An exegesis on special collateral
This post is for Phil.
When talking about the financial system with more casual observers, I have more than once been backed into a particular conversational corner: I am invited to comment on the connection between securities repo, an important part of the global dollar-based monetary system, and the 1984 film Repo Man, Alex Cox's dark satire of American culture. Starring Harry Dean Stanton and Emilio Estevez, the film tells the story of a disaffected punk who takes a job at an automobile repossession agency, only to find himself confronted with a series of obstacles, some mundane and others truly otherworldly.
The straightforward response, for the observer of the monetary system, is to note dryly that car repossession and securities repurchase agreements, though both can indeed be shortened to "repo," are two quite different things without much in common. But that is what a know-it-all would say. The more challenging answer, but one which might lead to a more interesting conversation, is that both repo and Repo Man pivot on questions of collateral, and that therefore the film speaks directly to issues at the core of the monetary system. In this post, I articulate some of this connection, as a conversational reference for financial plumbers.
Repo Man's protagonist is the hapless punk Otto (Estevez), who finds himself short of liquid assets after losing his job in humiliating fashion. Insult is added to injury when Otto loses his girlfriend to his best friend, and when his own parents reveal that the savings they had promised to him they have given instead to televangelist Reverend Larry (Bruce White), who "want[s] your money, because God wants your money." Otto reluctantly accepts an offer made to him by Bud (Stanton), to take up employment with car repossession agency Helping Hand Acceptance Corporation.
The business of Helping Hand and its competitors, generally, is to locate and take possession of the vehicles of defaulted debtors. For this service the repo agency might expect to collect in fees a fraction of the vehicle's value—$5,000 for a $50,000 Porsche, for example. The work routinely brings the repossessor into conflict with the vehicles' owners, and so, as Bud warns Otto, "the life of a repo man is always intense."
Securities repo, which figures centrally in the global dollar-based monetary system but which makes no explicit appearance in Repo Man, connects a loan of money, typically overnight, with a deposit of securities, typically US Treasury debt. At the beginning of the transaction, the borrower deposits the collateral and accepts the funds; the next day, both transactions are reversed, with an adjustment that leaves the lender of money slightly ahead, a form of interest.
Any borrower is quick to demand the return of their collateral after their loan has been repaid. The systemically important tri-party repo market, for example, uses a custodial structure to unwind the loan of money and the deposit of collateral simultaneously. In Repo Man, more ad hoc measures are used: during Otto's first visit to Helping Hand, he observes the unwinding of a collateralized debt, as vehicle owner and repo man stare each other down, finally swapping cash and keys in something approximating simultaneity (at 11:30). After a moment in which violence seems imminent, everyone walks away laughing.
Bud's warning is not idle, as Otto soon discovers, but the intensity of the life never excuses poor treatment of the collateral. The Repo Code binds all repo men: "I shall not cause harm to any vehicle nor the personal contents thereof, nor through inaction let the personal contents thereof come to harm." Similar words could characterize the securities repo lender's obligation to return collateral to the borrower in carefully contracted quantities.
Most securities repo is based on general collateral, in which it doesn't matter exactly what the securities are, only that they are of sufficient quality. But the market has an important special collateral segment, in which a cash lender might offer rich compensation for access to a specific security. It is just this quality that the repo men notice when Double-X Finance offers $20,000 for a 1964 Chevy Malibu, far above the market price, "but—the money is in escrow" (30:26). The Malibu turns out to be truly special collateral, with the remains of extraterrestrial life-forms in the trunk, creating both hazards and supernatural opportunities for the vehicle's operator.
A sacred trust
Repo Man also deals with non-financial topics, if less systematically. Otto's and Bud's travails eventually land them in possession of the Chevy Malibu, which they lose and regain repeatedly when confronted with the competing claims of religion, government, science, and finance, providing ample opportunity for comment on the hollowness of American life. In the end, perhaps, the film offers two truths: Miller's paranoid truth, that something weird is going on, and the repo man's ironic truth, that "credit is a sacred trust."