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-- -- -- -- about shadow banking for the Dewey decimal system -- shadow banking and the banking system joining us now.
Is -- wider marketwatch.com.
Wrote a very interesting article called the financial system lurking in the shadows actually commentary Washington needs to address.
Shadow banking David welcome back.
Glad to be here.
We've heard a lot about -- shadow banking on picturing parking garage is you know mysterious men -- -- not knowing that something about the movies you know I mean you know how how close copter something exactly how close are we to that really.
Well OK first let's talk about what shadow banking -- America it's not the illuminati it's not.
It's not new world order.
What it is is it's it's actually shadow banking is happening in broad daylight and in these -- institutions that.
We think we can't have come to think of do one thing but are really participating in the banking system.
Insurance companies hedge funds.
Structured investment vehicles those off balance sheet invest investments that the banks are making.
Really anything that is out there in the credit.
Market right now offering credit and taking deposits and really this is -- exploded right now.
-- for the credit crisis really erupted it was.
A six point two they had six point two trillion in assets while the whole banking system only had about ten trillion.
So it's huge it's influential and now people are are recognizing that it really triggered.
The whole financial crisis -- -- does it need to be regulated.
More carefully and like the banking system and that what would that ever happen.
Well I think that that's the important thing about this is that Timothy Geithner.
The Treasury Secretary looks is looking at the system right now in terms of the shadow banking system needing bank like regulation.
And this would be stepping outside the traditional definition.
That banks have charters -- borrow money for money center banks and eventually from the Fed.
And -- so what do we what do we do with it would it would place bank like restrictions.
On all these different Andy's.
In -- much is that they are doing bank like.
Here's the hard part everybody now and they read your articles and excellent article to talk it was oh my god I'm outraged I'm outraged it's so big I never knew about it.
But if they are 660%.
Of the size of the real banking system.
That's a lot of capital.
Exactly and somebody needed.
That capital they're not just throwing money out there there we differ filling a need right so we suddenly regulate -- -- try to shrink it.
Who's gonna pick up the capital.
Well that's that's really you know that the the government has a tough choice here because it's turned Arenas and and at the same time is trying to pump money into the system to get to get the financial markets going to get the economy going.
So I had -- just take their money and go home and go home and you know find something else to do -- -- and then the businesses that rely madness.
Will suffer and it -- mad about Chrysler and he's always groups of people wouldn't agree to this.
If wasn't for a lot of these groups these companies wouldn't have been in existence did three years ago.
Absolutely and and I think that the solution that's being talked about -- and it and you know you talked about here is is this idea of a systemic risk regulator.
Going in and saying looking at every entity whether or not their insurance company hedge fund.
Even a pension fund and saying if if these guys make bad -- if they take on too much.
If they take on too many loans will they be a risk to the system and I think it.
It's a different way of looking at the financial system than we're used to because we -- realizing that.
If you consider what happened was -- panic.
If it didn't originate in the banking system it ended up in the banking system but it was because these -- really are just.
There there -- mirror images.
Banks in many ways.
Didn't the people in Washington see this know that the shadow banking system existed didn't they know that the risk that was built into it and how many people down in DC.
Really understand the complexity of the way our financial system marks to the point -- they really know -- -- regulated.
-- you know I don't think they do even we don't even with the even with some do I'm sure but some financial services reform that we have -- that repealed Glass-Steagall onset.
Okay big financial institutions can do banking and investment banking insurance and all kinds of stuff.
Even with that the system.
The regulatory system was set up really for 1930s type of model where you have securities over here you have banking here.
You have insurance over here.
And nobody was really looking at the big picture and I think that as lawmakers.
They're going to have to look at this whole picture.
In the end the week.
And I was in DC when the Lehman -- -- went down it was their run for five days and I spent some time opponent no kind of look at call anybody on this but I but I have -- it.
I was being asked by staffers and congress people like what a credit default swap once.
How did it work OK this is the day before.
They voted on the first part.
And I'm explaining to congress people what -- instruments are.
So you don't we don't you speculate and I don't not going to have a lot of things that place -- -- -- to speculate that some of them may not know I guarantee you some of them don't know I'm not change the fact that I'm explaining to them.
What these things are he's pretty scary.
There because I have trouble making decisions that could best restore well that's why you should be nervous that the congress has been handed the ability to put all the details in about cap and trade and health care but those are two other giant.
Problems I think I think the answer is obviously people in congress can't be expected to know how deeply complex the financial markets are.
But they can bring in people they can bring in people from academia they can bring in people from the businesses themselves.
Derivative experts banking experts and put all together try to come up with something.
-- cap and trade for congress like -- Kurt long term limit caps and we could trade them for somebody else because if you're congress for thirty or forty years why would you -- -- -- credit default swap its.
You know you -- obviously done anything else but -- in congress for thirty years we can track your your history because clearly not worked in it is sort of a real job leading finance or whatever.
Why would you know.
Cap and trade out the congressman and -- those emissions are the issue with counters.
The point David thank you very much appreciate -- good article.
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