Temporary open market operation on MBS repos: any foreshadowing of the financial crisis of 2008?

Abstract

The financial crisis of 2008 was significantly influenced by housing, mortgage markets and mortgage-backed securities (MBS). The Federal Reserve (Fed) conducts temporary open market operations on a daily basis and frequently uses repos on MBS. With this daily interaction with MBS, we examine whether any signal about the impending financial crisis could have been seen in the Fed’s temporary open market operations. We identify four anomalous events in MBS temporary open market operations and examine those events for signals of the financial crisis. We find nothing in the four events that would have provided signals of the financial crisis. Instead, the common feature of the four events is an unusually large supply of MBS made available to the Fed for those day’s temporary open market operations.