The Truth about Archegos Scandal & How Shadow Banks Could Cause The Next Financial Crisis?
Greensill and Archegos Capital are the latest high-profile shadow banking financial scandals to hit the headlines.
Credit Suisse is still unloading its position in the wake of Archegos Capital Management’s blowup. The bank was selling 19 million shares of Discovery’s class A stock on Tuesday. Credit Suisse slashed the amount of money set aside for employee bonuses by hundreds of millions of dollars and used the savings to limit the financial hit from the implosion of Archegos Capital Management.
Wall Street could be staring at a meltdown as big investment banks, including Nomura and Credit Suisse, rush to unwind bets in various stocks after a common client defaulted on margin calls.
Although the client’s name has not been confirmed, media reports claim it to be Archegos Capital Management, a family office run by Bill Hwang. The margin default may lead to Nomura reporting a one-time loss of $2 billion in the March quarter, while Credit Suisse may incur a loss of $1 billion.
These two scandals are just the tip of the iceberg, as shadow banking’s lack of regulation could spark another debt crisis in 2021.
So what are shadow banks, and why you should be worried? The average person has no idea what the shadow banking system is.
The problem with the shadow banking market; it is shadow, you cannot see it. The Technical definition of the Shadow Banking System is non-traditional banking, which doesn’t tell you anything. I like to phrase what banking is; Banking is a regulated Bank with the FDIC, which takes in deposits and makes loans. Anything else done by anybody else is Shadow Banking.
In other words, it is outside of the banking system.
The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking. It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
The shadow banking system played a significant role in the expansion of housing credit in the run-up to the 2008 financial crisis but has grown in size and largely escaped government oversight even since then.
It looks super sync, but it’s really backed by assets that are very volatile. And when these things unwind, and people want to sell them, there’s no market for them. And so the price collapses, and that shuts off the flow of money to these companies that were trying to boost their stock prices.
It was a shadow banking system that injected the virus called credit default swaps into the system that blew up in 2008. And right now, we’re doing the same thing again.
For the full transcript go to https://financearmageddon.blogspot.com