The Shadow Banking System

Let me first say what I've had to say before. There is only only one general daily newspaper in the United States that covers business properly, and that is the New York Times. The Wall Street Journal does fine, since it's a business newspaper. The Financial Times does well, but it's also not even from the United States. If you go to your quality regional daily like the Los Angeles Times looking for what you need to know you will not find it. You will learn nothing. If you get your financial news on TV, you are in the financial equivalent of the sixth grade, and I would like to sell you some collateralized debt obligations newly backed by the Fed.

Even the NYT will tell you that the barn door is open only after your money horse is gone. But at least it will help you understand how the door got open. This means that YOU, dear reader, are in serious long term financial trouble. No agency in American society cares about your financial stability, and yet you, who do care, are thanks to our pitiful media likely to stay middle-class stupid.

Luckily knowledge springs eternal. The NYT has a good long account of the financial "monster." They have picked up the term "the shadow banking system." Two of many useful moments:

It is a stealth market that relies on trades conducted by phone between Wall Street dealer desks, away from open securities exchanges. How much changes hands or who holds what is ultimately unknown to analysts, investors and regulators.

Credit rating agencies, which banks paid to grade some of the new products, slapped high ratings on many of them, despite having only a loose familiarity with the quality of the assets behind these instruments.

Even the people running Wall Street firms didn’t really understand what they were buying and selling, says Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist of Pequot Capital, a hedge fund.

This is the key: the epistemology is shot, the math is shit. They can't run numbers that come out right. How do you restabilize then?

Another useful moment, on how we got here:

A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.

Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December.

Mr. Gramm, now the vice chairman of UBS, the Swiss investment banking giant, was unavailable for comment. (UBS has recently seen its fortunes hammered by ill-considered derivative investments.)

Gramm was an arch-conservative ally of Newt Gingrich and his merry pranksters, haters of government bordering on the sociopathic. Sometimes gov got in the way of raking in the real money like this. Fun for them, while it lasted.

Gretchen Morgenson has a good piece on the credit insurance markets. In addition to the content, it's a good reminder that we still don't know much about how much gaming is still going on. There is no transparency here, really, just endless buyer beware. How do you get trust back out of this?

Same for Ben Stein, the NYT's best Main Street Manhattan Republican. His piece should be called "Time to Panic." He goes on for a bit about how the real economy hasn't been torpedoed by the financial one - yet. But then he says stuff like this:

The task of the hedge funds is to find a weak spot in the market, and to put so much pressure on it that they can move it down, scare other players into selling (with the endless help of guileless journalists), wreak havoc with the markets’ indexes and then create that much more selling. Once the process starts rolling, it’s shooting fish in a barrel.

Just think of what the short sellers did to Bear Stearns. It’s true that Bear Stearns’s fabled risk management was not up to par in its portfolio. But it’s also true that without the hedge fund heavies of great wealth and great gossip beating them to the ground, Bear would surely have “shlepped it through,” as we say. . . .

This is important for two reasons. One, if market manipulators terrify the banks, lending will slow, and the economy will really falter. It won’t be rumor. It will happen.

Second, as the hedge funds change the stock market into a chamber of horrors, the retirement hopes of tens of millions of Americans will be dashed, and the stock market as a place for sensible Americans to place their money for long-term growth will be destroyed.

Actually, the latter happened a while ago. You never hear it first in the NYT, but you do eventually hear it.

Krugman throws out the same term "shadow banking system" today. He also quotes Clinton's Treasury Secretary Robert Rubin on the quid pro quo of new regulation: "If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks." Krugman goes on to say there's no obvious will or insight behind such a move among Democrats, which we should note is partly the result of the the tireless and triumphant deregulation efforts of Dims like Rubin, who turned economic policy over to Wall Street.

Today's most amazing financial story is buried in Bloomberg's Currency news: "For the first time in 13 years, people who trade currencies say confidence in the markets to determine exchange rates is dwindling." Friends, THIS is news.