"In the aftermath of the "rehypothecation"
analysis exposing the quantum differences between the US and the UK, where
the former at least tries to put some breaks on "fractional reserve" synthetic
liquidity creation by Prime Brokers (which these days would be virtually anyone)
while the latter believes that virtually boundless risk is a welcome thing,
there has been a barrage of inquiries seeking further clarification of the
nuances of shadow banking, a topic Zero Hedge has covered since July
of 2010 (for much more see here) and which
we will update on tomorrow for the latest Flow of Funds report (spoiler alert:
in Q3 US shadow banking declined by at least $300 billion, a trend started at
the credit bubble peak, over $6 trillion higher).
In order to bring some clarity to the matter we present two of the seminal pieces on the topic: first, fro the IMF: "The (sizable) Role of Rehypothecation in the Shadow Banking System" and then from one of the best scholars of shadow banking, Gary Gorton, "Haircuts." We will let readers digest the wealth of information contained in these two pieces on their own, however, we will point out the two key messages: on one hand we get a definitive explanation of why not NY but London is true hub of financial engineering and infinite leverage (recall that the UK is in fact the most levered nation on a GDP basis in the world when one takes into account all outstanding debt, not just sovereign - a fact well known to S&P and explaining why the UK will be the last to be downgraded as this would bring attention to the last domino in the chain) as follows: "Mathematically, the cumulative ‘collateral creation’ can be infinite in the United Kingdom"..."
at http://www.zerohedge.com/news/shadow-rehypothecation-infinte-leverage-and-why-breaking-tyrrany-ignorance-only-solution
In order to bring some clarity to the matter we present two of the seminal pieces on the topic: first, fro the IMF: "The (sizable) Role of Rehypothecation in the Shadow Banking System" and then from one of the best scholars of shadow banking, Gary Gorton, "Haircuts." We will let readers digest the wealth of information contained in these two pieces on their own, however, we will point out the two key messages: on one hand we get a definitive explanation of why not NY but London is true hub of financial engineering and infinite leverage (recall that the UK is in fact the most levered nation on a GDP basis in the world when one takes into account all outstanding debt, not just sovereign - a fact well known to S&P and explaining why the UK will be the last to be downgraded as this would bring attention to the last domino in the chain) as follows: "Mathematically, the cumulative ‘collateral creation’ can be infinite in the United Kingdom"..."
at http://www.zerohedge.com/news/shadow-rehypothecation-infinte-leverage-and-why-breaking-tyrrany-ignorance-only-solution
