Shadow Banking Anyone?
There are influences in the economy above and beyond the basics of traditional economic theory. These influences consist of the world of shadow banking.
The public would be wise to become very intimate to the games afoot. The alphabet soup of derivatives first must be made comprehensible to be controlled.
In the mid-90s while in banking, it was clear at least in the little unit that I was in, that swaps, and derivatives could cause a meltdown. The fear was that by becoming increasingly opaque, that the force of greed would eventually drive the creation of increasingly idiotic instruments that would be foist on the wary and unwary alike. As early as July 07 the auction system for debt backed securities (CDOs) started to stutter. http://en.wikipedia.org/wiki/Collateralized_debt_obligation Institutions were backing away from taking on the touted "same as cash"instruments.
The bankers started pushing the CDOs out the door. They managed to get them off their books and into the hands of others, most of whom were sold these as "same as cash" which of course they were not.
When the auctions failed totally in Mid-Feb 2008 300 billion dollars in "same as cash" became illiquid. That is to say they about as far from "same as cash" as you can get.
I emphasize, that individuals and businesses had been told that these things were money market accounts, (same as cash). Many businesses and personal economic lives came to a screeching halt. The Organization for Economic Co-Operation and Development Financial regulation institutions were flooded with complaints.
The players in the industry feigned innocence. The investigations continued. In the end many small investors got back their principal at least.
Was the press interested? Well, it didn't boil down to a quick set of soundbytes. Besides, the perpetrators were some of the biggest financial institutions in the country.
What got the press to cover the story was the total meltdown in September 08. When Bernanke and Paulson demanded 700 billion dollars for Wall Street the story started to unfold to the public.
Where is the accountability you may ask? It isn't too much a stretch to get the idea now in November of that year that to a large degree the money being paid back to investors for the CDOs will effectively come out of the pockets of the US Treasury.
The market shook shortly after the Presidential Election. Rumors flew that the market was not pleased at the idea that bonuses could be impacted.
Specifically Dick Fuld of Lehman Brothers is being cut off at year end with no Bonus. His bonus in 2007 was a clear 34 million. dollars.Alan Greenspan's discipleship of Ayn Rand gave him a blind spot in the area of regulation. On October 24th 08 he was quoted as saying to the House Committee on Oversight and Reform, "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself especially, are in a state of shocked disbelief."
Greenspan was more than a little surprised that short term greed had nearly ended the economic game.
These "Too big to fail" are not national institutions. They are international. The idea of a sovereign nation is a thing of the past.
Will the New Vikings prevail? Stay tuned
Article Source: FxTradingStock.com
About the Author
James Horne has been a securities analyst for over 10 years. He is CEO of Pure Reason LLC, the home of Shadowtraders. His voice has been heard by hundreds of students learning to trade the Futures Market with Shadowtraders online day trading strategies. Before you buy any trading software, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen
by: James Horne
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Word Count: 572
Date: Tue, 13 Apr 2010
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