Boy, if this weren't happening I would swear this guy is on meds.
but it is happening.
Dr. Roubini wrote an op-ed in the Financial Times called The shadow banking system is unraveling
He has expanding the 5 stages of grief to the stages of economic financial system collapse and concludes:
Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.
Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self-fulfilling and destructive run on its liquid liabilities.
But unlike banks, which are sheltered from the risk of a run – via deposit insurance and central banks’ lender-of-last-resort liquidity – most members of the shadow system did not have access to these firewalls that prevent runs.
One thing he points to is leveraged buyouts imploding and a run on hedge funds.
As he typed his message of impeding disaster, another Mega Bomb, Morgan Stanley and Goldman Sachs decide to become banks.
Why would they do that? To gain access to the Fed's emergency lending money.
The Shadow Banking System refers to the derivatives, SIV market.
Here is a fantastic article which explains the Shadow banking system from which the above alarming graph is from.
One major point is the shadow banking system is completely unregulated and hardly anyone really understands how it all works, it is so complex.
All roads seem to point back to the dergulation as the turning point of financial systems run amok.
What is funded vs. non-funded in your chart above?
nasty topic isn't it?
Unfunded CDO (Collateralized Debt Obligation) means if there is a default, only then does the issuer have to pay up. Funded means they have to pay up front.
So, (and trust me, this is a lay person's blog so if I'm wrong, someone correct me), it appears to work like this
These CDOs an investor gets a premium amount (like you pay an insurance company your premiums) when they buy one of these.
But, if there is a default on the underlying or associated security these things are supposed to insure, the investor has to pony up the funds in that case.
So, this is saying they created methods so the investor didn't have to pony up any funds while getting premiums for insuring bad debt (in so many words) and didn't have to pay up until an actual default occurred.
Fitchratings has a pretty good paper on their website that comes somewhat close to English in explaining these.