collapse of shadow banking system
Nouriel Roubini does an excellent job describing what is happening to our financial system. I completely agree with his assessment that the entire "shadow banking" system is in the process of imploding. The business models of broker/dealers and hedge funds simply don't work anymore, in a world of contracting credit and illiquidity. Not one of the big Wall Street investment banks will be alive in it's current form 3 years from now.
http://www.rgemonitor.com/roubini-monitor/253567/if_lehman_collapses_expect_a_run_on_all_of_the_other_broker_dealers_and_the_collapse_of_the_shadow_banking_system
Roubini wrote:What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don't have access to deposit insurance and don't have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.
http://www.rgemonitor.com/roubini-monitor/253567/if_lehman_collapses_expect_a_run_on_all_of_the_other_broker_dealers_and_the_collapse_of_the_shadow_banking_system
Comments
A bail-out of some sort is certainly possible. Nevertheless, I think Roubini's general thesis that all investment banks will go bust before this is through is fairly compelling. I just don't see how their business model of borrowing short and lending long will work anymore. Maybe the government will wind up nationalizing every last one of the IBs since they seem to have an alergy to letting them truly collapse.
Seriously though...where did I leave my gold bricks!?!
In engineering, giving people clarity into the inner workings of complex "machines" is essential. What are the major functional components of the "machine"? What are the inputs and outputs of each component relative to each other? Who are the end users/suppliers? What are the triggering events? etc.
With respect to the financial "machine", the void of details providing how the "machine" works is suspicious. Especially since such a "machine" would only require a rudimentary knowledge of mathematics to understand, and not the higher order math of engineering paradigms which most of the public couldn't grasp (or care about).
The only logical conclusion is that if a "schematic" of our current financial system (which a LOT of people care about) existed and was put into the public domain, there would be an instant revolution.
Once the losses have been written down, however, and an acceptable level of capitalization is reached the system will rebound. The market fundamentals under the housing market will reassert itself -- when it becomes cheaper to buy a home than rent, then more people will buy a home and landlords will buy houses for investment property. That will put a floor under the housing market and it will eventually bottom. Once that happens all the complicated paper (CDOs, ABCP, etc) will start to find a bottom and the writedowns at financial institutions will stop -- and some of the presently completely illiquid paper may eventually find a market price and wall street may see a rebound as some of these instruments turn out to not be *completely* worthless like a lot of them are currently priced.
The bubble being blown up was very complicated because the risk was all hidden in complicated instruments. The process of deflating the bubble and deleveraging, however, is pretty straight-forwards fractional reserve banking or leverage running in the unfavorable direction.
The "text book" description you allude to is available. But it skims the surface and provides at best only a static overview in general terms.
I am not talking about the way the system is ADVERTISED to work, I am talking about the way it works in actual practice. There is a vast hidden (and illegal) side that has been corrupted by greed and Harvard MBAs who invent new "financial instruments" so they can con their way into retiring by 30.
And then there is the FED. Who owns the FED? It is a private institution and as such is "owned" by someone. What is the actual sphere of influence and who actually pulls the strings? What are their names? Are they even Americans? And since they now use our tax dollars to bail out the aforementioned Harvard MBAs and damage done by these scammers, by what authority do they do so?
One must go beyond the surface to get to the inner workings....
How do you think the current financial meltdown happened? Do you believe that the current disaster happened within the bounds of moral and ethical decisions made within a "fractional reserve lending system"?
If so, I have RE in Seattle I would love to sell you......