Shadow Banking Topology

Tyler Durden's picture

A new paper by the IMF provides much needed insights into the nature of Asset Backed Commercial Paper (ABCP) conduits, which amounted to $1.2 trillion in June 2007, a subset of the broader Commercial Paper shadow asset class (which as Bill Dudley discussed a week ago, hit a peak of $2.3 trillion), and the product's role in funding imbalances (and maturity mismatch) at global banks courtesy of the shadow banking system. However, the most useful observation of the paper's addenda include insights into the global shadow banking system's holdings, as well as its changing composition over time, the collapse of the ABS securitization market whose reincarnation via TALF is critical for preventing the CRE market's implosion in 2012, and lastly a comprehensive overview of the entire shadow banking system topology.

The first chart presents the breakdown of the ~$10 trillion (at its peak) in shadow liabilities. As can be seen, the Repo system, which as Zero Hedge discussed extensively previously, is the primary component of shadow money, accounting for about 25% of the entire shadow banking system.

The collapse of shadow banking and its attempted compensation by boosting traditional monetary aggregates (M1-3) is shown on the next slide. Obviously, the Fed is woefully unprepared to fully compensate for the ongoing contraction in shadow liquidity, especially of the very near-term variety. At over $2 trillion in just CP and Reverse Repo contraction from the peak, the Fed can pump all the liquidity it wants into the monetary system: it will merely slosh around equities and never make its way into anything of actual consumer value (merely speculative capital market gambling).

The utter collapse in ABS products such as ABS CDOs, SIVs, Arbitrage conduits, and others is presented by the next chart. If one were to remove the government-guaranteed attempt to jump start securitization, it becomes clear that the Fed is doomed to failure at reigniting the securitization spark.

The virtual standstill in ABS issuance is seen next: there is no market interest for securitized products. Of course, that could change once CCC bonds start trading at 101, courtesy of the Fed guaranteeing that no risky asset will ever again be impaired.

The key observation is one of the most comprehensive single page topology overviews of the entire shadow banking system. The take home here is the massive leverage applied to any single product (which courtesy of soon to be defunct rating agencies was presented as having AAA or comparable collateral when in fact the underlying assets were total garbage), which ranges anywhere from 7x to infinity. This last leverage category is precisely what the Fed, in its attempt to reincarnate the bubble once again, consequences be damned, is doing its damnedest to make sure comes back. And if investors are stupid enough to fall for the same trick one again, then we all deserve the financial apocalypse that will ensue as a result. Because while in 2007 the ABS collateral pool at least had some more quality assets supporting it, over the past 2 years even these have gotten impaired, courtesy of horrendous asset resource management.

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Anonymous's picture

i would term this as seminal.

orange juice's picture

Not sure if you saw this article yet:


US Federal Reserve officials are stepping up scrutiny of the biggest US banks to ensure the lenders can withstand a reversal of soaring global-asset prices, according to people with knowledge of the matter.

Supervisors are examining whether banks such as JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. have enough capital for the risks they take, how much they know about the strength of their counterparties and whether risk managers have authority to influence bank practices and policies.


Basically they're feeling the govt heat that's coming their way.  With midterm elections soon the govt officials are looking for any and all possible scapegoats that are driving up prices on goods while job creation remains stagnant (at best). 




Anonymous's picture


The Feds may be planning to dump all the toxic garbage on Bank of America

The desperate, cornered criminal rats who own the Federal Reserve Board are now planning to take all their toxic financial waste and dump it on Bank of America and make it the fall guy, according to a CIA source. That is why they have been unable to find a new CEO. However, that is not going to be enough to save the criminals.

Multiple, reliable sources including MI6 and the Chinese government now confirm that the Federal Reserve Board and the Bank of England were using gold-plated tungsten to “back up” their massive selling of gold futures. As the contracts came due for the delivery, the scam was unveiled.

This means that as long as the US remains under the control of fascist gangsters, it will be treated as a pariah state. Unless the Federal Reserve Board control of the United States ends, the United States is expected to be cut off from the international trading system in January. Sources both within the N.W.O. and MI6 and in China say the dollar will fall to under 6 cents by that time. In such an event, the Feds will try to implement martial law and detain millions of US citizens in concentration camps, according to CIA and other sources.

However, if the US returns to a constitutional democratic form of government, their debts will be paid off in gold and huge amounts of money will be invested in rebuilding the US economy. In that event, the US dollar should rise in value.
Meanwhile, the Feds have sent N.W.O. agent Dragi Emseriev (of Macedonian descent carrying a Swiss Passport) to Japan along with fellow Turkish and Bulgarian Turks and possibly 1 Turkish Intelligence Officer in an attempt to sabotage the Japanese economy. They are believed to be trying to cash the 134.5 Billion USD Kennedy bonds seized in Italy this summer. A Bulgarian Turk named Emroullah is possibly carrying the bonds. This group is notorious for running fraudulent Private program games(algos,software,etc.) in Switzerland and is now in Japan so we must stay alert. Some well known Japanese are also part of this but we will keep their names to ourselves for now. They know who they are and we know who they are so we suggest they surrender or face the consequences.

Fish Gone Bad's picture

Just how are 4 guys going to take down the Japanese economy?


Mark Beck's picture

The GSEs look more like toxic central to me.

Mark Beck's picture

I would love to see the FED team in action responsible to price some of the CDOs. As they haggle with the bank's accountants about the appropriate model to use, the conversation deteriorates to;

Well dammit take your best guess.

Then, the fun really starts when they try to get a handle on the potential range of errors contained within their hypothesis, and the realization that the amount of error, combined with leverage, potentially wipes out all of the banks capital. A new suggestion is voiced;

Well dammit take a better guess.

Mark Beck

Anonymous's picture

the fed's botox and silicone policy will crash - it will surely crash....little boy bernanke might rue the day he skipped first grade....punkass bitch....

Anonymous's picture

Indeed. The FED once an object of obscurative beauty is looking like this:

Anonymous's picture

lol....that is an eight bagger...

hungrydweller's picture

That's just worng.  Don't do that again!

faustian bargain's picture

oh. oh my. she went just a little too far.

sohbetme's picture

I like your ideas and thoughts. While chat and sohbet with my friends talking about it.

Anonymous's picture


There are central bankers and their handmaids, and then there is the rest of us on this small planet. Choose sides...


steve from virginia's picture


I wouldn't jump to the conclusion that the Fed is trying to re- inflate anything, rather it is more realistic and is assisting the ABS participants - particularly repo broker- dealers - to cash out. This would illuminate Bernanke's 'pump- and- dump' operation as a spectacular money laundering operation, presuming that shadow banking generates its own credit as described by Steve Keen and others.

Rising asset prices to broker- dealers would provide a venue for them to convert ABS into cash and partially explain shrinking M3 while base money is constant. Cash could be created by open market activities as well as by dollar- denominated swaps and repos with overseas banks in opaque transfers.

Another reason to call yr representative and demand support for Paul's and Grayson's initiative to audit the Fed.


Apocalypse Now's picture

Great comment T-Rex.  What we are seeing is a multi-headed beast and a shell game.  Just like AIG, they will play musical chairs and sacrifice the weakest links for the benefit of their remaining banks (sacrificing pieces on the chess board).  The fed and other franchised CB's in other countries are the king, TBTFs are the queens, and international corporations and politicians round out the rest of the first row, while the middle class and the poor are pawns. 

They will sacrifice many other pieces before allowing themselves to be check mated.  Within this system they have unlimited funds and currently operate with absolutely no oversight.  They have assassinated presidents, politicians, and businesses for more power when their schemes have been threatened.

As we all know they are passing off the losses to tax payers while clothing themselves in royal robes claiming authority based on their exhaulted position and posession being 9/10ths of the law despite a lack of moral authority.  In my opinion, their last position might be to sacrifice the fed for survival of their TBTFs which they could later evolve into another central bank down the road (if populism is strong enough to oust it in its current form).  This has occured a number of times in this country - we have cycled through a number of national and private central banks.

Problem Is's picture

Politicians are the pawns...

We are their playing field, we are the board they trample on.

Problem Is's picture

Another one of those NSA messing with my internet connection, hang up double posts...

Livin' KGB Surveillance American Style...

That is what Sergey Aleynikov tells me anyway...

sgt_doom's picture

I second that -- great comment to the T-Rex.

I believe we can be sure who the last man standing will be: Goldman Sachs, JPMorgan, Morgan Stanley and the oil boys.

Anonymous's picture

While I would agree that, yes, the Fed is assisting (to use a polite term) the ABS brokers, it seems pretty clear to me that their ultimate goal is to restart the F.I.R.E. economy. (Finance, Insurance and Real Estate).

You know, Alan Greenspans' legacy. The flawed system of Financial Engineering over real production.

They want to go back to yesterday. They think they can, too, because they think it works.

Reality is about to hit all of us square in the face, and it's going to be ugly.

Anonymous's picture

If the ABCP commercial paper is a $1.2 Trillion subset of the entire shadow banking system, what's the total of the shadow banking system? I thought it was in the hundreds of Trillions, but I can't find a good reference for that.

Anyone know, or have a reference?


heatbarrier's picture

SIFMA. Look under research and statistics for ABS and MBS. Derivatives is about US$600 trillion but I'm not sure they included them in the "shadow banking system" since banks are their hubs.

Anonymous's picture

Thank you, that was helpful.

I think the $600 Trillion is the standard number for derivatives, as cleared by the BIS. It's in line with the BIS's standard number, and doesn't include the Special Investment Vehicles et. al. of the Shadow Banking System.

And note that non-shadow derivatives size has been growing recently, undeterred by the financial collapse last year.

I've found an excellent article on wikipedia:

The various stats given by different sources are $2 Trillion, $4 Trillion and $6 Trillion. It seems one well published figure in the hundreds of Trillions is at best completely unsubstantiated, and apparently quite wrong.

Bubby BankenStein's picture

Chaz Ponzi would recognize game over.


Psquared's picture

Reverse repos will only happen if the Fed relaxes leverage limits. Repos should also expose the stuff on the Fed's balance sheet as bogus and worth pennies on the dollar.

And what happens when the Fed stops buying MBS's from FNM and FRE next year? Do they think the Chinese will pick up the slack?

Anonymous's picture

Too many complicated names for what is essentialy a junk bond. Too many complicated solutions for what is essentialy a simple solution:no leverage,no money printing,no tbtf,no market interference. That is capitalism. Or we can choose the other way:No more multiple than 10x of the lowest salary. Distribute wealth according to needs and not performance.And that is socialism. What you can't have is millions for the few,and food stamps for the rest(35 million and growing)...............

Fibozachi's picture

Thanks for your highlights TD ... and once again for your 10/25 overview of the PDCF Repo window; fantastic work there.

time123's picture

That is the problem. Credit contraction and substantially reduced money velocity make it hard to achieve sustainable economic growth. But tha is exactly what we need, if we want unemployment to go down, real estate stabilization, and bank balance sheets impaired.



sgt_doom's picture

You are partially right....that is part of the problem.

The real problem is that sustainable economic growth, the way those debt-financed billionaires have been gaming it, is a loser proposition.

And since "they" are continuing to perpetrate the same loser proposition, hard times are ahead.

Only a complete change in planning will create some type of sustainable economy --- as of now, there is no actual American economy!

Anonymous's picture

Last graphic, right hand side under 60 day. One of those classes has the potential to increase dramatically...... Floaters!

heatbarrier's picture

"Shadow" banking system is used by some to advocate a return to banking, a model with 800 years history of instability.

ABS is an important technology if properly used. It holds the key for a gradual evolution away from banking to a more stable financial system, if properly regulated. ABS was contaminated by the role of banks in it but it doesn't need banks. One of the most unfortunate casualties of this crisis may be the death of the ABS technology.

torabora's picture

So the ChiComs buy underwater housing and export their excess population over here?

Problem Is's picture

Tyler... why do you think I am reading ZH at the moment?

I am avoiding homework problem 2:

"If a topological space is Hausdorff, second countable, then it is a topological manifold."

Prove or give a counter example.

So I am sadistically drawn in by the title of your post...


sgt_doom's picture

Thanks, Lord T.D., that topology is a thing of beauty.  My very own hand-drawn map just doesn't look as colorful.

I've been attempting to point people towards the ABCP situation extant, but too many were just looking at the drop-in-the-bucket, the subprime mortgage arena.

Great job, stupendous post, outstanding graphx.

Anonymous's picture

Here's another article to contribute to the discussion. Why do people not realize what is happening?

Anonymous's picture

All trails lead to one source, the name Rothschild. Sold out Pathetic slaves of arrogant and pompous political puppet wolves dressed in? see-through sheepskins of false legitimacy. Tax is extorted immoral theft and no more than a debt slave control mechanism. The fiat money is counterfiet and worthless as is the fake loan of it to the puppet governments. The compounded intrest, Usury used to justify the extorted tax theft is immoral. Nothing but liers, theives and genocide committing evil scum. Thats all I have to say.

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