A pension contract, also known as a pension loan, is an instrument for borrowing short-term funds. With a pension transaction, financial institutions essentially sell someone else`s securities, usually a government, in a night transaction and agree to buy them back later at a higher price. The guarantee serves as a guarantee to the buyer until the seller can repay the buyer and the buyer receives interest in return. The financial panic of 2007-8 was the result of a rush to the buyback or « repo » market — the main source of funds for the securitized banking system — and not from a rush on deposits as in previous bank panics, as a recent study by Gary Gorton and Andrew Metrick shows. Repo is a form of bank in which companies and institutional investors « deposit » money by providing short-term loans for interest and obtaining guarantees. The authors define « securitized banking » as the creation of bonds structured from bank loans, such as mortgages, which are then used as collateral for repo. In Securitized Banking and the Run on Repo (NBER Working Paper No. 15223), they argue that securities issued from loans originating in the subprime market played an important role in inciting this event, but that ultimately the loss of corporate liquidity was the main player in the securitized banking system that led to the financial crisis. Before the panic, the securitized banking sector was a $12 trillion business, practiced by the country`s largest investment firms, including Bear Stearns, Lehman Brothers, Morgan Stanley and Merrill Lynch, as well as by commercial banks such as Citigroup, J.P. Morgan and Bank of America, in addition to their traditional banking activities. Buyers of securitized bonds, often made up of mortgages, benefit from seller protection in the form of a renub agreement: the investor buys an asset representative of the bank`s guarantees for a specified amount and the bank agrees to buy back the same asset at an agreed price some time later. The percentage that the investor earns on these guarantees, which sometimes consists of other securitized bonds, is equal to the interest rate of a bank deposit; it is called « repo-rate. » As a general rule, the total amount of the deposit is slightly less than the value of the asset without a base, the difference being called « haircut. » This responsibility requires banks to keep some of their assets in reserve when borrowing money through pension markets. If companies are forced to raise immediate cash but do not want to sell their securities over the long term, they can enter into a pension contract.
Such agreements are common in large banks and other large financial institutions, but they also work at the small business level.