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Europe Opens $80 Trillion Shadow Banking Pandora's Box: Will Seek To Collapse Repo "Collateral Chains"
In what may be the most important story of the day, or maybe year, for a world in which there already is an $11 trillion shortfall in high-quality collateral (and declining every day courtesy of Ben's monetization of Treasury paper) so needed to support the deposit-free liability structures of the shadow banking system (as most recently explained here), Bloomberg has just reported that Europe may begin a crackdown on that most important credit money conduit: the $80 trillion+ global shadow banking system, by effectively collapsing collateral chains, and by making wanton asset rehypothecation a thing of the past, permitted only with express prior permission, which obviously will never come: who in their right mind would allow a bank to repledge an asset which may be lost as part of the counterparty carnage should said bank pull a Lehman. The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.
From Bloomberg:
Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades as part of European Union moves to bolster market stability and rein in shadow banking.
The European Commission is weighing whether firms should have to obtain formal consent from their clients before being allowed to reuse assets to back other trades, according to a document obtained by Bloomberg News. The consent would be enshrined in a “contractual agreement” between the parties.
The handing over of collateral is an integral part of repurchase agreements, or repos -- one of the activities under review by global regulators as part of their efforts to regulate shadow banking. The reuse of clients’ assets poses a potential threat to financial stability should one of a chain of firms that handled the securities go bankrupt, according to the document prepared by commission officials and dated May 15. Uncertainty about who holds an asset can fuel panic in times of market stress, according to the paper.
“Complex” chains of collateral can make it difficult for investors to “identify who owns what, where risk is concentrated and who is exposed to whom,” according to the document. “This has consequences for transparency and financial stability.”
Under the plans being weighed by the commission, banks and brokers holding securities for clients wouldn’t be allowed to reuse the assets for trading on their own account -- speculation on the markets aimed solely at boosting their own revenues, according to the document.
...
The Financial Stability Board has estimated that the global shadow-banking system was worth $67 trillion in 2011, with EU-based activities accounting for about $31 trillion.
Here's the kicker: collateral chains collapse on their own when confidence and faith in the financial system is evapoarting. This is usually manifested in soaring variation margin, and demand for delivery of collateral (which having been pledged at 10 or more different places just doesn't actually exist).
In other words, the last thing Europe needs is to force the aftereffect of a plunge in systemic confidence to be imposed upon the market participants! And yet, it is doing just that.
And for a comparable virtualization of repo pathways in the US, here is a chart showing the key relationships as of 2009. For the modern iteration, just update $30 trillion with $80 trillion (including custodial "assets" State Street, BoNY and JPM). This is $80 trillion in custodial credit money created via repo. Just in the US.
In other words, just as we have been warning for the past four years, Europe may pull the switch on its own electric chair. Among others, read:
- "The Scramble For US Safety, As Europe Imploded, Offset The $357 Billion Plunge In Q3 Shadow Banking"
- "Shadow Rehypothecation, Infinite Leverage, And Why Breaking The Tyranny Of Ignorance Is The Only Solution"
- "Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else".
Finally, read Kyle Bass' own thoughts on the matter: Presenting Kyle Bass' Analysis On Shortening Collateral Chains; Or The Gradual Evisceration Of Shadow Banking
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Ask Martin Armstrong.
He can fix it in 30 days.
Armstrong is a Shyster. The more I research the facts he puts out, the more I realize what a liar he is. The latest debunking is him claiming that the Chinese used paper money successfully for 100's of years because they agreed to. Wrong. They used paper reciepts for gold, silk and other items as paper money. It was redeemable. Then it was abused and made non-redeemable. Then it collapsed and took etheir economy with it. Add that one to your list of Armstrong nonsense.
Can someone give me an example of non-monetized U.S. Bonds ?
Wow, who woulda thunk it. Europe is actually being the responsible party while the U.S. lives in a cloud of denial and pretend. End of the day, somebody has to clean up this mess and I don't care where the process begins. That said, I'm sure this is somehow blocked.
They be talkin' rollin dat rock away an resurrecting dat feller with the loaves and fishes cuz he goin be workin overtime.
Don't think dats a good idea cuz dat crazy feller on de corner say when dat dead feller git up, all hell be comin wid em.
I best be gittin outta town, fo sure.
nothing to see here. just as under current regime a new disclosure will be buried in the account agreement without account holder being able to easily understand fully the ramifications........ Or if everyone is required to disclose it and obtain clients' separate and exlicit sign off then still no impact as a client who needs services provided by some financial institution cannot get the same services elsewhere without having to sign off rehypothecation permission.......
No problemo, I'll just sell my gold holdings to make the call for real assets
What's the number for the sham-wow guy?
Dude!.....
When you have the world's biggest house of cards, that is of course the moment to test its soundness via a Hollywood soundstage wind machine. Bravo, Europe!
Does the concept of "ownership" mean anything anymore? Does private property have any sense? When governments began to tax property the entire concept of ownership was destroyed.
I have a serious question and I will appreciate any answer or answers:
Q: Will this lead to bank failures and thus Cyrus style bail-ins????
Depends on the timescale. Look at what the UK tories have offered as a referdendum for membership of the EU - a vote in 2017 when they will not be in office.
Answer: yes and yes
Confidence and faith is gone but they can pretend a while longer.
If you don't hold it or occupy it, you don't own it. You may need to defend it eventually.
yup, euro's about 5 years behind us and having their CORZINE moment...but nothing will happen until their PAULSON moment & he/she meets KEYSER SOSA SCHAUBLE...worse than what happened in London cuz its in slo mo and no one knows what to do..."sickening" is the least of it.
Zulauf: Bubble will burst in 2 years:
Full analysis:
http://homment.com/Zulauf-bubble
The economy would do fantastic if they had written down the debt and reduced the bank profits.
We are top heavy. The ship is sinking. The bottom floors are not able to carry the top. Carrying huge amounts of concentrated wealth is not sustainable for the mass population and their collective labor efforts.
Per new law: Australian govt is seizing all funds from citizens' bank accounts that have been "inactive" for 3 years . http://www.news.com.au/money/money-matters/queensland-pensioner-emerged-...
Canada also has such a law. I know people whose accounts were seized years ago under this and it’s only 1 year in Canada.
Isn't this why you don't leave valuables in a safety deposit box. A crook or a banker might take them without your permission.
@walkure - thanks!
I am hoarding cash, gold and silver - physically holding it. I have tried to warn my family but they do not want to listen to me when I suggest hoarding cash and stacking on physical. This is going to be an EPIC disaster!!!
No one is listening!!!
Another question : what will happen to people with mortage debt for example? will the interest rates on payments spike?
From Ted Butler this evening;
In the last paragraph of the January 5 Weekly Review; I made reference to something I was working on that I preferred not to disclose at that time. I’d like to do so now and ask for your assistance. A little over a year ago, a subscriber sent me a constructive suggestion for how to force the CFTC to do their job and end the silver manipulation. Since I had promised myself that I would never leave any stone unturned in the attempt to end the manipulation, I followed Jeff’s suggestion, although I admit to doing so with as close to zero expectation for success as was possible. The suggestion was to complain to the Government Accountability Office (GAO) about the CFTC. I filed a complaint on their web site hotline
www.gao.gov and promptly forgot about the matter. After all, over the years I had complained to every government agency possible and never heard back from anyone.In December, I got a follow up call from the GAO that caught me so much by surprise that I didn’t know why they were calling me at first. They requested additional information (which I provided) and I have had several conference calls with the agency concerning my allegations of malfeasance by the CFTC in matters related to the silver manipulation. It was only after the first phone call from the agency that I took the time to find out what this agency was all about and I suggest you do the same.
I thought I knew it as the General Accounting Office, but the name was changed in 2004. What I also learned was that this was a unique government agency, separate and distinct from all the other federal agencies, including the CFTC. The GAO reports only to Congress and exists to ensure that all the other federal agencies stay on the up and up. In a practical sense, the GAO is the Inspector General of all the federal agencies. As such (and you can verify this on your own), this agency seems tailor-made to investigate why the CFTC won’t do its job when it comes to the silver manipulation.
Generally, the GAO audits and investigates as directed by law or congressional mandate, ideally at the request of the leadership of the congressional committee that has requisite jurisdiction. However, they can take some cases on their own initiative and that is the approach by which things have advanced to date. I took this approach and stayed quiet about it because I was concerned that as soon as JPMorgan learned of this initiative, they would call in their political favors and make sure any review by the GAO of the CFTC was squashed. That may still turn out to be the case, but that fear is not enough so as to not try at all.
According to my read on the situation, the GAO is interested in pursuing the matter, but a request to investigate from the right committee or representative would seal the deal. I can tell you that in my conversations with them to date, this agency sounds fiercely independent and interested in doing the right thing. What is the right thing in my view? The right thing would be an impartial and objective review for why the CFTC won’t conclude a more than 4.5 year formal silver investigation or make any comment about the unusually large price takedowns that are unique to silver. You know the CFTC would not tolerate such price volatility in any other market, only silver. Can you imagine the uproar if it was the stock market that fell 10% in thin Sunday evening dealings?
I believe that an impartial review of the CFTC by the GAO could end the silver manipulation. At the very least, it would be most welcome to hear from an objective government source which is not tainted by the conflict of having denied a silver manipulation has existed on countless past occasions over decades. If you agree, here’s what I would ask you to do. First, please check and see if your elected representatives are on any of the following committees that have jurisdiction over the CFTC. Don’t let that stop you from contacting the appropriate chairmen directly or your own representatives even if they are not on the appropriate committees.
http://financialservices.house.gov/about/members.htm
http://democrats.agriculture.house.gov/singlepages.aspx?NewsID=34&LSBID=23%7C69
http://www.ag.senate.gov/about
http://www.finance.senate.gov/about/subcommittees/#energy (energy, natural resources and infrastructure)
If you decide to contact your representatives, email me (info@butlerresearch.com
) and I will send you my email exchange with the GAO which you can then forward to your elected officials. Each representative has an email system that you must work through that favors actual constituents. In this case email is better than snail mail, as it can take a month to screen correspondence through the postal system. And please follow up by phone and email.
All you have to do is forward my email correspondence to the GAO (which I will send to you upon your request) with a cover note saying that the GAO is considering investigating the CFTC’s handling of the silver market and you are asking that your senator or congressman to also ask the GAO to investigate. Please ask that your representative ask the committee chairman to request that the GAO investigate the CFTC on the issue of the never-ending silver investigation and the agency’s refusal to comment on the unusual price takedowns in silver. It will take a few minutes but it just might make all the difference. The idea is to get a fair and impartial investigation, something that the CFTC is not capable of.
I wouldn’t ask you to write to the CFTC any longer, as it is clear that they are not about to lift a finger to end the manipulation. I don’t regret doing so in the past, but the time has long passed to appeal to the CFTC. The GAO prides itself on its integrity and impartiality and I think they are up to the task of getting to the bottom of this. Your involvement may make the difference. But please keep it to the unresolved silver investigation and the lack of regulatory reaction to the extreme price takedowns.
In closing, please remember these are not trivial matters and you are appealing to those at the highest levels of our country whose job it is to deal with such important issues. I believe that makes it a noble quest. And it sure beats suffering silently.
thanks for posting gloomy
That's incredible. These criminals will gladly do their crimes in full public view but nevertheless we must FORCE them to chooose to do that or turn back. Full exposure is necessary to ruin confidence in "crime as business as usual"
This is huger than huge....if it goes through...the EU has a way of getting bogged down in red tape and bs that slows everything to a crawl...this said if this does even begin to go through it will cause the mother of all crashes and gold/silver will go through the roof as the only asset that has no counter party risk. It will probably result in a spike in the $US as a safe haven but that may not last when the damage starts to be done to the markets and it becomes clear that no one - not even the great B - can stop this....this is the beginning of the Great Depression of the 21st century......if the EU moves forward....or maybe even if they just keep talking about it....or maybe even if the don't immediately repudiate their statements.......surprised that the BIS let them say this...maybe they have bought enough gold now........all imho....
could germany's gold repatriation taking 7 years have something to do with the immediacy of this action, like the new york fed just pissed off germany enough for rehypothecating their gold 30 times that germany decided to screw the squid though the backdoor?
Obviously Germany’s in on it: they had to show the people they made a demand yet they don’t complain about how long this delivery will take.
You really have to be impressed with the banks. The system is so filled with fraud and hypothication that bailouts are a virtual guarentee with any size loss (as one counterparty can bring down the entire system)...cough....cough...AIG.
When problems are in the trillions and a man's paypacket is in the hundreds for most of the population, you begin to wonder what imposing austerity on the little person will actually achieve.
The whole shadow banking system reminds me of a upermarket pyramid of cans, the only difference being that the top cans are too high to touch (our rlite) and the bottom cans if removed will collapse the pyramid.
Either way we are doomed.
Everyone who reads ZeroHedge and has an investment portfolio managed by an independent third party (meaning not an employee) should be aware that in 99% of cases the investments you think you own are actually held in "beneficial trust" in "street name". That means not your name. The possibility that the financial institution you are dealing with will have to draw collateralize "your" securities for their own purposes, even though they are "held" in individual investment accounts might seem remote, and generally it is, but in a market collapse situation institutional self preservation takes over quicker than you can say Global MF.
If you've read this far and you want to verify for yourself that this is the case look at your portfolio statement. If you happen to hold some municipal bonds which identifies the issuer make an independent effort to contact that issuer and ask them who they hold on record as the owner of the bond cusip. I guarantee it will not be you. It will either be the issuing broker or a large block purchaser, most likely the people who "sold" you the bond.
Then go read the very fine print of your investment agreement with whomever manages your portfolio and look for absolute guarantees of ownership. You won't find any.
if you read the really fine print most of these managed investments have a paragraph that says your money may not actually be invested where you asked it to be invested but that your investment will be redeemed as if it was invested where you wanted it to be invested regardless of where it is actually invested.
WOW, now that’s a twist. I read the fine print, that’s not in mine. Guaranteed ownership isn’t either, however.
That is probably the best and most important post I've seen on Zero Hedge ever. Informative and snarky, just how I like it. No wonder ZH is the best website on the planet! Rock ON! Fire Angel
"Europe may pull the switch on its own electric chair." - genius