SAN FRANCISCO (MarketWatch) – A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
Big brokerage firms like Goldman Sachs (GS:
Goldman Sachs Group, Inc GS 186.93, +4.16, +2.3%) , Lehman Brothers (LEH: Lehman Brothers Holdings Inc LEH 24.46, -0.32, -1.3%) , Morgan Stanley (MS: morgan stanley com MS 40.19, -0.50, -1.2%) and Merrill Lynch (MER: Merrill Lynch & Co., Inc MER 37.69, +0.14, +0.4%) , which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn’t have reliable access to short-term borrowing during times of stress.
Brokers threatened by run on shadow bank system
“The key to the game is capital reserves. If you don’t have enough you can’t piss in the tall weeds with the big dogs.”