Shadow banks may control about 25 to 30 percent of the word’s financial system. They may be about 50 percent of all banking assets in the world. I say may in both of those sentences because it is hard to tell how big this financial sector is. The United States may [...]]]>
Shadow banks may control about 25 to 30 percent of the word’s financial system. They may be about 50 percent of all banking assets in the world. I say may in both of those sentences because it is hard to tell how big this financial sector is. The United States may make up about 40 to 50 percent of all shadow banking. However, shadow banking is spread throughout the world.
Shadow banks are not as regulated as regular banks. They also go about gathering capital for lending in a different way than regular banks. They often securitize assets such as commercial and residential mortgages, corporate bonds, consumer loan packages, and the like. Shadow banks also find other assets and derivatives of those assets to back up their securitized debt instruments. Many use US Treasury bills and other sovereign debt (the debt instruments of many nations and their equivalent of Treasury bills, for example) to act as risk mitigation and collateral in the “loan” making process.
Shadow banks also rely on something called the repurchase (repo) markets to liquefy debt and other assets in the short run – even though most of these assets are long run ones, like mortgages and long term bonds. Simply put, repos are a way to quickly pay off short term debts and also to get some of the debt off the books of the shadow banks either overnight or even for longer periods.
Ok, this is all very complicated. Frankly, for the shadow banks that complexity has protected them over the years. It has also led to some very big crashes because the people who should have understood what was going on did not. That includes many governments and even some of the leadership of the shadow banks themselves.
So what we have is a large massive part of the world financial system basing its capital on sliced and diced assets with sometimes questionable risk calculations and even sometimes questionable valuations of the assets. How much might it be? How does $40 trillion dollars sound?
The valuation of the assets could be a real problem if there is a war with Iran that gets out of hand and leads to significant damage to oil and gas fields and facilities in the Gulf. If energy prices spike and spike again for the short run, the market could bear that. If the oil and gas prices spike and stay way up in many markets then we have a much bigger problem.
One of the mechanisms of asset destruction in the shadow banking system can be a huge increase in energy prices followed by recessions or worse in many places, including in the already fragile EU, China and the US. Other commodity and goods prices will be affected as well.
Many shadow bank assets are heavily leveraged. Does this sound familiar? Leveraged shadow bank assets took down the US and part of the world economy when the housing market went bust in 2007-2008.
Many shadow banks are heavily into derivatives and even derivatives of derivatives. If the underlying assets of the derivatives collapse due to falling economies then the derivatives collapse along with them.
It is quite possible that under some war and conflict scenarios attached to scenarios of oil and gas prices that the economic impacts of a protracted and quite damaging war with Iran could be magnified well beyond the normal way this is considered.
Shadow banking is huge. It needs to be considered in calculations about military conflict. The losses could be gigantic on the financial markets.
Some shadow banks might benefit from war if some of the sharpies in the shadow banks have already set up derivatives and options as hedges betting on a war. They cash in if the war happens.
Either way some people in the shadow banks could lose. Some could win.
The regular folks lose. The top guns in the shadow banks will drive their Ferraris. The regular people may end up selling apples.
You see, a war with Iran now would be very different than if it happened in 1979. Back then the shadow banking system was tiny. Derivative markets were tiny compared to what they are now. The leverage and risk inherent in sometimes unstable sliced and diced assets in the tens of trillions was just not there.
Is this something to think about? I surely believe so. I am going to look much more deeply into this situation and hope to have more to write about it to clarify and educate, hopefully before possibly catastrophic events take place.
Policy conclusion: take great care and do your homework on the realities of the risks within the world economy before stepping off the cliff toward a potentially very costly war.
To read more about shadow banking try:
]]>In an interview with Al-Monitor‘s Laura Rozen, the Obama Administration’s former top Pentagon mideast advisor, Colin Kahl, explains why he isn’t writing off Israel’s latest threats about Iran from key Israeli decision-makers Benjamin Netanyahu and Ehud Barak as mere saber-rattling:
Al-Monitor: Why are the arguments that it is [...]]]>
In an interview with Al-Monitor‘s Laura Rozen, the Obama Administration’s former top Pentagon mideast advisor, Colin Kahl, explains why he isn’t writing off Israel’s latest threats about Iran from key Israeli decision-makers Benjamin Netanyahu and Ehud Barak as mere saber-rattling:
Al-Monitor: Why are the arguments that it is not just saber-rattling more compelling?
Kahl: First, US and European sanctions have nearly maxed out. So what additional benefit does the saber-rattling produce here? Second, the P5+1 process is on hold for the moment and a major breakthrough on the accelerated timeline envisioned by the Israelis is unlikely. Not to mention the fact that some Israeli decision- makers seem skeptical of the benefits of diplomacy, period. Third, despite the saber-rattling, the Iranians don’t fear an Israeli strike (although they might fear a US strike). So Tehran isn’t likely to make a concession in the near-term just because of an Israeli threat.
Finally, the Israelis would seem to know that the prospect of a US strike before the [November 6 US presidential] election is very low, regardless of their posture. This is not primarily for political reasons, as some suggest, but because Iran is not likely to cross US red lines this year. So the prospect of an Israeli attack is unlikely to drive Obama to war before November.
So, I think it is more likely Israeli leaders are preparing the Israeli public for a strike, and creating a narrative for the international community that diplomacy and sanctions have failed and thus Israel has no choice.
Kahl, a Georgetown Professor who is advising the Obama campaign’s foreign policy team, summarized his position about using the “military option” on Iran this June in a report he co-authored for the Washington-based think tank, the Center for a New American Security (CNAS):
A nuclear-armed Iran would pose a significant challenge to U.S. and Israeli interests and would increase the prospects for regional conflict. Nevertheless, a preventive military strike against Iran’s nuclear program by either the United States or Israel at this time is not the best option, and rushing to war would risk making the threat worse.
“Although Israel’s leaders frequently lament all the Iran ‘chitchat,’ make no mistake: It’s they who are fueling the discussion,” the Associated Press notes in a report on “Israel plunged into unprecedented debate on Iran war.”
The United States’ “red line” on Iran (an Iranian nuclear weapon), which differs from Israel’s “red line” (Iranian nuclear weapon capability), is one reason why the U.S. remains reluctant to give in to the Israeli pressure campaign. From the CNAS report:
Until Iran appears poised to weaponize its nuclear capability, however, the preferable option is to continue the current combination of pressure and diplomacy. All options, including preventive military action, should remain on the table, but policymakers should recognize that the potential risks and costs associated with using force are high. Military action should remain a last resort, which should be contemplated only by the United States and only under stringent conditions.
Kahl tells Rozen that the two Israeli leaders are convinced that they have to rely on themselves when it comes to dealing with Iran — another Israeli-pushed narrative that’s being reinforced by U.S.-based Israel advocates like Jennifer Rubin — and while that may be the juiciest part of the interview, the following stood out for me (emphasis mine):
]]>Al-Monitor: It’s worth noting these arguments are being made primarily in the Israeli media, as opposed to the international media — The New York Times, CNN, etc. as in the past. This is an argument being made to the Israeli public.
Kahl: It’s very interesting… One explanation may be that it is an intentional effort to condition the Israeli public. Israel appears to be going through the Iraq dynamic we in the United States went through in 2002-2003 [ahead of the March 2003 US invasion of Iraq]. And as Time’s Tony Karon noted the other day, there are only so many times you can tell the Israeli public that they face a “grave and gathering threat of annihilation” before Israeli politicians, for the sake of their credibility at home and abroad, have no choice but to act.