Reposting by popular demand, and because
everyone has to understand the embedded risks in this market, courtesy
of the shadow banking system.
In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?"
in which we explained how it was not only the repo market, but the far
broader and massively unregulated shadow banking system in Europe that
was becoming thoroughly unhinged, and was manifesting itself in a
complete "lock up in interbank liquidity" and which, we
speculated, is pressuring the Bundesbank, which is well aware of what is
going on behind the scenes, to slowly back away from what will soon be
an "apocalyptic" event (not our words... read on).
Why was this
prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute,
but also why the MF Global bankruptcy, much more than merely a one-off
instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is
a symptom of two things: i) the lax London-based unregulated and
unsupervised system which has allowed such unprecedented, leveraged
monsters as AIG, Lehman and now as it turns out MF Global, to flourish
until they end up imploding and threatening the world's entire financial
system, and ii) an implicit construct embedded within the shadow
banking model which permitted the heaping of leverage upon leverage upon
leverage, probably more so than any structured finance product in the
past (up to and including synthetic CDO cubeds), and certainly on par
with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin.
Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things, and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.
Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things, and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.
But first, a detour to London...
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