Dublin Opinion

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2 Responses to “AN OVERVIEW OF SHADOW BANKING FOR JOURNALISTS”

1. on 25 Sep 2012 at 2:35 pm1willyrobinson

   Great link, thanks a lot - w

2. on 27 Nov 2012 at 11:23 am2willyrobinson

   The most interesting part of this article is the following, because it describes a business practice that is at face value totally unsound:

   “Now, at this step in shadow banking something interesting happens. In a securities lending transaction or in a repurchase transaction, somebody gives cash and gets back securities. Whoever gets the securities can re-use them as collateral to get their own repo loan. Then the second repo lender can re-use the same securities as collateral to get a repo loan for themselves. And so on.”

   Wikipedia makes no real mention of this when talking about repurchase agreements (Repo), but if you look up rehypothecation (the practice of reusing collateral referred to above) it’s absolute dynamite:

   “In the UK, there is no limit on the amount of a clients assets that can be rehypothecated, except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client’s debit balance.

   In 2007, rehypothecation accounted for half the activity in the shadow banking system. Because the collateral is not cash it does not show up on conventional balance sheet accounting. Before the Lehman collapse, the International Monetary Fund (IMF) calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statutory limits governing the reuse of a client’s collateral. It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated several times over, with an estimated churn factor of 4.”

   Excuse me if there’s children reading this, but fuck me! Competing with Credit Default Swaps for the title of ‘most insanely suicidal short term casino business model in the world’. Fuck me twice - it’s nuts that it’s legal, but they even have a term - ‘churn factor’ - for the sheer quantity of nuttiness involved.

   *shakes head sadly for weeks until christmas drinking begins*

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