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What’s sometime referred to as ‘shadow bankers’ have been running the economy and drafting US domestic economic policy since Trump took office. ‘Shadow’ banks include such financial institutions as investment banks, private equity firms, hedge funds, insurance companies, finance companies, asset management companies, etc. They are outside the traditional commercial banking system (e.g. Chase, Bank of America, Wells, etc.) and virtually unregulated. Shadow banks globally now also control more investible liquid assets than do the world’s commercial banks.

It was the shadow banks–investment banks like Lehman, Bear Stearns, insurance giant AIG, GE credit and others that precipitated the 2008 financial crisis that then froze up the entire credit system and led to the 2008-09 collapse of the real, non-financial economy. None of the CEOs of the shadow bank system went to jail for their roles in the collapse. And now they are back–not only reaping record profits and asserting even greater influence over the US and global economy; but have penetrated the political institutions of control in the US and other advanced economies even more than they did pre-2008.

Shadow Bankers On the Inside

In the US, shadow bankers from Goldman Sachs, the giant investment bank, took over the drafting of US economic policy when Trump took office. (Trump himself, a commercial property speculator, is part of this shadow banker segment of the US capitalist elite). Running the US Treasury is ex-Goldman Sacher, Steve Mnuchin. On the ‘inside’ of the Trump administration is Gary Cohn, chair of Trump’s key advisory, ‘Economic Council’. Together the two are the original drafters (which was done in secret) of the recent Trump Tax cuts that will yield a $5 trillion windfall for US businesses, especially multinationals. (More on this in my forthcoming article, to be posted here subsequently).

…click on the above link to read the rest of the article…

Chinese Banks Push Back On Shadow Banking Regulations – Expose “Catch-22” For Financial System

December 12, 2017

Chinese Banks Push Back On Shadow Banking Regulations – Expose “Catch-22” For Financial System

In November, we discussed how the post-Party Congress measures to deleverage and crackdown on the worst abuses in China’s credit bubble took an important step forward with the announcement of a new era of regulation for China’s $15 trillion shadow banking and asset management industry. See “A New Era In Chinese Regulation Means Turmoil For $15 Trillion In China’s Shadows”. In particular, the authorities turned their sights on wealth management products (WMPs).

On the way out are “guaranteed returns” and “capital pools” which had turned the $4 trillion sector into a leveraged Ponzi scheme. We joked that in a “radical and shocking” departure from the norm, financial institutions would have to offer yields based on the risk and returns of the underlying assets. Paying out guaranteed returns with new funds from depositors would no longer be allowed.

Commentators at the time described it as “a new era of regulation” which would lead to tighter risk control and slower but higher quality growth in the Chinese economy, blah, blah. However, our interest was piqued by the implementation date for the new rules. This is slated for the end of June 2019, providing Chinese banks and the entire shadow banking system a grade period to get their house in order. As we suggested.

We can only guess the delay reflects the enormity of the problems discovered by China’s regulators when they finally looked under the hood.

We didn’t have to wait long for confirmation that our cynicism was justified. It turns out that there was a “closed-door meeting” last week during which Chinese banks laid out the systemic risk if the regulators pursue their reform plan. According to Reuters.

…click on the above link to read the rest of the article…

The Sum of All Fears…..and a few related charts……

October 5, 2017

The Sum of All Fears…..and a few related charts……

Today, I’d like to take some time to revisit a couple of related topics that we first started discussing a few years ago. I am, of course, referring to the burgeoning increases in China’s Debt levels, Shadow Bank Assets (loans) and M2, along with a high-level analysis of the most recent PBOC Financial Stability Report and FSB Global Shadow Bank Monitoring Report. (No!….please don’t click this page closed….I promise this will eventually get interesting…)

As a starting point, let’s begin by reviewing the February, 2015 McKinsey report Debt and (not much) Deleveraging . I first referenced the report in this blog in March of 2015. The report focused on the world’s, and particularly China’s, rapidly building debt/leverage phenomenon (2014 Year End Data). I encourage you to re-read the entire report, but for those of you who are pressed for time, I’ll give you the executive summary bullet-points right here:

Debt continues to grow
Reducing government debt will require a wider range of solutions
Shadow banking has retreated, but non‑bank credit remains important
Households borrow more
China’s debt is rising rapidly

I’m hoping that the McKinsey authors will consider updating the report, bringing the figures current, as I believe these observations, figures and analysis are even more pertinent today than they were back in 2015.

China’s Debt

So now, using McKinsey as a reference point, let’s take a look at where we are today, via the FRED (St. Louis FED)data below.

The FRED (Federal Reserve Economic Data – Citations below) Chart below represents US Core Debt (as defined and provided by the BIS – Bureau of International Settlements) compared to China Core Debt, as a percentage of GDP. The third (bold Red) line represents China’s debt levels adjusted for a “what-if” constant I’ll explain shortly.

…click on the above link to read the rest of the article…

A Matter Of “Trust”: A Look Inside China’s Crackdown Of Its $3 Trillion Shadow Banking Industry

September 10, 2017

A Matter Of “Trust”: A Look Inside China’s Crackdown Of Its $3 Trillion Shadow Banking Industry

As discussed here in mid-August, when China reported its latest credit data, for the first time in 9 months China’s trillion Shadow Banking Industry – defined as the sum of Trust Loans, Entrusted Loans and Undiscounted Bank Loans – contracted.

These three key components combined resulted in a 64BN yuan drain in credit from China’s economy, the first negative print since October, seen by analysts as more evidence that Beijing’s campaign to contain shadow banking and quash risks to the financial system, is starting to bear fruit.

And, as a follow up report from Reuters overnight details, the crackdown against unregulated shadow financing is accelerating, noting that as the flood of unregulated cash swirls through the Chinese economy, Beijing has been taking aim at the trust companies whose unrestrained lending practices are worrying regulators. The trusts, which as we have discussed previously are at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed towards greater transparency.

Something strange is going on in the financial system. And according to The Wall Street Journal, it’s causing some investors to move massive amounts of money out of the banking system.

But the fast-growing 20 trillion yuan ($3 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts.

As Reuters details, a regulatory sanction against one trust, Shanghai International Trust, and a legal case against another, National Trust, offer rare insights into the industry, and reveals just how hard it will be to police it.

…click on the above link to read the rest of the article…

“This Is Probably Just The Beginning” – Chinese Banks Are In Big Trouble

May 23, 2017

“This Is Probably Just The Beginning” – Chinese Banks Are In Big Trouble

That’s not supposed to happen…

With the crackdown on financial system leverage underway, Chinese banks (and securities firms) are in big trouble. As we noted previously, China’s bond curve is inverted, yields are surging, and Chinese regulatory decisions shutting down various shadow-banking pipelines has crushed securities firms’ stocks. However, as Bloomberg points out, as China’s deleveraging efforts cut into banks’ profit margins, rising base funding costs and interbank credit risk concerns have pushed banks’ cost of borrowing beyond the rate they charge customers for loans for the first time in history.

As the chart above shows, the one-year Shanghai Interbank Offered Rate has exceeded the Loan Prime Rate, the first time this has happened since the latter was introduced in 2013.

“This is probably just the beginning” and interbank funding costs will rise further amid the drive to reduce leverage, said Xu Hanfei, chief fixed-income analyst at China Merchants Securities Co. in Shanghai.

Chinese Insurer Warns Of “Mass Defaults, Social Unrest” Due To “Mass Redemption” Run

May 18, 2017

Chinese Insurer Warns Of “Mass Defaults, Social Unrest” Due To “Mass Redemption” Run

One month ago, China came “this close” to the one event which terrifies Beijing more than anything: a run on China’s shadow banks.

As a quick reminder, 150 customers of China’s Mingsheng Bank, the country’s largest private bank, were furious in mid-April when they learned that some 3 trillion yuan invested in Wealth Management Products, the backbone of China’s shadow banking system, had vaporized after bank employees had engaged in fraud and embezzled the funds without ever investing it (later it emerged that Mingsheng employees had put the money into “cultural relics” and jewelry, for their own use).

And while fraud and embezzlement are both endemic in China, the bigger concern raised by the article was the threat of a bank run across China’s massive and unregulated, nearly $10 trillion shadow banking system. Indeed, while there have been numerous allegations and warnings that China’s entire shadow banking facade, dominated by WMPs and other “investment products”, is nothing but a giant ponzi scheme in which recoveries – should there be a bank run, a topic recently discussed on Bloomberg – would be non-existent if there is ever a bank run, defaults of WMPs issued by big banks – and this case an unapproved WMP – are rare, as are shadow bank runs.

For now.

However, in a stunning announcement made by one of China’s largest insurers, Foresea Life has warned of “mass defaults and social unrest” unless China’s regulator lifts a recent ban on its issuance of new products. In a letter to China’s insurance regulator, first reported by the Financial Times, Foresea Life Insurance which is a heavy investor in WMPs, has warned that the company expects “redemptions” of 60 billion yuan, or $8.7 billion, this year and might be unable to meet payouts unless it is able to sell new products.

…click on the above link to read the rest of the article…

China Is Cracking Down On Shadow Banking, But One European Country Is Encouraging It

September 25, 2016

China Is Cracking Down On Shadow Banking, But One European Country Is Encouraging It

When you hear about Shadow Banking, most people still associate it with dodgy Chinese schemes where more and more financial transactions were conducted outside of the normal and regulated banking system. In a previous column, we already briefly discussed how the Chinese shadow banking system had an impact on the copper price.

The scheme was actually pretty simple, and was aimed at maximizing the potential profits on borrowed money as even though copper importers in China received letters of credit valid for 3-6 months, the purchased copper was immediately sold on the domestic market, meaning the importer basically had a ‘free’ line of credit as it could invest the proceeds from the copper sales before having to repay the money drawn down from the letter of credit.

China has been trying to reduce the size of the shadow banking sector, and we argued this was one of the main reasons for the copper price weakness. As the world economy is correlated with how China is doing, the world is obviously keeping a close eye on the Chinese policies, and several first world countries blamed the Chinese regulators for letting things escalate.

But the truth is, the shadow banking issue is much more wide-spread than just China. Sure, the Chinese situation escalated pretty quickly, so it attracted more (unwanted) attention, but let’s have a look at how the shadow banking system is working elsewhere in the world. There is very little doubt peer to peer lending, which is essentially the basis of any shadow banking system, is booming and crowdfunding websites and simple P2P websites are popping up everywhere.

Source: ECB

…click on the above link to read the rest of the article…

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

March 9, 2016

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The Triumph of Politics

All of life’s odds aren’t 3:2, but that’s how you’re supposed to bet, or so they say. They are not saying that so much anymore, or saying that history rhymes, or that nothing’s new under the sun. More and more theys seem to be figuring out that past economic and market experiences can’t be extrapolated forward – a terrifying prospect for the social and political order.

Consider today’s realities:

Global economies have grown to their current scale thanks to a glorious secular expansion of worldwide credit – credit unreserved with bank assets and deposits; credit extended to brand new capitalists; credit that can never be extinguished without significant debt deflation or hyper monetary inflation

Economies no longer form sufficient capital to sustain their scales or to justify broad asset values in real terms

Markets cannot price assets fairly in real terms without risking significant declines in collateral values supporting them and their underlying economies

Politicians that used to anguish (rhetorically) over the right mix of potential fiscal policies, ostensibly to get things back on track (as if somehow finding the right path would have actually been legislated into existence), have come to realize the limits of their power to have a meaningful impact

Monetary authorities have become the only game in town,assassinating all economic logic so they may juggle public expectations in the hope – so far successfully executed – that neither man nor nature will be the wiser.

The good news for policy makers is that man remains collectively unaware and vacuous; the bad news is that nature abhors a vacuum. The massive scale of economies relative to necessary production (not to mention already embedded systemic leverage) suggests this time is truly different.

…click on the above link to read the rest of the article…

G-20 Needs To “Man Up” Or Risk Sparking Market Chaos, Citi Warns

February 26, 2016

G-20 Needs To “Man Up” Or Risk Sparking Market Chaos, Citi Warns

Two days ago, the man who now signs your Federal Reserve notes threw cold water on hopes for a so-called “Shanghai Accord.”

Over the past month or so, anticipation has built among market participants for some manner of coordinated policy response at this weekend’s G20 summit in Shanghai. The hoped for agreement would ideally be something akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth.

Calls for coordinated action come on the heels of a turbulent January in which collapsing crude, RMB jitters, and worries that central banks are out of bullets have sowed fear in the minds of investors. “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions,” BofA said last week, ahead of the summit.

“Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview broadcast Wednesday with David Westin of Bloomberg Television. “This is a moment where you’ve got real economies doing better than markets think in some cases.”

Whether or not you agree with Lew’s assessment of “real economies” or not, the message was clear. The US isn’t set to support some kind of joint statement on fiscal stimulus and may not even be willing to be part of a consensus on the need to implement emergency measures to juice global growth and trade.

On Friday, the soundbites are rolling in as the world’s financial heavyweights opine on the state of the decelerating global economy and the turmoil that likely lies ahead for markets.

…click on the above link to read the rest of the article…

Meet China’s Latest $1.8 Trillion “Problem”

February 1, 2016

Meet China’s Latest $1.8 Trillion “Problem”

Last summer we outlined how Chinese banks obscure trillions in credit risk.

The powers that be in Beijing aren’t particularly keen on allowing the banking sector to report “real” data on souring loans – especially given the fragile state of the country’s economy. In some cases, the Politburo will pressure banks to simply roll over bad debt, effectively kicking the can.

In addition, banks carry around 40% of their credit risk outside of “official loans.” Here’s what Fitch had to say last year:

“Off-balance-sheet financing (I.e. trust loans, entrusted loans, acceptances and bills) accounted for 18% of official TSF stock at end-2014, up from less than 2% just over a decade ago,” Fitch wrote. “Of the off-balance-sheet exposure reported at individual banks, this is equivalent to 15% of total assets for state commercial banks and 25% for mid-tier commercial banks, on a weighted average basis. These ratios would be even higher if we included entrusted loans (see Figure 2), although this information is not disclosed at all banks. Fitch estimates that around 38% of credit is outside bank loans.”

In many cases, channel loans (so credit extended by banks via non-bank intermediaries) are carried as “investments classified as receivables” on the balance sheet.

Now, as more Chinese firms lose access to traditional financing amid rising defaults and increasing economic turmoil, banks are increasingly turning to channel loans as a way of extending credit.

In turn, the amount of “investment receivables” on many mid-tier banks’ books is soaring to dizzying levels. “Mid-tier Chinese banks are increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on their balance sheets, masking the scale and risks of their lending to China’s slowing economy,” Reuters reports. “The size of this ‘shadow loan’ book rose by a third in the first half of 2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all commercial loans in China.”

…click on the above link to read the rest of the article…

Interview With Lord Turner on Monetary Reform

November 12, 2015

Interview With Lord Turner on Monetary Reform

Max Rangeley:	The cover of your book is adorned with the image of Faust and Mephistopheles. In Goethe’s Faust, the Emperor is granted the right to create money ex nihilo, whereas we currently have this Faustian pact with the banks, so before we get into the technocratic, economic aspects, does this create any moral issues?
Lord Turner:	I don’t know whether I would use the word “moral”, because I don’t think that the banks are guilty of a sort of deliberate conspiracy to create money without the populace understanding it. Indeed, it’s noticeable that many individual private bankers do not understand that, collectively with all other bankers combined, they create credit and money ex nihilo. However, while I would not use the word moral, I do think it’s striking that we have, as it were, outsourced an inherently social function, which is the increase in the level of aggregate nominal demand, and we have, relied on the banking system to do that for us, without asking searching questions as to whether, and under what conditions, they will perform that crucial macroeconomic function effectively.
Max Rangeley:	So should there always only be a small number of credit institutions that have the right to create money in such a fashion?


Lord Turner:	If we’re going to grant this power to banks, we should very tightly regulate how they are able to use it, and we can regulate the amount of money that banks create, for instance, by having reserve requirements which limit the size of the money supply relative to the size of the monetary base : and since the government and central bank together determine the size of the monetary base, if you have a system of minimum reserve requirements, you can constrain and control the ability of the banks to create money.

…click on the above link to read the rest of the article…

One Analyst Says China’s Banking Sector Is Sitting On A $3 Trillion Neutron Bomb

November 3, 2015

One Analyst Says China’s Banking Sector Is Sitting On A $3 Trillion Neutron Bomb

To be sure, we’ve long contended that official data on bad loans at Chinese banks is even less reliable than NBS GDP prints. Indeed, the lengths Beijing goes to in order to obscure the extent to which banks’ balance sheets are in peril is truly something to behold and much like the deficient deflator math which may be causing the country to habitually overstate GDP growth, it’s not even clear that China could report the real numbers if it wanted to.

We took an in-depth look at the problem in “How China’s Banks Hide Trillions In Credit Risk: Full Frontal”, and we’ve revisited the issue on a number of occasions noting in August that according to a transcript of an internal meeting of the China Banking Regulatory Commission, bad loans jumped CNY322.2 billion in H1 to CNY1.8 trillion, a 36% increase. Of course that’s just the tip of the iceberg. In other words, that comes from a government agency and although the scope of the increase sounds serious, it still translates into an NPL ratio of just 1.82%. Here’s a look at the “official” numbers (note that when one includes doubtful accounts, the ratio jumps to somewhere in the neighborhood of 3-4%):

Source: Fitch

There are any number of reasons why those figures don’t even come close to approximating reality. For instance, there’s Beijing’s habit of compelling banks to roll over bad loans, and then there’s China’s massive (and by “massive” we mean CNY17 trillion) wealth management product industry which, when coupled with some creative accounting, allows Chinese banks to hold some 40% of credit risk off balance sheet.

Goldman Strikes Again: Did A Probe Into “Global Warming” Fraud Cost A Prime Minister’s Job

September 26, 2015

Goldman Strikes Again: Did A Probe Into “Global Warming” Fraud Cost A Prime Minister’s Job

When Tony Abbott became Australia’s prime minister in September 2013, the chain of events that would prematurely end his tenure may already have been in motion: just a few months later China would order its out of control shadow banking system to put on hold its debt issuance machinery, which as we reported a year ago, ground to a complete stop around November 2014 (which also was the explanation for the dramatic slowdown in the US economy over the winter as the collapse in China’s Total Social Financing growth sent a deflationary ripple effect around the globe), which – as we warned at the time – would have dire consequences on all of China’s “feeder” economies, namely Brazil and Australia.

But while we have been tracking the implosion of Brazil’s economy since December, long before the rest of the world noticed the calamitous collapse of what was once Latin America’s most vibrant economy, it was a very recent event in Australia – not the country’s parallel economic slowdown also due to China’s hard landing: that was painfully clear long in advance – that took many by surprise. Namely, the resignation of Tony Abbott almost exactly two years after becoming Prime Minister.

And while it is easy to blame his admission of failure on external factors, namely the Chinese slowdown, a very surprising finding has emerged over the past few days, one which reveals Abbott’s “ouster” in a totally different light.

According to Freedom of Information documents obtained by Australia’s ABC, now-former prime minister Tony Abbott’s own department discussed setting up an investigation into the Bureau of Meteorology amid media claims it was exaggerating estimates of global warming.

Yes, it appears that the prime minister himself had dared to question to prevailing status quo on “global warming.”

ABC reports that in August and September 2014, The Australian newspaper published reports questioning the Bureau of Meteorology’s (BoM) methodology for analyzing temperatures, reporting claims BoM was “wilfully ignoring evidence that contradicts its own propaganda.”

…click on the above link to read the rest of the article…

China’s “Credit Mystery” Deepens, As Moody’s Warns On Shadow Financing

September 26, 2015

China’s “Credit Mystery” Deepens, As Moody’s Warns On Shadow Financing

Last month, we took a detailed look at what we said could be a multi-trillion yuan black swan.

In short, one of China’s many spinning plates is the country’s vast shadow banking complex which allowed local governments to skirt borrowing restrictions leading directly to the accumulation of debt that totals some 35% of GDP and which has channeled trillions into speculative investments via the proliferation of maturity mismatched wealth management products.

One of the problems with the system is that it allows Chinese banks to obscure credit risk.

As Fitch noted earlier this year, some 40% of credit exposure is effectively carried off balance sheet in China’s banking sector, making it virtually impossible to assess the extent to which banks are exposed. When considered in combination with the unofficial policy whereby the PBoC forces lenders to roll bad debt thus artificially suppressing NPLs, a picture emerges of a system that’s decidedly opaque. Here’s what we said back in May:

The percentage of loans which are not yet classified as non-performing but which are nonetheless doubtful is much higher than the headline NPL figure and in fact, [Fitch] seems to suggest that some Chinese banks (notably the largest lenders) may be under-reporting their special mention loans. But ultimately it’s irrelevant because between bad assets that are ultimately transferred to AMCs, loans that are channeled through non-bank financial institutions and carried as “investments classified as receivables”, and off-balance sheet financing, nearly 40% of credit risk is carried outside of traditional loans, rendering official NPL data essentially meaningless in terms of assessing the severity of the problem.

Well don’t look now, but according to Moody’s, the practice of obscuring credit risk using one or more of the methods delineated above and outlined in these pages on any number of occasions looks to be getting worse. Here’s Bloomberg:

…click on the above link to read the rest of the article…

Buiter: Only “Helicopter Money” Can Save The World From The Next Recession

September 9, 2015

Buiter: Only “Helicopter Money” Can Save The World From The Next Recession

It is to be expected that economists – even economists working for the same team – have different views about the likelihood of different future outcomes. Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air.

That rather hilarious characterization of the pseudoscience that is economics comes from the desk of Citi’s Chief Economist Willem Buiter and it’s apparently evidence that even if you don’t think too much of his views on “pet rocks” (gold is a 6,000 year-old bubble) or on the efficacy and/or utility of physical banknotes (ban cash), you’d be hard pressed to disagree with him when it comes to critiquing his profession. Of course we don’t want to give Buiter too much credit here because the quote shown above could simply be an attempt to stamp a caveat emptor on his latest prediction in case, like his predictions on when Greece would ultimately leave the euro, it turns out to be wrong.

As tipped by comments made at the Council of Foreign Relations in New York late last month, Buiter is out with a damning look at the global economy which he says will be drug kicking and screaming into a recession by the turmoil in China and the unfolding chaos in EM. Here’s the call:

In the Global Economics team, however, we believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so. To clarify further, the most likely scenario, in our view, for the next few years is that global real GDP growth at market exchange rates will decline steadily from here on and reach or fall below 2%.

More specifically, Buiter says the odds of some kind of recession (either mild or terrifying) are 55%. Not 54%, or 56% mind you, but exactly 55%, because as indicated by the introductory excerpt above, economic outcomes are very amenable to precise forecasting:

…click on the above link to read the rest of the article…

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