This Report never mentions the fraud that brought the financial system to its knees. Instead it uses obfuscating euphemisms to describe the causes of the crisis, words like "fragility," "times of stress," "risk," breakdown" and "credit-risk free" to temper the descriptions of the Shadow Banking System (SBS). Though the fraud lay thick and deep in the CDOs and CDS that are part of the SBS, the authors acknowledge only that it "played a quantitatively important role in the run-up to the financial crisis." That description is the equivalence of Pilate washing his hands in water and claiming innocence while everyone else is declared guilty!
The SBS contains a "Cash" and a "Synthetic" component. The authors would rather that SBS not be a pejorative term, but when you picture Blankfein salivating while he thinks about the possibilities for wealth transference by securitizing Social Security, Medicare and Medicaid (if they are ever privatized,) we know SBS is not a laudatory place.
How Wall Street "Privatized" Money Creation
By Mike Whitney - Counterpunch
Regulators are worried about the explosive growth of shadow banking, and they should be. Shadow banks were at the heart of the last financial crisis and they’ll be at the heart of the next financial crisis as well. There’s no doubt about it. It’s simply impossible to maintain a system where unregulated, non-bank financial institutions are able to create their own money (credit) without oversight or supervision. The money they create–via off-balance sheets operations, securitization, repo or other unmonitored mega-leveraging activities–feeds into the economy, creates artificial demand, lowers unemployment, and fuels growth. But when the cycle slams into reverse (and debts are no longer serviced on time), then thinly-capitalised shadow banks begin to default one-by-one, creating a daisy-chain of counterparty bankruptcies that push stocks into a nosedive while the economy slips into a long-term slump.
The reason the global economy is still in a shambles a full 5 years after Lehman Brothers collapsed, is because this deeply-flawed system –which had previously generated 40 percent of the credit in the US economy–was still in rebuilding-mode. But now, according to a new report by the Financial Stability Board, shadow banking has made a comeback and is bigger than ever. The FSB found that assets held by shadow banks have swollen to $67 trillion, a sum that’s nearly as large as global GDP ($69.97 trillion) and greater than the $62 trillion that was in the system prior to the Crash of ’08. The more shadow banking grows, the greater the probability of another financial crisis.
So what is shadow banking and how does it work?
Read the whole piece here