Morgan Stanley’s Doom Scenario: Major Recession in 2013 Published: Tuesday, 20 Nov 2012 | http://www.cnbc.com/id/49898014
..Morgan Stanley isn’t alone in warning about a recession next year. Noted bear, Nouriel Roubini warned on Monday that certain key developments would exacerbate the downside risks to global growth in 2013....[end excerpt]
Majia here: Now why is the global economy heading for recession again?
Could it be because the SHADOW BANKING system is now larger than before, and requires more bailouts of derivatives that have been re-hypothecated?
'Shadow Banking' Still Thrives, System Hits $67 Trillion 18 Nov 2012 | 5:37 PM ET http://www.cnbc.com/id/49877573
[Excrpted] The system of so-called "shadow banking," blamed
by some for aggravating the global financial crisis, grew to a new high of $67
trillion globally last year, a top regulatory group said, calling for tighter
control of the sector.
…The multitrillion-dollar activities of hedge funds and
private equity companies are often cited as examples of shadow banking.But the term also covers investment funds, money market
funds and even cash-rich firms that lend government bonds to banks, which in
turn use them as security when taking credit from the European Central Bank.
Even the man credited with coining the term, former
investment executive Paul McCulley, gave a catch-all definition, saying he
understood shadow banking to mean "the whole alphabet soup of levered up
non-bank investment conduits, vehicles and structures," such as the special
investment vehicles that many blamed for the financial crisis....[end excerpt]
Majia Here: Washington's Blog provides a good analysis here
One important reason that the shadow banking system remains in dire straights is because of the practice of re-hypothecation that allows financial players to all use the same underlying collateral. Below find an excerpt from an essay I've written on the subject of financial fraud:
Christopher Elias, in his article "MF
Global and the great Wall St re-hypothecation scandal" explains that
customer accounts were essentially re-hypothecated, or used as collateral for
borrowing billions of dollars in a complex repurchasing (i.e., “repo”)
agreement:
Re-hypothecation occurs when a bank or
broker re-uses collateral posted by clients, such as hedge funds, to back the
broker’s own trades and borrowings. The practice of re-hypothecation runs into
the trillions of dollars and is perfectly legal. It is justified by brokers on
the basis that it is a capital efficient way of financing their operations much
to the chagrin of hedge funds.
What is particularly of
note is that the agent that lent billions to MF Global may have used the
re-hypothecated customer funds as its own collateral for further trading. This
is described as “churn:
In fact, by 2007, re-hypothecation had
grown so large that it accounted for half of the activity of the shadow banking
system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were
receiving $4 trillion worth of funding by re-hypothecation, much of which was
sourced from the UK.
With assets being re-hypothecated many
times over (known as “churn”), the original collateral being used may have been
as little as $1 trillion – a quarter of the financial footprint created through
re-hypothecation.
Essentially,
the “churning” of re-hypothecated funds allows many different financial players
to use the same collateral base. That means if any player defaults, they all
are in danger of default because the re-hypothecated funds would be vaporized.
The MF Global disaster illustrates both vacuous capital accumulation has become
and how vulnerable the entire system is to shocks.
Elias,
Christopher . "MF Global and the great Wall St re-hypothecation
scandal" Thomas Reuters News and Insight (2011, December), http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
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Nov 16, 2012
MF
Global and the great Wall St re-hypothecation scandal Christopher Elias
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
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Jul 26, 2012
Christopher
Elias, in his article "MF Global and the great Wall St re-hypothecation
scandal" explains that customer accounts were essentially
re-hypothecated, or used as collateral for borrowing billions of dollars
in a complex ...
Jan 30, 2012
The
significance of re-hypothecation of re-hypothecation is that the
structure of debt is based on such a tiny pool that if the system starts
crumbling there is grossly insufficient capital reserves in the system
to shore up losses.
Dec 08, 2011
MF
Global and the great Wall St re-hypothecation scandal Christopher Elias
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
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