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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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Sat, 11/21/2009 - 23:04 | Link to Comment Anonymous
Sat, 11/21/2009 - 23:06 | Link to Comment orange juice
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). 




Sun, 11/22/2009 - 11:09 | Link to Comment Anonymous
Sun, 11/22/2009 - 13:22 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

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


Sun, 11/22/2009 - 15:36 | Link to Comment Mark Beck
Mark Beck's picture

The GSEs look more like toxic central to me.

Sun, 11/22/2009 - 15:50 | Link to Comment Mark Beck
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

Sat, 11/21/2009 - 23:14 | Link to Comment Anonymous
Sat, 11/21/2009 - 23:31 | Link to Comment Anonymous
Sat, 11/21/2009 - 23:55 | Link to Comment Anonymous
Sun, 11/22/2009 - 01:03 | Link to Comment hungrydweller
hungrydweller's picture

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

Sun, 11/22/2009 - 03:59 | Link to Comment faustian bargain
faustian bargain's picture

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

Sat, 11/06/2010 - 18:01 | Link to Comment sohbetme
sohbetme's picture

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

Sat, 11/21/2009 - 23:48 | Link to Comment Anonymous
Sun, 11/22/2009 - 00:05 | Link to Comment steve from virginia
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.


Sun, 11/22/2009 - 01:28 | Link to Comment Apocalypse Now
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.

Sun, 11/22/2009 - 14:35 | Link to Comment Problem Is
Problem Is's picture

Politicians are the pawns...

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

Sun, 11/22/2009 - 14:34 | Link to Comment Problem Is
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...

Sun, 11/22/2009 - 16:31 | Link to Comment sgt_doom
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.

Sun, 11/22/2009 - 01:30 | Link to Comment Anonymous
Sun, 11/22/2009 - 00:06 | Link to Comment Anonymous
Sun, 11/22/2009 - 10:02 | Link to Comment heatbarrier
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.

Sun, 11/22/2009 - 14:30 | Link to Comment Anonymous
Sun, 11/22/2009 - 00:09 | Link to Comment Bubby BankenStein
Bubby BankenStein's picture

Chaz Ponzi would recognize game over.


Sun, 11/22/2009 - 00:22 | Link to Comment Psquared
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?

Sun, 11/22/2009 - 02:21 | Link to Comment Anonymous
Sun, 11/22/2009 - 03:53 | Link to Comment Fibozachi
Fibozachi's picture

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

Sun, 11/22/2009 - 07:48 | Link to Comment time123
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.



Sun, 11/22/2009 - 16:39 | Link to Comment sgt_doom
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!

Sun, 11/22/2009 - 10:27 | Link to Comment Anonymous
Sun, 11/22/2009 - 16:35 | Link to Comment heatbarrier
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.

Sun, 11/22/2009 - 12:18 | Link to Comment torabora
torabora's picture

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

Sun, 11/22/2009 - 13:09 | Link to Comment Problem Is
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...


Sun, 11/22/2009 - 18:50 | Link to Comment jm
Sun, 11/22/2009 - 16:30 | Link to Comment sgt_doom
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.

Mon, 11/23/2009 - 00:28 | Link to Comment Anonymous
Mon, 11/23/2009 - 12:30 | Link to Comment Anonymous
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