Weekend Economists Ring in the Old, Wring Out the New: Dec. 30, 2011 to Jan. 2, 2012

[Demeter]

145. The $18 Trillion Threat Of The Unregulated Shadow Banking System

http://www.forbes.com/sites/robertlenzner/2011/12/30/the-18-trillion-threat-of-the-unregulated-shadow-banking-system/

...When you add together the assets in hedge funds, ETFs, money market mutual funds, sovereign wealth funds and family investment offices(think Soros) t he total amount of assets that are subject to oversight and regulation appears to be $18 trillion, down from $25 trillion before the 2008 meltdown. This money is what we call “the shadow banking system.” And is where the most “games” are being played using other people’s money.

Risk taking, I have been warned , has moved to the “shadow banking system,” which utilize flow of funds accounts that are outside the purview of the Dodd-Frank Act, Basel III, and even the ministrations of t he Federal Reserve. None of these regulators have the obligation of overseeing the re-use of this pledged collateral, which are being supplied by asset managers to other dealers or players who “mine” this collateral for other purposes than were first intended.

You want to worry about money you can’t see– and don’t know where it is located? Then, worry big-time about some $5.8 trillion of the “shadow banking” system that are in some kind of crazy-quilt daisy chain where they are pledged by some huge unregulated hedge fund or sovereign wealth fund, and then end up as collateral being used by yet another financial dealer. There’s no central collateral clearing desk or depositary– where all of these transactions can be observed. It means long term savings can be turned into short-term transactions that are part of the counter-party web of global financial markets.

If a hedge fund can use its Treasury bills to finance various transactions, which lead to related transactions, how are we to monitor the use o the $5.8 trillion– much less the whole lot of $18 trillion in the system at the end of 2010? You can be sure this IMF study won’t be the first investigation of this phenomenon. The way to comprehend this transformation of finance into a shadow banking system is to understand that this is how MF Global got into trouble and went under. Reverse maturity transactions that are “the dominant source of marginal demand for money-type instruments in the financial system,” were the tools used by MF Global’s CEO Jon Corzine to take his fatal leveraged bond position in European sovereign debt...

THAT MONEY SLOSHING AROUND IN THE BATHTUB MULTIPLIES LIKE THE SORCERER'S APPRENTICE'S BROOOMS...