Oh Noes It's The "Shadow" Banking System
It doesn't involve ninjas, but the "shadow" banking system is an important part of the US economy, it's the companies that loan money but aren't themselves banks. The loans they make aren't kept on the companies books, they're securitized and resold as bonds. White whiteboard and magic marker, Marketplace Senior Editor Paddy Hirsch argues this shadow banking system deserves it own bailout.
Shadow banking [Marketplace]
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Comments:
Maybe if Bruce had a more respectable haircut (and some clothes) he could get a rate cheaper than 9-10%!
:)
Can we have the guy from the UPS commercials explain this?
Never trusted Moe. Joe and Curly should have ran the shadow-bank.
Nyuck nyuck nyuck, my @ss.
Great explanation. My concern is that the governments plan to create an artificial market for these bonds. This is spectacularly short sighted. They plan to convince investors to put their money into these toxic bonds, thereby taking money away from other investment options. They're trying to get MORE NEW MONEY into these toxic assets -- this is malinvestment.
Paddy Hirsch and John Oliver... Two Brits that are just delightful to listen to.
If shadow banking was 60% of our financial lending industry wouldn't traditional banking be the shadow?
They should make a movie about this. Someone like Niam Leeson would have to take down the bank because they use your money ... to murder.
Couldn't the gov cut out the middle man an loan out $??
Then if those investors want something to invest in, can't they just invest into bonds?
@sam-i-am: I've recently seen a movie's preview. The story is exactly the same, as you describe. Only I don't remember movie's title.
@Trai_Dep: What, no love for Larry or Shepmp?
(Don't hit me, I'm only up to Volume 5 of the Three Stooges Collection.)
On topic, though, is the reason we got this huge "Shadow banking" system the same reason we have so much toxic debt?
@Keavy_Rain: Short answer*: yes.
The shadow banking system both allowed crazy bet-fueled brokers to swarm like locusts up and down our financial system, and as a bonus, exerted tremendous pressure for non-scheming entities (traditional banks, Fanny & Freddie...) to join the zany, sky's-the-limit returns that these unregulated (sorry, self-regulated) entities enjoyed.
Until they didn't.
* Thanks to Phil Gramm, the patron saint of global financial apocalypse.
@t-r0y: i believe the big issue is that many investors are already tied up in these vehicles, thereby reducing the amount of money that can be invested altogether. by creating a market, the government hopes to inject value back into these investments & restore liquidity. the desired result is that investors will be able to buy/sell the bonds at a fair price, which should free up money to invest elsewhere.
where we are now, people are holding $100 bonds that people won't buy for 10¢. realistically, those bonds are worth more than 10¢, but no one knows exactly how much. so, the sellers won't sell, the buyers won't buy & the people who price the market have no way to peg value.
it's quite similar to the housing market that it's based on. to an extent it's caused by the same issue. buyers, sellers, appraisers & investors all have unrealistic ideas of value b/c the market is so volatile right now.
the big issue i have with it concerns that "safety net" discussed in the video. we're talking about an unregulated industry - what responsibility does the government have stepping in for people trading outside of the traditional, regulated marketplace? a large part of the reason "nationwide" (& others) can afford to give "bruce" a better rate is b/c they don't have the expense of meeting the same government regulations as banks.
i guess what i'm saying is NO INTERVENTION WITHOUT GOVERNMENT REGULATION. require these institutions to follow the same rulebook before you expend capital trying to save their asses. those that agree can participate. those that don't can march their ass down to bankruptcy court.
@mac-phisto: I totally agree, but on the other hand, these businesses know that the govenment can't afford to LET them fail. Just look at AIG. They continutally pull ridiculous business acts, giving out bonuses and having huge expensive corporate parties with OUR money because the government really can't do anything to stop them without risking them failing.
It's a really tough situation since these businesses, who miffed everything up to begin with, now have the power to say "Help us or we'll go out of business and ruin the economy irrevocably."
And, none of us want that.
@Trai_Dep: At the risk of entering an argument about merits of government regulation ... If these business were self-regulated, as you say, then they should be allowed to self-destruct. Painful? Yes. Innocents hurt? Maybe. The governments obligation to fix? Most definitely NOT.
@Duffin: understandable, but the way i look at it, this is a carrot. obtaining the carrot is easy - you agree to intense governmental scrutiny from here on in. you don't want the scrutiny? no problem. we'll be happy to issue a letter to your voting shareholders & investors expressing our concern with management's ability to govern the institution.
blackmail? perhaps. but completely worthwhile, imho.
All banking is shadow banking. Banks don't have to have 100% reserves backing the money they lend out. It's more like 10%. They can create money out of thin air just by lending it.
@t-r0y: Kind of, in a laboratory setting fashion. Or, after a nice meal, a snifter of cognac and a nice cigar, musing, "I wonder how cataclysmic is would have been if the global financial system melted down for longer than the one-half day that it did." Followed by a "Gosh, living in animal skins and eating raw meat while being pursued by roving gangs of feral street urchins with Uzis might be a nominally unpleasant!"
I don't think anyone rationally wants to live - or see others live - that scenario in reality, though.
(and, yeah: hyperbole for comic effect but our freaking commercial paper markets froze for a half-day. This was a REALLY big deal. Let alone the couple trillion in market cap evaporated in that 2-3 day period: POOF!)
No one likes this. The cold fury I have for those that did this can't be measured. But it has to be done. We can't be nine-year-olds refusing to do anything about this.
@Trai_Dep: Oh, and if your Q is directed towards the Shadow Banks, and if they should be allowed to fail?
YES. Hell the Hell yes.
Sorry if I misunderstood that part of your question. The other parts of my response were regards getting our mainstream financial entities operational. Then paid back what we're owed. Then I'd like to see them split into Not Too Big To Fail entities. Then regulated so that they can't go all Las Vegas with our money.
Then set free to do was they will, within those guidelines. The government is always the manager of last resort.
How does this correlate to the MBS (mortgage backed securities) that the banks did? Or is it basically one in the same, only difference is the loan originator isn't a bank?
@Skankingmike: If you've ever been outside you should know that your own shadow can be much "taller" than yourself!
There are hundreds of thousands, if not millions, of people who would buy these things, but they don't want to sell them off in small pieces, they want enormous investors to pick them up wholesale.
It doesn't count as "no market" when you don't actually bother LOOKING for a market. Sort of like how businesses claim there "aren't enough workers" when we have a 10%+ unemployment rate.
Actually, banks are required to have enough money on-hand to cover deposits. When a bank reaches a critically low reserve (which only the Treasury really knows), they're taken over by the feds.
The bank is free to borrow additional capital from other sources, and they're free to lend that however they like, but they must keep enough cash-on-hand to meet FDIC-covered accounts.
@wiley14:
Many of these pseudo-banks are simply unregulated investment 'banks.' Much of the money that banks have been lending for years has come from these 'banks.'
The short answer is that yes, they're often one-and-the-same. The difference is just in whether or not the debtor is an individual or an institution.
@wiley14: I'm pretty sure your 2nd sentence is right. When the banks should have said, "we can't lend more money, because it might affect our stability," and then either allow for less growth, or have the Fed do something (raise interest or something? I don't pretend to know if that would really have been good or not), or whatever...they decided to get very heavy into areas of the business they shouldn't have.
@RvLeshrac: If that's true, that banks are required to have enough money to cover deposits, then why do we need an FDIC?
Also, I'd recommend reading about fractional-reserve banking:
[en.wikipedia.org]
Yay! Another Whiteboard lesson! Now with ninja references.
Seriously though, thanks to this recession, and these Whiteboard session, I've re-learned a lot about the economy. Looking forward for the next video.