The Unspoken, Festering Secret At The Heart Of Shadow Banking: "Self-Securitization" ... With Central Banks

Tyler Durden's picture

By now everyone has heard of securitization: the process whereby banks take risky assets on their books, package, tranche them, and then re-sell them to yield chasing fiduciaries of widows and orphans. The conversion process can be nebulous, usually involving a 20 year-old evil French mastermind working for Goldman, and a billionaire hedge fund manager, who select the worthless securities put into the weakest tranche, just so the abovementioned two parties can short it while misrepresenting their conflicts of interest, and make a boatload of money when the whole securitized structure implodes. The process usually takes place "off balance sheet" via Special Purpose Vehicles so it is completely unregulated, and as such allows massive leverage.

According to many, the hidden leverage embedded in the securitization pipeline is what catalyzed the 2008 near-death experience of the financial markets.

All of this is well-known to most.

What however is certainly not known, because until a few days ago the concept did not technicall exist, is what emerged deep from the bowels of the FSB's 2013 "Global Shadow Banking report", and what is barely even defined anywhere in popular literature, which thus we have defined as the "unspoken, festering secret at the heart of shadow banking."

Presenting self-securitization.

What is "self-securitization"? Go ahead and Google it: there doesn't exist any technical definition of this heretofore unheard of phrase.

Rather the term, conceived by the FSB as a means of making the total size of the $71 trillion shadow banking sector somewhat more palatable, is defined as follows:

Self-securitisation (retained securitisation) is defined as those securitisation transactions done solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All of the securities issued by the Structured Finance Vehicle (SFV) for all tranches are owned by the originating bank and remain on its balance sheet.

At this point alarm bells should be going off. And if they aren't, here is some more color.

The numbers for OFIs presented in sections 2 to 4 of this report include all financial assets of Structured Finance Vehicles (SFVs), regardless of who holds the securitised products. However, in a number of jurisdictions, some of these products are returned back onto the balance sheet of the bank that originally provided the asset to be securitised. This so called self-securitisation, or retained securitisation, is defined as those securitisation transactions done solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All of the securities issued by the SFV for all tranches are owned by the originating bank and remain on the bank’s balance sheet, so that third-party investors do not own any of the securities issued by the SFV. These assets should not be included in the shadow banking figure, as prudential consolidation rules consider them as banks’ own assets and as such subject to consolidated supervision and capital requirements.


...  some of the assets that are currently ‘self-securitised’ by banks may at some point be sold to third parties when financial conditions improve.

Wait a minute: a company is "securitizing" assets.... which it then keeps, but only after it has "obtained funding with a central bank"? What?

Judging by the countries whose shadow bank institutions are the most aggressive participants in "self-securitization", it gets clearer just what is going on here:

While Italy and Spain are clear, why is Australia on this list?

While the large increase in Australian banks’ self-securitisation of residential mortgage-backed securities (RMBS) started in 2008 (i.e. before Basel III was developed), the amount of self-securitisation is expected to stay high going forward as these securities are eligible as collateral for the Reserve Bank of Australia’s Committed Liquidity Facility (CLF). Indeed some banks are gearing up already for the CLF. Given the low level of government debt in Australia, the Australian prudential regulator has adopted elements of the Basel rules that allow banks to count a committed liquidity facility provided by the central banks as part of their Basel III liquidity requirements.

So that very strict Basel III requirements are permissive enough to allow... shadow "banks" to engage in self-securitization with their central bank? Just brilliant.

Finally, what amount of circularly (non) securitized, central-bank backstopped securities are we talking here?

Answer: $1,200,000,000,000.

That is the amount of unlevered notional that shadow (and regular) banks engage in circular check-kiting games with central banks for, and in the process obtaing "funding." As one trading desk explained it:

you take yr worst assets... package up in an spv (which removes em from yr gaap balance sheet) then flip to central bank for cash at modest haircut and boom revenues...

And presto: magic balance sheet clean up and even more magical "revenues."

But wait, there's more (spoiler preview: take the above quote and put in on constant rewind)

Where this mindblowing, circular scheme in which riskless central banks serve as secret sources of incremental bank funding, i.e., free money, gets completely insane, is the realization that these self-securitized assets can also participate in rehypothecation chains. Recall from our exposition yesterday on the permitted leverage resulting from collateral reuse in a repo chain which is fundamentally what shadow banking is all about: unregulated, stratospheric leverage.

We added:

So... three participants result in 4x leverage; four: in roughly 6x, and so on. Of course, these are conservative estimates: in the real, collateral-strapped world, the amount of collateral reuse, and thus the number of participants is orders of magnitude higher. Which means that after just a few turns of rehypothecation, leverage approaches infinity.

Which means that should these same banks that self-securitize with Central Bank X, then proceed to re-use the same security with the same counterparty - i.e., their host central bank, or the Fed of course - then this $1.2 trillion in assets, already carried off-balance sheet with Basel III's blessings, can get 2x, 3x, 5x, 8x, 13x or more turns of leverage on them, as for the shadow bank it is the central bank that is the (up to infinity) levered counterparty. And the central bank, as everyone knows, can always just print money if and when the worthless collateral backing the bank's self securitization ends up worthless.

The implication of this unprecedented shadow banking circle jerk, which could very easily make even the direct wealth transfer resulting from trillions in QE pale by comparison, is so stunning that we leave it up to the reader to come to their own conclusion.

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chunga's picture

That is SO fucked up!


Say What Again's picture

In many ways, this is similar to a nuclear reaction.  One electron (one loan) hits another and releases all this energy (more rehypothecated capital), and continues in an exponential fashion, until things go boom.

"rehypothecation chains" == Uranium 235.

That's why they called it the "Manhattan Project"

It all makes sense now.

johnQpublic's picture

is that why my head exploded after reading this?

Say What Again's picture

Allow me to clear this up for you...

92U235 +0n1 --> 55Cs140+ 37Rb93 +3 0n1 + Energy

Say What Again's picture

What do you think caused that orange glow in the briefcase every time I opened it.  I couldn't show it to the audience because they might have thought we were turning Japanese.

Say What Again's picture

I couldn't show it to John Q Public either.

johnQpublic's picture

That is some fucked-up repugnant shit

Keyser's picture

Careful, he might start reciting Ezeikiel 25:17. 

Say What Again's picture
Mind if I have some of your tasty beverage to wash this down with?
Jack Napier's picture

The last straw is finally taking form. The law of exponents is reaching its inevitable culmination.

Remember Chris Martenson's analogy of the magic exponential water drop in a stadium that doubles in size every minute. It may go hours or days without anyone noticing the tiny puddle, but once they start getting water around their ankles it will be less than 10 minutes to stampede for the door before the stadium is filled. We are on that cusp now. Time is not your friend in this game. Don't waste it.

And don't get suckered in by BitCoin or leveraged assets. Tangible assets will be king before the decade is done.

Say What Again's picture

Exponential growth....

I love this old guy

He spells it out in ways that even a central banker could understand, but I doubt they care.

Stackers's picture

So I want to create a security backed by my collection of Wayne Newton signed vinyl record albums and post it with the Federal Reserve for a one billion dollar loan (they are worth 10x's that at least) and I get to keep my Wayne Newton albums ? Win Win !!!!

HardAssets's picture

These guys make it so complicated now. (Smoke screen.)

When they get their global neo-feudalism in place, they'll just make commands & decrees and get whatever they want from the serfs. No 'money', 'markets' or 'accounting' required.

CH1's picture

The system is DOOMED.

quintago's picture

"self securitization"

Ha!! The last time I heard this term was at the peak of 2007. This was happening wrt mortgage lenders who were packaging things up so quickly, that they resorted to this practice so they could re-hypothecate their own shit loans into additional warehouse lines, compounding their ability to borrow in advance of their ability to sell.

Of course, when the credit markets collapsed, it compounded their problems. In this case, it is even worse because it's no longer the shite mortgage lenders like CW, but their "counterparties" up the chain who are involved in these shenanigans.

Harlequin001's picture

I don't see the problem. We've been doing it for years and it hasn't blown up yet has it?

Chill baby chill, and oh, er, go buy some gold...

NoDebt's picture

BitCoin just hit $450.

I think it's time to take some profits.  In anything you have profits to realize.  You are now experiencing the parabolic phase of the market.

Meanwhile, on ground level.... the "real" economy isn't doing so well.  Perhaps even recessionary.

I have been here twice in the last decade.  This is exactly what it felt like near the top.  You hear that?  That's the mythical bell they don't ring at the top.

GetZeeGold's picture





BitCoin just hit $450. I think it's time to take some profits.


That's just what they would be expecting us to do. Don't fall for it.


RSloane's picture

Almost. You are backing up your collection of Wayne Newton signed vinyl record albums with unmatched socks from your sock drawer.

Radical Marijuana's picture

I enjoyed your insightful comments, Say What Again. Your name could hardly be more appropriate handle to comment on this excellent Zero Hedge article! I see it as the Bizarro Mirror Worlds being on hinges, that can be turned in on each other, so that their reflections reflect back on each other an increasing number of times. Self-reference in the form of self-securitization! Of course, this is all based on its fundamental source, which the legalized counterfeiting of the public money supply out of nothing, as debts, by private banks. After that fundamental fraud was achieved by the international banksters throughout the Anglo-American (Zionist) empire, which was able to dominate most of the rest of the world, it automatically runs away with itself, indeed, by a kind of chain reaction of frauds, which is best understood as its exponential growth driving overshoot in a nutshell ...

Kirk2NCC1701's picture

Jack, seeing that you go by the fine name of "Napier"*, I'd imagine you know plenty about exponential functions.  :-)

* John Napier...

joe90's picture

Ahh memories of a well worn "Napierian" log book and slide rule.

Oracle of Kypseli's picture

@ Jack Napier

<<<<< but once they start getting water around their ankles it will be less than 10 minutes to stampede for the door before the stadium is filled. >>>>

But if this doubling continues for several more minutes, the waters of the whole Pacific ocean will be needed.

Run for cover and accumulate food, ammunition gold and silver. Water will be plenty and toilet paper will be reduntant 


Eeyores Enigma's picture


You gots to be pretty limber to do that.

dick cheneys ghost's picture

If I could lick my own balls, I'd never leave the house

11b40's picture

Old joke.

"why does a dog lick his balls?"


Because he can.

Payable on Death's picture

jqp, your comment is the real reason I read ZH.

NoDebt's picture

Hear that?  That's the sound of bankers LAUGHING at us.  

I'm thinking that it IS about time to roll the guillotines.  Obviously SOMEBODY blessed this new ponzi variant.  Who?  Oh yeah, other bankers.

Bangin7GramRocks's picture

It's like when a phony phone caller keeps calling the puppet head TV host a jizz face and dipshit, then finally needs to tell the empty suit that he is being pranked. The bankers must be flabbergasted that they can pull any scheme, make up any bullshit and hardly any Americans even care. Goldman could restart the slave trade and I don't think it would result in an indictment!

Al Huxley's picture

Yeah, I've said the same thing - I bet they have internal office contests to see who can get away with the most flagrant, egregious lie, breach of public trust, criminally fraudulent activity, etc...  Of course by now it's gotten so far out of hand that the fun must be running out - break the law, rape the public enough times and the thrill and novelty must wear off.

NoDebt's picture

I bet it never gets old for them.

Eternal Complainer's picture

This is why they'll need to up the ante going forward and add erotic asphyxiation and speedballs to the mix.

chemystical's picture


Next they'll tell us, "Yeah, as a matter of fact, one of the ingredients in matzo is the blood of gentile children who we kidnap and then slaughter every Easter.  Those old "myths" were spot on; our massive PR machine (publishing, television, edukation, gov't) put a stop to them and demonised all who doubt us...kinda like everything else we do."

"On a related note, do you think it's a cohencidence that the abortion mill industry and pro-abortion groups are founded, funded, and promoted by us?"


Jafo's picture

The guys that dreamed this scheme up are a sure bet to receive this years John Law award for Advancing the Science of Banking at the Bankers Ball

booboo's picture

Call it what you will but outside the banking industry it would have no value what so ever. That alone should tell you that we are dealing with some magic fairy dust believing mother fuckers and give you a hint to what the value of a dollar of currency will be worth 5 years hence.

Simplifiedfrisbee's picture

During the rehypothecation chain, are the assets used as collateral tangible or intangible?

noless's picture

Intangible, although i guess that you could pretend that somewhere deep deep down there was a claim to something real..

starfcker's picture

uhhh... goldman did restart the slave trade. it's called most favored nation trading status with china. you are correct. no indictments

MiltonFriedmansNightmare's picture

I'll lay you 10:1 odds that whomever dreamt this one up is a 33rd degree Freemason; purely Luciferian.

Element's picture

Yeah fine, just don't forget the govt and decades of prime ministers, and all the past cabinets and congresses that allowed it and all the public servants and 'advisory' parasites and lawyers who enabled it.



Yes_Questions's picture



a former office wife (Mrs. Questions undisclosed the first) thought it was your soul.

had something to do with that band aid on your neck.


and you rock tonight btw.

salvadordaly's picture


miro1a's picture

Seriously? Uranium gets hit by netron releasing 3 neutrons, energy, Rubidium and some cesium.  Sheesh.

Say What Again's picture

Yes, I'm Serious.

Sincerely,   Mr. Schrödinger

DCFusor's picture

Finally, someone who speaks English!

HardAssets's picture

<delete>   off topic, sorry

Cadavre's picture

That looks like the empirical formula for instant water.

You know ...

Empty a packet of "Instant Water" into a glass. Fill the glass with water, and voile, INSTANT WATER!

I believe self-securitization is the only available structure to rehypotecate counterfeit currency before it's actually printed.

Figured out what the shutdown was all about. Lamestream cadres of Krugman (the guy that gave America's Shabby Sheik Wal Mart Elite the prospect of a War On Space Aliens as medicine for the dead broke dead beat US of A's mafia economy) clones were blabbing out their well boned and sloppy honed kazoos that the shutdown will hair cut a half point off GDP.

Why is that significant. Well the White Shoe Boy K-Street Kiddie Brothel Queens on CSPAN and our new FED chair have another double faked stat providing some voodoo logic thingamabob for another one of them  "what's new" arguments to continue easing.

Lest we forget. "Soylent Green is People". But a banker's flanks make some mighty tender and tasty USDA premium fillets. That why people breed bankers and politicos, sweet meat for the spit.