onetime write-off of perhaps $135 million after taxes, or more than what the bank had expected to earn in the second quarter. Another...
...week trying to nail down how Drysdale pulled off its caper. Though the nearly four-month-old company employed about 30 securities traders and operated with little more than $20 million in capital of its own, it had managed to put together a $6.5 billion portfolio of U.S. Government bonds, bills and notes. More than $4 billion of that was borrowed. Said a top Wall Street bond trader of the bewilderingly complex financial structure of the upstart firm's activities: "It was the most astonishingly leveraged operation that I have ever seen...
...which a bank or brokerage house raises cash by selling a Treasury security to another dealer on a promise to buy it back when the deal expires. Since typical repos last for only a few days, traders normally do not take account of the accrued interest on a bond, bill or note when valuing it in the transaction. Instead, when the interest is paid by the Treasury to the current holder, the money is automatically passed back to the original owner of the security...
...chief counsel to the Central Intelligence Agency: "How many incidents do you need before someone says that something has to be done?" Philip Loomis, an SEC commissioner, suggested that "it might be desirable" for Government securities dealers and brokers to register with the SEC just as stockbrokers and bond traders are required...
Though repo deals can wind up involving dozens middlemen, the interest that the U.S. Treasury pays regularly on the certificates always goes back to the original owner of the note or bond. Whenever the Treasury sends out interest checks to the holders of its securities, that amount is paid by each repo buyer back to the preceding seller in the chain...