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.