The $30 Trillion "Problem" At The Heart Of Shadow Banking - A Teaser

Tyler Durden's picture

Frequent readers know about Zero Hedge's fascination with the murky world of "shadow banking" a topic we have been covering since late 2009, which can best be summarized as follows: the near-infinite fungibility of electronic credit-money equivalents within the infinitely interconnected modern financial system. The recent escalation in the discovery of massive broker capital deficiency courtesy of the MF Global bankruptcy as a result of a collapse in one of the numerous shadow banking funding pathways, namely rehypothecation, is just the very tip of the iceberg. Much more is coming, as shadow banking continues to be unwound day after day (we will post an update of the Q3 data later in the day). In the meantime, we go back to that one certain Citi report from September 5, 2008 which explained just how broken the financial system was that according to some, the realization, and not some ulterior deathwish, is what sparked the run on Lehman, and subsequently money market, ABCP, repos, synthetics, structured products, securities lenders, AIG, and everything else that the Fed had to step in with a roughly $30 trillion bail out. Why was it $30 trillion? Simple: because at its heart, the "shadow banking" system has a $30+ trillion diabolic funding mechanism, where when one cuts out all the fancy nomenclature, acronyms, abbreviations, and jargon, the bottom line is that there are increasingly less and less hard assets (i.e., cash-flow generating), funding ever more and more liabilities, and where one's assets are another's liabilities in a "fractional reserve" recursive loop, and which in that shadowy sub-center of modern banking - London (because New York is just for regulatory diversion)- the loop can go on literally in perpetuity.

Said otherwise, when one or more of the funding pathways in this system break, the whole backbone of what maintains modern finance can and will collapse, as was explained so vividly back in September 2008 by Citi. While we will go into far greater depth on this topic soon, we want to leave readers with a teaser schematic that explains the core relationships betweem the key actors and the primary driver of global economic "growth" over the past 3 decades - the flow of synthetic liquidity. It took the Fed every weapon in its caliber to prevent this chart from imploding (in its real world manifestations of course) in late 2008. It will take the global central banking cartel all that and much more to halt the second such implosion. Which is coming.

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maxmad's picture

$30 Trillion, Bitchez!

greased up deaf guy's picture

i wish the phucknuts that be would just let the system reset already. my popcorn is getting stale.

Ahmeexnal's picture

Get melamine popcorn.  No best-by date.

Eally Ucked's picture

I highly recomend Harveys turnover, it's always crispy, rain, fog whatever it is. Probably is good after 1 year and delivers fruity vitamins to your system, as good as popcorn + vitamins.

trav7777's picture

all that debt, needing to grow, needing to be serviced and nobody can do it.

MsCreant's picture

It is stunning anyone is still trying.


Service=Pay the monthly.

Service=Politicains in kneepads trying to keep bankers in the money so that the gravy train does not stop.

Service=Serve us, debt slaves. Work your job, take home your check, give it to us, all for shit we have convinced you that you need which you really don't.

Service=Serve vices. All your habits are belong to us. American Idol, NASCAR, football, booze, drugs, video games, whores, serve all your vices because it's all you got to live for.

Service=Serve US.

Cheesy Bastard's picture

I wasn't cheating, honey.  I was merely rehypothecating your dowry.

economics1996's picture

Can anyone pronounce that fucking word?

Oh regional Indian's picture

Ahhhhh.....classic. Can't decide if that is s joke or for realz!

Shadow banking is merely a euphamism for Black Money. Seriously, just replace "Shadow Banking" with "Black Money".

Suddenly all this reads better, puts all the suited criminals in their true light and since we all know that the Black Money game is far huger than the white one, gives us a sense of scope and danger of the Black Money System.

Seriously folks, labels are important.

The 30 Trillion problem at the heart of the Black Money System.



bentaxle's picture

Yep, you need Mary Poppins.

centerline's picture

Ahh, a serial junker who doesn't understand debt dynamics.  Funny.

Bring the Gold's picture

Great stuff MsCreant I especially liked "All your habits are belong to us". Very apropos in a list that includes video games.

Pegasus Muse's picture

OT.  Fast Money Interview:  James West of the Midas Letter

He gets some serious licks in.  US interests manipulating the paper gold market.  4000 contracts sold in the wee hours last night.  Fiat money going to zero value.  There will always be a buyer of physical gold.   Melissa Lee cut him off abruptly because he KO’ed the entire Fast Money BS-er crew.


dick cheneys ghost's picture

lots of US Banks in "the City".............more than i would have thought.....


"There are 110 banks in the City owned by France and Germany which could be caught up by the tax. Most of the 1,117 foreign banks and financial services firms in the capital are US-owned."

kylebassfan's picture

@ Pegasus: If you look at the transcript of the clip, any references to "fiat" currencies have been removed. Ditto the entire section where James talks about vested interests who shorted 4000 gold futures contracts during HK trading hours.  Amazing!

Bring the Gold's picture

That is wild. Where are our resident anti-gold shills and or apologists for fiat manipulation? Hmm, please justify this NON-conspiracy. *chortle*

disabledvet's picture

actually you have (accidentally) just stumbled on to a far greater problem than "the shadow banking system." Where the system breaks down is when lending growth seizes up. In the US it's growing about 2 percent a year which is at best...ahem...ANEMIC. In Europe i guarantee it's negative. If loan growth turns sharply negative...and so far we have the perfect storm of policies to create just such a perfectly disastrous outcome in Europe...then that would be the precursor to a start of a massive bank run as "i don't trust your country with my money" is writ real.

Ghordius's picture

already happened - some 50% of lending from US banks & funds to EU banks & funds was retracted in the last months

collateral damage: the FED "realized" the Europeans could sell off the US assets in the same measure (they were partly funded by the USD loans)

hence the direct lending in USD through the CBs

TimmyM's picture

Dehypothecation Bitchez

Mauibrad's picture

@TimmyM Have you not coined a new word?  I believe you have.  You might go enter it into the Urban Dictionary.  De-hypothecation.  Indeed, that's what it will be.  BTW, for those wanting to know how to pronounce it, I figure the syllables break down like this:  De-hypo-the-ca-tion.

LowProfile's picture

Dehypothecation:  (Verb)  To cash out of one's financial assets and exchange them for real assets.  See also (BEANS, BULLETZ N' BULLION, BITCHEZ).

Pythaes's picture

Dehypothecation?swab mouth offshore swapfx short covering bund hedge ABACUS Bitchez aka jello banking___ tagline once 

Taint Boil's picture



“That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.”

Aldous Huxley

Shizzmoney's picture

Srsly.  Fucked if it happens around Dec 2012 too.  People will lose their shit.

Pythaes's picture

no... the ones that will freak out have no wealth... those that freak out will say ...well HOW could the canadian dollar be an impact to me.

Pythaes's picture

completely ANONYMOUS... my house was hoarded with y2k in 1997 supplies form my uncle... bubbles move."brilliant guy that got crazy yet worked for GS...moved mbs...cdo2...for years since inception...the house of cards will fall.. but a new house will be built".....on quicksand...but whatever...crouds think strange things... he knew meriwether and kinsella and a ...your...fn...eyes

Teamtc321's picture

Eyes wide open now. It's time to call the ball.

Pretty simple really I think, shitty yes but an old saying I like is this, if it smells like shit, taste like shit, then just shove it out into the sunlight.

Pretty soon the shit that is in the sunlight, if it looks, taste and smells like shit, let the sunlight burn on it for a bit.   

ParaZite's picture

As long as Bernanke has a printing press, does it really matter how fucking high the number is, if the world goes along with the game?

To a Skewes' number and beyond!

Calmyourself's picture

If the world goes along...  It will and it wants too, like a beaten wife willing and able to jump o n the cop's back handcuffing her abuser.  Most people will take the blue pill without a doubt and that is why this will take much longer.  Forget finance concentrate on psychology if your interest is timing.

DarkestPhoenix's picture

I haven't seen the Tylers post this link, but in the most recent AC 2011 Session, Kyle Bass kind of touched upon this rehypothaeklajklation stuff starting at 42:00. 

JW n FL's picture



what do you mean?

Kyle LOVES the Comex.. and he Loves how his Gold was spread out all over the place.. and he really does trust in Price controling the deliverable amounts of Gold!

$80 Billion Trading in Paper Gold.

$2.7 Billion in physical, before Kyle took his $1 Billion which ='s $1.7 Billion v $80 Billion!

Dont worry the price of Gold will drop as Credit Markets Freeze.. as Martial Law is enacted.. but the real question people skip when yapping about the price (of Paper) Gold going down forth coming because of the European Crash.. is where or who is selling real physical at that lower price?

Dont get me wrong! I will be looking for those people dumping Physical Gold or Silver! and buying..

But I dont think that there will be a retail or reasonable amount of physical metal trading at low prices during Martial Law Time Periods.

Jus sayin!

Travis you wanna try and take a wack?

DarkestPhoenix's picture

Who will be selling?  Sovereigns...for many reasons, not the least of which will be to keep prices down AND get cash they need for liquidity in the fiat system they absolutely believe in.  Worse comes to worse, they'll just try to steal it back from those stupid enough not to dump it over the side of their boat.  Government-sponsored brokers (and run of the mill idiots) will still be offloading, IMHO.  But, if not....that's why I have 40% of my desired position already.

Thomas's picture

Tyler posted it. I was #302. It's now over 60,000. Zero Hedge's public service announcements work.

DormRoom's picture

the diagram looks like a squid. It's Goldman Sachs.

prains's picture

It's not what the diagram looks like but what the motivation is to blow a $30 trillion dollar line of smoke

pavman's picture

It looks like a whale to me.  What you need to do is shed the bottom 20%, that will make things better.  Then, shed the next 20% ad naseum until there's no customers, and thus no profit, left.  Oh wait, wrong decade...its a squid.

johny2's picture

The biggest Pyramid in all human and alien civilisation history....Keyneses Pyramid.

Tunga's picture

This is not the virgin you're looking for.

maxw3st's picture

Great Chart. I want the T-Shirt!

Rainman's picture

Drink up.....Aint' no party like a counterparty !!

Manthong's picture

I need a break from all this heartless and self-serving financial conniving.

I think I’ll go do some good and donate a toy for some poor impoverished child.

Happy Holidays.

Rainman's picture

Charming idea. It's all about the little kiddies at Xmas.

yabyum's picture

Time to give a slug to the local foodbank and health clinic. Time to give a kid a toy. They may take our money, skull fuck our future, but they can not take our humanity, were fucking better than that.

crghill's picture

Like a East coast counterparty cuz a East coast counterparty don't stop! All the banksters in the house say YEAH....YEAH.