According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.
The Hidden Government Guarantee that Props Up the Shadow Banking System
According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding. But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?
Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims.Perotti writes....
The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked.Talk about moral hazard. This is a financial Armageddon not just waiting to be happen but potentially being engineered by the TBTF-TBTJ banks since it would lead to an unprecedented windfall and further consolidation of banking.
The Web of Debt
The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives
Ellen Brown
1 comment:
Ellen's article is good but it contains too much Wall Street technical jargon. Any chance of anyone - Mike Norman perhaps - doing a version that Mr & Mrs Average can understand?
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