A week ago we posted Dave Friedman's insightful piece on "Why We Must Care About Shadow Banking" as shadow banking, whose shadow liabilities comprises the bulk of the unreported M3, represents a critical component of the credit system. Today, we present the second part in this three part series for all who wish to get up to speed with some of the key issues in this most critical topic.
Submitted by Dave Friedman of Wall St. Cheat Sheet
Shadow Banking Part II: Why You MUST Care
I recently blogged
about the origins of the shadow banking system. This is the second
blog post in that series, which discusses in more detail why the average
investor should care about shadow banking. The third post in this
series will discuss proposed regulatory reforms that address shadow
banking.
In short, shadow banking is the largely unregulated component of the
banking sector. The shadow banking system is a source of funding and
liquidity for non-bank financial institutions. What is a non-bank
financial institution? Well, it can be any large institution (a
corporation, a pension fund, a very wealthy individual, etc.) that has a
large cash balance. These institutions have a large asset, cash,
sitting on their balance sheet. It is both a source of liquidity for
the institution, and a source of return, assuming that the cash can be
invested safely. So, for example, say Microsoft is sitting on $10
billion in cash. It can deposit the cash with a financial intermediary,
such as the now-defunct Bear Stearns, in exchange for collateral of
short-term debt instruments, and so earn a return on its liquid asset.
At its heart, this is the shadow banking system: it is a funding and
liquidity source provided by non-banks, and it arose because entities
with large piles of cash needed to manage that asset in some manner that
generated a return.
(As a side note, there are a number of very good posts on the shadow banking system at Zero Hedge. See here, here, here, and here.)
So, going back to the paper from the previous post,
why should we care about the shadow banking system at this juncture?
After all, a reasonable person would point out that the Dodd-Frank bill
contains many regulatory reforms. But, as the authors point out,
“hree important gaps [in the Dodd-Frank bill] are in money-market
mutual funds (MMMFs), securitization, and repurchase transactions
(‘repo’).” These are the three parts of the shadow banking system.
Recall from the previous post that money market funds were created when
“cash-rich non-financial companies did not have easy access to safe,
interest-earning, short-term investments.”
So, we have a situation in which companies and other institutions
laden with cash needed a way to earn money on those stockpiles, but they
didn’t want to do so by depositing the cash with a traditional bank.
Traditional bank deposits are insured only to $100,000 (though this has since been changed to $250,000),
which is far too small a balance for institutions with hundreds of
millions, or even billions, of dollars of cash on their balance sheet.
Since the regulated market did not provide a solution, the private
market did, in the form of money market mutual funds, off-balance-sheet
securitizations, and the repo market.
But, because no bank could afford to serve as a backstop to the
shadow banking system, in the midst of the crisis, the US government,
and other sovereign governments, had to step into the breech and act as a
de facto backstop to this unregulated system of liquidity and
funding. But, once governments accepted this role, they provided an
implicit, if not explicit, guarantee of the shadow banking system. In
the short term, this was likely necessary, in order for non-financial
entities to continue to operate, be able to pay their employees, etc.
But in the longer term, the implications of making an implicit guarantee
on an un-regulated banking system are unclear. The third and final
post in this series will explore one regulatory proposal, called narrow-funding banks, to deal with this mess in the future.
David Friedman is the Editor of our new Wall St. Watchdog platform. Click here to follow Wall St. Watchdog on Twitter or Facebook.
This is a Recap of Boardwalk Empire Episode 2, “The Ivory Tower”, originally airing September 26, 2010. If you thought the first episode was Olde Timey Gangstery, then hoo boy, you were correct in that evaluation.
Episode 2 of the ‘Walks picks up with Nucky getting a visit from the resident prohibition agent, the joyless, no-nonsense, no-sympathies, yes-hat Agent Van Alden:
Live-Action Rex Banner isn’t buying Nucky’s explanation that Hans Schroder, the baker’s assistant with one minor arrest 10 years ago, mastermined the previous week’s gangster mass-murder, and shrugs off Nucky’s shady offer to speak with the sheriff, Brother McIncahoots. We find out later that the agent isn’t just mad at Nucky but also generally joyless, evidenced when he writes this unromantic letter to his wife:
Van Alden returns to his supervisor with the series-establishing line that compared to Arnold Rothstein, Nucky Thompson is the “much bigger fish.” Congratulations – you watched the opening credits.
After the jump, Al Capone beats a reporter, then some not the most famous gangster ever gangsters do some other gangster stuff:
Meanwhile in Chicago, we open on the giant funeral procession for Big Jim Colosimo, the gangster who got shot in the face last episode for playing a record real loud. Press agents hound the pallbearers asking Johnny Torrio if he was involved in the murder, and I don’t know who he is because seriously this show has like ninety characters right now. But his companion, Al Capone — easy to remember! — shrugs the reporters off all Al-Caponelike.
Later, a reporter comes to Capone in a speakeasy asking him to give a statement about the murder, and Al gives him the statement “Hey I am hitting you with this bottle”:
Having Al Capone in the show really helps things, because he’s super famous and you never forget which character he is. Every character should be someone really famous. Jimmy? He should be Teddy Roosevelt. Rothstein should be Charlie Chaplin. And Margaret is Abe Lincoln. Not should be – she is Abe Lincoln. That’s the subtext I got from this episode. Just wait a few more weeks, it’ll be revealed.
Speaking of Rothstein, he’s surprisingly uncool with Nucky stealing his own liquor shipment and selling it to Chicago, and demands $100,000 to cover the damages, which in the 20s was literally 9 trillion dollars. Nucky’s like “Go buzz off like Ruth Buzzi!” That was the most vulgar insult back then.
Rothstein takes his frustration out by interrogating the guy who shot Big Jim with a really badass story about making a dude choke to death on a cue ball. But my guess is he’s gonna let the murder slide and let the 100 grand slide then go buy a slip n’ slide and slide down it.
Margaret is recovering in the hospital by reading Henry James’ The Ivory Tower — titular line! — and gets a visit from Nucky’s brother Eli, who shadily gives her money to ensure that she won’t deny her husband’s involvement in the gang shooting:
In other financial matters, Nucky demands that Jimmy pay him the $3,000 from his share that he was shorted. Sidenote: Gangsters are always shorting each other money, aren’t they? Here’s my impression of a gangster: “You shorted me, where’s my money, see? I’m a gangster!” That line was originally gonna be the title of this show.
Jimmy gets the money by selling his mother’s necklace that he was originally gonna give as a gift to a showgirl [Correction: That showgirl WAS his mother - thanks, commenters!] — seriously, so many humans filmed in this thing — and hands the cash to Nucky, who immediately loses the whole amount on one roulette spin. Burn! Gonna take Jimmy a lot of Fatty Arbuckle watching to get over that one.
Also, Jimmy and his wife are having sex and their kid is right next to them and wakes up. Zuh?
In general, pretty solid second episode of the ‘Walks (gonna keep calling it that because it sounds so uncool), even if it was basically a “react to stuff last week, set up stuff for coming weeks” transition episode, and not a traditional television “things happening” episode. I dealt with Lost for like 15 years, these things don’t bother me anymore; it’s like once you’ve been on a 14 hour flight, you no longer get restless on 5 hour flights. Especially if those flights crash and cause time mysteries.
Much has been made over Steve Buscemi’s role in this series — my colleague Alex Zalben called him the show’s central problem – but I’m still torn on the casting decision. On one hand, it’s a different role for Buscemi, and his alternately reserved and passionate demeanor is both unpredictable and interesting, if a bit uneven. On the other hand, though, part of me wishes HBO had gone with a semi-newcomer in the lead role, giving someone the chance to really inherit the role independently of their own notoriety, like James Gandolfini in The Sopranos, Ian McShane in Deadwood, or Mrs. Blankenship in Mad Men. Or just straight up given the role to Mrs. Blankenship.
That about wraps up the recap for this week. Oh also, some boardwalk guy was trying to sleep with a 19-year-old and she finally was giving him an HJ in the car and a dying guy stumbled onto the road and scared them. Also, Nucky is giving Mickey Doyle’s business to Chalky White, because his name is even more olde timey. Also the prohibition agent stole Margaret’s ribbon and was sniffing it.
…The f*ck?
Boardwalk Empire episode thoughts? Series thoughts? Evaluations/predictions? Favorite/least favorite parts? Buscemi feedback? Leave it in the comments.
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A week ago we posted Dave Friedman's insightful piece on "Why We Must Care About Shadow Banking" as shadow banking, whose shadow liabilities comprises the bulk of the unreported M3, represents a critical component of the credit system. Today, we present the second part in this three part series for all who wish to get up to speed with some of the key issues in this most critical topic.
Submitted by Dave Friedman of Wall St. Cheat Sheet
Shadow Banking Part II: Why You MUST Care
I recently blogged
about the origins of the shadow banking system. This is the second
blog post in that series, which discusses in more detail why the average
investor should care about shadow banking. The third post in this
series will discuss proposed regulatory reforms that address shadow
banking.
In short, shadow banking is the largely unregulated component of the
banking sector. The shadow banking system is a source of funding and
liquidity for non-bank financial institutions. What is a non-bank
financial institution? Well, it can be any large institution (a
corporation, a pension fund, a very wealthy individual, etc.) that has a
large cash balance. These institutions have a large asset, cash,
sitting on their balance sheet. It is both a source of liquidity for
the institution, and a source of return, assuming that the cash can be
invested safely. So, for example, say Microsoft is sitting on $10
billion in cash. It can deposit the cash with a financial intermediary,
such as the now-defunct Bear Stearns, in exchange for collateral of
short-term debt instruments, and so earn a return on its liquid asset.
At its heart, this is the shadow banking system: it is a funding and
liquidity source provided by non-banks, and it arose because entities
with large piles of cash needed to manage that asset in some manner that
generated a return.
(As a side note, there are a number of very good posts on the shadow banking system at Zero Hedge. See here, here, here, and here.)
So, going back to the paper from the previous post,
why should we care about the shadow banking system at this juncture?
After all, a reasonable person would point out that the Dodd-Frank bill
contains many regulatory reforms. But, as the authors point out,
“hree important gaps [in the Dodd-Frank bill] are in money-market
mutual funds (MMMFs), securitization, and repurchase transactions
(‘repo’).” These are the three parts of the shadow banking system.
Recall from the previous post that money market funds were created when
“cash-rich non-financial companies did not have easy access to safe,
interest-earning, short-term investments.”
So, we have a situation in which companies and other institutions
laden with cash needed a way to earn money on those stockpiles, but they
didn’t want to do so by depositing the cash with a traditional bank.
Traditional bank deposits are insured only to $100,000 (though this has since been changed to $250,000),
which is far too small a balance for institutions with hundreds of
millions, or even billions, of dollars of cash on their balance sheet.
Since the regulated market did not provide a solution, the private
market did, in the form of money market mutual funds, off-balance-sheet
securitizations, and the repo market.
But, because no bank could afford to serve as a backstop to the
shadow banking system, in the midst of the crisis, the US government,
and other sovereign governments, had to step into the breech and act as a
de facto backstop to this unregulated system of liquidity and
funding. But, once governments accepted this role, they provided an
implicit, if not explicit, guarantee of the shadow banking system. In
the short term, this was likely necessary, in order for non-financial
entities to continue to operate, be able to pay their employees, etc.
But in the longer term, the implications of making an implicit guarantee
on an un-regulated banking system are unclear. The third and final
post in this series will explore one regulatory proposal, called narrow-funding banks, to deal with this mess in the future.
David Friedman is the Editor of our new Wall St. Watchdog platform. Click here to follow Wall St. Watchdog on Twitter or Facebook.
This is a Recap of Boardwalk Empire Episode 2, “The Ivory Tower”, originally airing September 26, 2010. If you thought the first episode was Olde Timey Gangstery, then hoo boy, you were correct in that evaluation.
Episode 2 of the ‘Walks picks up with Nucky getting a visit from the resident prohibition agent, the joyless, no-nonsense, no-sympathies, yes-hat Agent Van Alden:
Live-Action Rex Banner isn’t buying Nucky’s explanation that Hans Schroder, the baker’s assistant with one minor arrest 10 years ago, mastermined the previous week’s gangster mass-murder, and shrugs off Nucky’s shady offer to speak with the sheriff, Brother McIncahoots. We find out later that the agent isn’t just mad at Nucky but also generally joyless, evidenced when he writes this unromantic letter to his wife:
Van Alden returns to his supervisor with the series-establishing line that compared to Arnold Rothstein, Nucky Thompson is the “much bigger fish.” Congratulations – you watched the opening credits.
After the jump, Al Capone beats a reporter, then some not the most famous gangster ever gangsters do some other gangster stuff:
Meanwhile in Chicago, we open on the giant funeral procession for Big Jim Colosimo, the gangster who got shot in the face last episode for playing a record real loud. Press agents hound the pallbearers asking Johnny Torrio if he was involved in the murder, and I don’t know who he is because seriously this show has like ninety characters right now. But his companion, Al Capone — easy to remember! — shrugs the reporters off all Al-Caponelike.
Later, a reporter comes to Capone in a speakeasy asking him to give a statement about the murder, and Al gives him the statement “Hey I am hitting you with this bottle”:
Having Al Capone in the show really helps things, because he’s super famous and you never forget which character he is. Every character should be someone really famous. Jimmy? He should be Teddy Roosevelt. Rothstein should be Charlie Chaplin. And Margaret is Abe Lincoln. Not should be – she is Abe Lincoln. That’s the subtext I got from this episode. Just wait a few more weeks, it’ll be revealed.
Speaking of Rothstein, he’s surprisingly uncool with Nucky stealing his own liquor shipment and selling it to Chicago, and demands $100,000 to cover the damages, which in the 20s was literally 9 trillion dollars. Nucky’s like “Go buzz off like Ruth Buzzi!” That was the most vulgar insult back then.
Rothstein takes his frustration out by interrogating the guy who shot Big Jim with a really badass story about making a dude choke to death on a cue ball. But my guess is he’s gonna let the murder slide and let the 100 grand slide then go buy a slip n’ slide and slide down it.
Margaret is recovering in the hospital by reading Henry James’ The Ivory Tower — titular line! — and gets a visit from Nucky’s brother Eli, who shadily gives her money to ensure that she won’t deny her husband’s involvement in the gang shooting:
In other financial matters, Nucky demands that Jimmy pay him the $3,000 from his share that he was shorted. Sidenote: Gangsters are always shorting each other money, aren’t they? Here’s my impression of a gangster: “You shorted me, where’s my money, see? I’m a gangster!” That line was originally gonna be the title of this show.
Jimmy gets the money by selling his mother’s necklace that he was originally gonna give as a gift to a showgirl [Correction: That showgirl WAS his mother - thanks, commenters!] — seriously, so many humans filmed in this thing — and hands the cash to Nucky, who immediately loses the whole amount on one roulette spin. Burn! Gonna take Jimmy a lot of Fatty Arbuckle watching to get over that one.
Also, Jimmy and his wife are having sex and their kid is right next to them and wakes up. Zuh?
In general, pretty solid second episode of the ‘Walks (gonna keep calling it that because it sounds so uncool), even if it was basically a “react to stuff last week, set up stuff for coming weeks” transition episode, and not a traditional television “things happening” episode. I dealt with Lost for like 15 years, these things don’t bother me anymore; it’s like once you’ve been on a 14 hour flight, you no longer get restless on 5 hour flights. Especially if those flights crash and cause time mysteries.
Much has been made over Steve Buscemi’s role in this series — my colleague Alex Zalben called him the show’s central problem – but I’m still torn on the casting decision. On one hand, it’s a different role for Buscemi, and his alternately reserved and passionate demeanor is both unpredictable and interesting, if a bit uneven. On the other hand, though, part of me wishes HBO had gone with a semi-newcomer in the lead role, giving someone the chance to really inherit the role independently of their own notoriety, like James Gandolfini in The Sopranos, Ian McShane in Deadwood, or Mrs. Blankenship in Mad Men. Or just straight up given the role to Mrs. Blankenship.
That about wraps up the recap for this week. Oh also, some boardwalk guy was trying to sleep with a 19-year-old and she finally was giving him an HJ in the car and a dying guy stumbled onto the road and scared them. Also, Nucky is giving Mickey Doyle’s business to Chalky White, because his name is even more olde timey. Also the prohibition agent stole Margaret’s ribbon and was sniffing it.
…The f*ck?
Boardwalk Empire episode thoughts? Series thoughts? Evaluations/predictions? Favorite/least favorite parts? Buscemi feedback? Leave it in the comments.
Probably Bad <b>News</b>: Breakfast Fail - Epic Fail Funny Videos and <b>...</b>
epic fail photos - Probably Bad News: Breakfast Fail.
"One in three households" have Wii console | <b>News</b>
Nintendo has revealed that one in three households in the UK contain a Wii console, while over 11 million people - around...
Microsoft officially announces Mattrick promotion | <b>News</b>
Microsoft has officially announced the promotion of Don Mattrick to president of the Interactive Entertainment division,...
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