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55 Trillion Reasons Why Bank Of New York And State Street Better Not Get Any Ideas From China

Tyler Durden's picture




 

While everyone knows the direct consequence of China's tinkering with collateral rules last night led to the biggest Chinese stock market crash in years, not many understand what caused this. In a nutshell, what China did was severely curb its shadow banking industry, when China’s securities clearing house said it raised the quality threshold for corporate bonds qualifying as collateral for repurchase agreements, or repos, which are short-term loans with maturities spanning from overnight to 182 days. And since the  proceeds of such repo deals are usually used to purchase stocks, suddenly a major source of "dry powder" for Chinese stock buying was violently and unexpectedly yanked away.

As those who are familiar with the US shadow banking industry are aware, this is precisely the very much unregulated lending pathway that froze up in the aftermath of the Lehman collapse, and which the Fed has been warning for years, is the most likely locus of the next financial crisis. Putting China's action into numbers, Shenyin Wanguo Securities analyst Kang Chen calculated this collateral adjustment would disqualify some 1.25 trillion yuan (or $202 billion) in corporate bonds as repo collateral, or 60% of all outstanding corporate bonds listed on China’s two stock exchanges.

This may sound huge but it actually is quite tiny, especially if one looks at it in the context of the market cap loss on the Shanghai Composite overnight. What is far more curious is that China would proactively pursue the same kind of action that the US and all western banks are terrified of: clogging up a key shadow banking conduit in the form of well-functioning repos.

So what would a comparable action look like in the US? For the answer we go to the two biggest players in the US repo market, those legacy asset custodians who perform asset transformation by matching assets held by Client X with assets demanded by Client Y on a rented, or repo, or better yet, rehypothecated basis: State Street and Bank of New York.

Just how big is the total asset pool of repoable securities as represented by America's two custodian banks? The answer: shown on the chart below.

One thing to note: when pundits discuss China's shadow banking system, unlike in western nations where this relates more fo the method and tenor of funding (as well as including the traditional risk, maturity and credit transformations), such as "unsecured overnight" in China shadow banking usually refers to the source of funds, not so much whether repo or other shadow conduits are employed. But both go directly to the most important aspect of the modern hyper-financialized economy: leverage.

In any event, if China managed to lead to the biggest crash of its market since 2009 when it halted a tiny leverage pathway which amounted to just $200 billion, imagine what would happen if - for whatever reason - BoNY and/or State Street decided to cut off some of their $55 trillion in custody assets, which in a time of ZIRP, effectively doulble as virtually free "dry powder" for anyone who wants to use them.

In short: let's hope that America's two venerable custody banks don't get any ideas from China and certainly don't decide, any time in the near future, to slam the shadow banking system shut - a system whose "assets" at just these two banks are about 3 times greater than the market cap of the S&P500.

Source: STT 10-K, BK 10-K

 

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Tue, 12/09/2014 - 16:01 | 5533852 Deathrips
Deathrips's picture

Release the Crack-in. Not to be confused with its little brother the Kracken!

 

Timber!

 

RIPS

Tue, 12/09/2014 - 16:04 | 5533921 DetectiveStern
DetectiveStern's picture

The clients of those assets under custody decide whether their holdings can be loaned so the real figure could be a lot lower.

Tue, 12/09/2014 - 16:09 | 5533941 NoDebt
NoDebt's picture

"let's hope that America's two venerable custody banks don't get any ideas from China and certainly don't decide, any time in the near future, to slam the shadow banking system shut"

Wait, I'm confused.  In China it was the government that shut down a small slice of the repo-able debt instruments.  Why would BONY or State Street do it to themselves?  I have a feeling I missed something here.

Tue, 12/09/2014 - 16:16 | 5533965 Dr. Engali
Dr. Engali's picture

Counter party fears are a bitch when the margin calls start rolling in. This garbage has been re hypothecated so many times nobody knows who owns what. Even if they do know what they own, they don't know where it's at.

Tue, 12/09/2014 - 17:58 | 5534348 SAT 800
SAT 800's picture

Do you know where your money market fund is tonight ?  No; you don't; which is a really good reason not to regard them as a "safe alternative"; for your retirement plan.

Tue, 12/09/2014 - 18:13 | 5534409 1984
1984's picture

Counterparty fears?  Ha ha ha.  Puleaze!  Whatever fear there was has been thoroughly allayed since 2008.   As it's been demonstrated again and again, the taxpayers will be there to backstop them.  Whatever these banks do is completely risk free.

Tue, 12/09/2014 - 16:17 | 5533968 ZH Snob
ZH Snob's picture

very true, no debt.  in america the banks run the government, unlike china where the government runs everything.

Tue, 12/09/2014 - 16:22 | 5533988 Panem et Circus
Panem et Circus's picture

You're kidding right? A bank will always would never, repeat ALWAYS NEVER, rehypothecate your shit without your express consent!

Tue, 12/09/2014 - 16:45 | 5534066 DetectiveStern
DetectiveStern's picture

Maybe but you're gonna struggle to explain where your stocks have gone if they don't come back off loan and a client could easily fuck off elsewhere.

 

BNY aren't smart enough to hide a white sheep in a field full of white sheep.

Tue, 12/09/2014 - 18:01 | 5534367 SAT 800
SAT 800's picture

And on  the other hand; we see that without the Banks making any executive decision; the mass mind, if it turns bearish, can collapse this crucial source of Stawk Market funding, all by it self. Fear is contagious, and falling prices are always self-fulfilling prophecies.

Tue, 12/09/2014 - 18:04 | 5534375 SAT 800
SAT 800's picture

responding to "Detective Stern".

Tue, 12/09/2014 - 16:46 | 5534072 Ruffmuff
Ruffmuff's picture

Give the chiners a break. It takes years to establish a great ponzi plan.

Maybe they'll be bag holders of all the plastic crap in a millions of storage bins, like misfit toys.

Tue, 12/09/2014 - 15:53 | 5533858 Belrev
Belrev's picture
The Fed will propose 1%-4.5% capital surcharges for major banks

This story is developing. Please check back for further updates.

 

http://www.cnbc.com/id/102183368

Tue, 12/09/2014 - 15:57 | 5533884 buzzsaw99
buzzsaw99's picture

The framework for these charges would be phased in beginning January 2016, through January 2019...

Just talk. They will never be implemented.

Tue, 12/09/2014 - 15:57 | 5533887 Belrev
Belrev's picture

The Federal Reserve will propose risk-based surcharges for major banks.

These surcharges would include eight top-tier banks with $50 billion or more in consolidated assets. The framework for these charges would be phased in beginning January 2016, through January 2019.

Fed officials identified the banks as JP Morgan, Bank of New York, Citi, Bank of America, Goldman Sachs, Morgan Stanley, State Street, and Wells Fargo.

Tue, 12/09/2014 - 16:04 | 5533920 ebworthen
ebworthen's picture

And the Treasury will give those banks all the money they want at the back door for 0.01% in perpetuity to lend out to us sheeples at 4.5%-20% while they charge us to hold our "money".

Tue, 12/09/2014 - 17:50 | 5534317 SAT 800
SAT 800's picture

They'll be famous amongst historians as the regulatory activity that was too little, too late. The Great Crash will come before they implement any of this "windown dressing"; and you may also be right that  the way, or manner, in which these are ultimately attempted will make them the equal of "never implemented".

Tue, 12/09/2014 - 15:53 | 5533864 goldhedge
goldhedge's picture

Bring it on.

<-Gets popcorn

Tue, 12/09/2014 - 15:55 | 5533876 highly debtful
highly debtful's picture

I'm glad the author didn't bother to mention Europe in all this. I don't even want to know what we have lurking in a dark corner. 

Tue, 12/09/2014 - 16:06 | 5533914 NoDebt
NoDebt's picture

You're still dealing with 2008 stuff.  We fixed all that (by suspending mark-to-market accounting rules and placing it in the basement where it will never be seen again) and proceeded to create all new repo-able debt instruments on top of that.

You really have to admire our ingenuity.  We created a whole new Europe worth of debt in only 5 years.  We are just THAT DAMNED GOOD!

Tue, 12/09/2014 - 16:22 | 5533983 highly debtful
highly debtful's picture

NoDebt, I was wondering about that recently. You seem convinced that they not only have succeeded in replacing the concept of mark-to-market with their make-believe economy, but that they will be able to continue to do so. Had you told me this post 2008, I admit I would have laughed in your face, but the past six years have humbled me somewhat. But still, I cannot imagine that they can keep fooling everyone all of the time for years to come. Once confidence is out the window...

And when you say in jest We are just THAT DAMNED GOOD!, I'm inclined to answer in all seriousness that it is indeed no mean feat to keep up such a charade for so long. 

Tue, 12/09/2014 - 17:07 | 5534146 Ruffmuff
Ruffmuff's picture

It's really no different than usual. The guy down the street has a house and thinks it's worth 350k and no one will pay 200 for it.

It's the grand Illusion, and we are all it. But keep it on the downlow so no one else notices it. So ssshhhhh..... iiiiiitttt.

Everyone thinks they are worth something when in reality we ain't worth much. JUmp on and enjoy the ride. Or jump off, over think it and get yo ass stomped into the ground.

Sometimes progress needs a little fastasy or maybe some ectasy. Whichever is available. And don't forget to wipe.

Tue, 12/09/2014 - 15:57 | 5533880 Wait What
Wait What's picture

tick, tock, tick, tock, mutherfuckers

Tue, 12/09/2014 - 16:10 | 5533899 noben
noben's picture

Say the guys with assets on MLK and Main Streets.

The Haves and the Have Naught.  The Haves and the Been Had.  This can't and won't go on forever.

p.s. Are you Junkers bankster shills or just fucking retarded?

Tue, 12/09/2014 - 15:57 | 5533888 buzzsaw99
buzzsaw99's picture

rigged on the way up, rigged on the way down. mostly up, but you get the point.

Tue, 12/09/2014 - 15:58 | 5533894 ebworthen
ebworthen's picture

You mean you can't turn lead into Gold!?!?

Tue, 12/09/2014 - 16:05 | 5533922 headhunt
headhunt's picture

You can but there is that risk of 10 to 20...

Tue, 12/09/2014 - 16:12 | 5533949 buzzsaw99
buzzsaw99's picture

actually you can but the process is cost prohibitive.

Tue, 12/09/2014 - 16:15 | 5533963 Beowulf55
Beowulf55's picture

Just depends on how much gold you want to spend for bullets.

Tue, 12/09/2014 - 16:00 | 5533905 SethDealer
SethDealer's picture

ho lee fuk

Tue, 12/09/2014 - 16:04 | 5533919 FreeNewEnergy
FreeNewEnergy's picture

Long impaled (or beheaded, take your pick) bankers.

Nail guns work pretty well, too.

Tue, 12/09/2014 - 16:10 | 5533943 alexmark2013
Tue, 12/09/2014 - 16:13 | 5533950 mattgallis
mattgallis's picture

Uh, securities lending in the US markets is backed with cash or treasury collateral... Not junk bonds or bernanke beard clippings like ZH is implying here.

zzzzzzzzzzzzzzzzz

 

Tue, 12/09/2014 - 17:53 | 5534328 Tyler Durden
Tyler Durden's picture

Pop quiz: what is the total amount of TSYs and cash outstanding?

Tue, 12/09/2014 - 18:14 | 5534411 motorollin
motorollin's picture

It's a helluva lot less than $55 trillion.

Tue, 12/09/2014 - 23:30 | 5535315 Livermore Legend
Livermore Legend's picture

Now you're talking my book......

"Cash Outstanding" = US Bills and Currency in Circulation....

The Answer is an Amount that Guarantees that Hyperinflation is Impossible......And makes Crystal Clear what the Outcome will Be.... 

As I said, Trillions, Not Billions, Will Be Permanently Lost....

Fri, 12/12/2014 - 14:17 | 5545193 mattgallis
mattgallis's picture

It's not 55 trillion but you're also assuming custodians are lending all of their client assets to 3rd parties.

 

Tue, 12/09/2014 - 21:24 | 5534992 TheReplacement
TheReplacement's picture

I used to know a Matt Gallis.  He was a total douche.

Tue, 12/09/2014 - 16:14 | 5533952 Inthemix96
Inthemix96's picture

This gets easier the more you know folks.

These cunts have 55 Trillion ways of seperating you from what you slaved your life over, the money changing fucking cunts.  You know all you worked for folks?  These fucking slimy fucking never done a manual days graft in their lives bastards want it.  They want it all.

The cunts couldnt polish your shoes, but they believe thanks to outright finacial criminality they is going to get yours backed by the laws they wrote, and passed in your name.  And they think not just people like me, but people like you will step aside and allow it.

Money for nothing and the fruits of the land for free?

Not this time shirts and ties.  Come and take it.  This will create a problem when the value of your worth is taken into account you cunts.

Fucking prove it.

Hehehehehe.

Bring it on cunts.....

:-)

Tue, 12/09/2014 - 16:42 | 5534053 Inthemix96
Inthemix96's picture

It didnt have to be like this did it you cunts?

Come with me, and lets put this right, as you caused it.

You are below the dog shit on a shoe.  Lower than skin on a snakes belly.

I really honestly hope it was worth it you fucking bastard dirty cunts.

I suspect not though.

Should have listened to your mothers you idiot cunts.  And you have been warned, have you not?

Oh well, thats fucking life, isnt it?

;-)

Tue, 12/09/2014 - 16:19 | 5533974 Al Huxley
Al Huxley's picture

Until some Genghis Khan/Attilla the Hun style motherfucker comes charging out of the steppes and starts hanging these fuckers by their nuts, there's no point speculating on anything in the banking sector other than how much they'll pay themselves.  Being a banker in the modern world means never having to say your sorry.

Tue, 12/09/2014 - 17:06 | 5534139 wendigo
wendigo's picture

Woman I used to know dreamed of hanging a man by his nuts. That's why I used to know her. 

Tue, 12/09/2014 - 16:27 | 5534001 disabledvet
disabledvet's picture

So General Motors goes bankrupt but gets a bailout while the bond holders get nothing. That says to me "you'll have to make it (meaning solvency) up on volume" which indeed General Motors is now doing.

This will cause a Generalized Price Decline in Motors. What those three engines are used four (4 cylinder gas, 4 cylinder turbo gas, 4 cylinder turbo diesel) is a good question. What is a certainty is that they will be giving them away.

since battery prices are also collapsing while storage and output is also storage that sounds bullish on "your home as a peaking plant for electricity" also known as a generator.

Base load will run the grid. Everything else will be pretty much...free.

Tue, 12/09/2014 - 16:38 | 5534034 69BIGDOG69
69BIGDOG69's picture

The US banks themselves would not limit repos on those assets held in custody because doing the repos is a source of revenue for the banks.  After all, is the banks' allegiance to the integrity of the financial system or to their own profits?  The Chinese banks did not take the initiative on improving the quality of repo collateral; their regulators forced them to do it.  Is there any reason to think that US regulators would make such a move on BoNY and State Street?

Tue, 12/09/2014 - 16:45 | 5534065 ghostzapper
ghostzapper's picture

Please reproduce this article in a format and level of complexity that even a CNBC employee and member of Congress could comprehend.  We need to try and understand what is really taking place.

Sincerely,

James Cramer and Senator Schumer

Tue, 12/09/2014 - 22:11 | 5535135 Wild Theories
Wild Theories's picture

not possible

your political and media figureheads were bred and selected for stupidity, intellect works against being a good goon.

Tue, 12/09/2014 - 17:08 | 5534145 Spectre
Spectre's picture

Whether it's BNY, State Street, JPM or BOFA I don't give a rat's ass.  I just hope somewhere there is a 10X Lehman brewing that is on the verge of implosion

Wed, 12/10/2014 - 11:17 | 5536407 Vin
Vin's picture

In the US, the clearing banks don't get to decide those things.  They are just functionaries that perform the matching required by its customers on both sides of the trade.

Therefore, they cannot make the kind of decisions indicated in this article. 

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