I don’t mean to be chicken little about the coming recession, but Bill Gross, the largest bond buyer in the US (PIMCO) has just published his January Investment Commentary. He writes about “The Bank Of Shadows” the unregulated banking system born of the Reagan era where reserve requirements are quite lax. Its a truly frightening piece. Here’s a sample:
According to the Bank for International Settlements (BIS), CDS (Credit Default Swaps) totaling $43 trillion were outstanding at year end 2007, more than half the size of the entire asset base of the global banking system. Total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks.
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The withdrawal of deposits from our new age shadow banking system has frightening potential consequences because a thinly capitalized banking system is always at risk relative to its more conservative counterpart. Visualize, as does Chart 1 (above), in crude yet understandable form, today’s shadow system versus that of two decades ago.
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Market based, regulation-lite American style capitalism, seemingly so ascendant after the dot.com madness nearly a decade ago, has met its match with the subprimes and the poorly structured and supervised derivative conduits of today’s markets. Financial innovation will inevitably march forward, if not in distinctly new forms, then into new asset markets and even unexplored continents. For now, however, its current surge is spent. Investment survivors will have to learn to live in a different world, filled with new risks, lower leverage, and at some point, hopefully greater rewards.
I have tried to suggest for the past few weeks that the notion that we can borrow our way out of this problem is ridiculous. Look at this chart of household indebtedness:
This is simply unsustainable. As a country we are going to have to live within our means. Mrs. Clinton was out today proposing the government loan a great deal of money to homeowners to stave off the inevitable foreclosure. This is not a solution, this is a political prank. It was the financial deregulation signed by her husband that allowed Investment Banks and Money Center Banks to merge, from whence the explosion in financial derivitaves sprang. The Clinton’s are not part of the solution, they are part of the problem.
10 responses so far ↓
mike michaels // January 11, 2008 at 9:24 pm |
SCARY SCARY SCARY.
The highly respected Bill Gross doent make words up and he is listened to. Thats what is so scary. See you on the soup line.
mike michaels // January 11, 2008 at 9:26 pm |
Paulson is even gettting real gloomy.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGGmbW5lWBO0&refer=home
Joseph Urla // January 12, 2008 at 9:16 am |
Thank God I found this website. I have been screaming about this stuff. The otc market is totally out of control, with total notional amounts of outstanding trades at roughly $600 trillion by now, and criminally under the radar. Many of the participants don’t even have to be registered financial entities. This is a failure of fiduciary responsibility of the highest order.
Tuesday Could Be Brutal on U.S. & World Markets « Jon Taplin’s Blog // January 21, 2008 at 5:03 pm |
[...] Especially if there is another day of World panic selling like today before New York opens. Bill Gross’s figure of $500 trillion of derivatives (most of that in borrowed money) gives you an idea of the scale of leverage now being applied like [...]
Liar’s Poker « Jon Taplin’s Blog // March 15, 2008 at 9:18 am |
[...] have been chronicling Gross’ warnings for some time here. This is not just about sub prime mortgages. This is about an economy that is [...]
Savage Capitalism « Jon Taplin’s Blog // March 23, 2008 at 2:54 pm |
[...] picture of what is really going on in the Shadow Banking System is beginning to emerge. It makes the coming slump much more troubling than those of the last 50 [...]
Paulson’s Fig Leaf « Jon Taplin’s Blog // March 31, 2008 at 10:13 am |
[...] have long cited Bill Gross’ depiction of the Shadow Banking System as the main culprit in our current meltdown. The ability of a bank like Bear Stearns to use [...]
cedarhilleditor // March 31, 2008 at 9:16 pm |
Let’s not forget that better than 2/3 of House Dems and 3/4 of Senate Dems voted for Gramm-Bliley-Leach. Even if the Slickster had vetoed it, it would have been roundly overridden.
So, don’t just point the finger at Hillary, point it at a bunch of Dems , as well as GOPers, still in Congress today.
Bush Stares Into The Abyss « Jon Taplin’s Blog // July 15, 2008 at 7:25 am |
[...] back in January we warned about the Shadow Banking System , the $500 Trillion of off balance sheet derivatives that would come to haunt America. When this [...]
September 18, 2008 « Rising in Phoenix // September 18, 2008 at 4:22 am |
[...] shadow banking system. Who created this monster? “A picture of what is really going on in the Shadow Banking System is beginning to emerge… To begin with, we never had such large opaque pools of capital and [...]