The quote that “History repeats itself the first time as a tragedy, and the second time as a farce” applies to financial crises, although one may disagree with how accurate the “farce” assessment is. -2009 was a repeat of the crisis of 1929, a real tragedy, because it led to the Second World War and what humanity is still trying to forget. However, this was probably not a “joke” for everyone, especially when it escalated into the eurozone debt crisis and the suffering it brought to Europeans. It is now no secret that the cause of the 2008 crisis was the phasing out of all security measures that were imposed on the financial system by the Bretton Woods agreement after World War II in order to prevent a repeat of 1929. However, the possibility of a repeat of the global financial crisis that will be born exactly where, after the crisis of two years in 2008-2009, no regulation was introduced. pension funds and hedge funds or hedge funds. Not only were these categories not subject to the same rules that applied to banks after the 2008 crisis, but the risk increased to a maximum as many of these institutions took on risks that banks could no longer take.

These are various schemes such as investment funds, insurance funds, pension funds and hedge funds.

And although there has been constant talk about the risk of a recession for about a year, there are many who see the brewing of a new financial crisis. Recently, Lawrence Summers, the former US Treasury Secretary, who spoke of “shaking” the markets and, trying not to cause too much concern, avoiding predicting a global financial crisis, stressed that the current situation justifies increased anxiety, such as that prevailed in August 2007. of the year. The most recent warning can be seen in the collapse of UK pension funds in the fall, forcing the Bank of England to intervene with extensive bond purchases to restore calm to the market. A crisis that was overshadowed by the political storm of the day and by the experiments of Liz Truss, then Britain’s shortest-serving Prime Minister. losses in banks with hidden rates, a loud drop in shares of Japanese Softbank, as well as British Greensill Capital. And in all of these crises, the concern was pervasive, as in most cases there was a risk that the problem would spread to the wider financial system.

As Politico points out in a related analysis, this is a repetition of the same familiar patterns that cause crises: short-term illiquidity, risky bets, and the domino effect.

The collapse of … the leader

A sample of what could happen from a combination of liquidity shortages, constant leverage and excessive risk taking by shadow financial institutions was presented in the spring of 2021 by a previously unknown hedge fund in which banks and SMEs were taking big risks. Under the vain name of Archegos Capital Management, which means “leader” in Greek, he took advantage of the low interest rates of the Federal Reserve, borrowed extensively, amassed unimaginable profits on clandestine bets, and crashed, causing chaos and losses on Wall Street. for banks, with vibrations that will be felt from Zurich to Tokyo.
It was a common story that was repeated from time to time, but with other companies and brands. Archegos Capital used leveraged funds to place bets that sent SME stocks skyrocketing. Its downfall began when Wall Street banks pressured the intrepid company to “hedge” its bets. Lacking sufficient liquidity, the fund launched a massive sell-off, causing shares of media giants such as ViacomCBS and Discovery to plummet. The massive sales that followed were so massive that Viacom lost half its market value within a week. And, of course, the big banks have suffered billions of dollars in losses due to their heavy exposure to Archegos. Both Swiss Credit Suisse and Japan’s Nomura posted losses at the time and their shares were in free fall.

Archegos was an obscure company that few people had heard of before its sudden collapse. Yet in an era of cheap money, Archegos could borrow so much thanks to near-zero interest rates that its collapse would set off tidal waves big enough to shake Wall Street and affect American retirement savings.

It’s over-borrowing, fueled by near-zero Federal Reserve interest rates. The Archegos stakes were kept secret. To avoid disclosing its rates, Archegos has used special derivatives known as “total return swaps” that effectively hide part of the investment. And, of course, he did not disclose his position to the US Securities and Exchange Commission.

The collapse of the Fearless Foundation led to the financial ruin of its founder, Bill Huang, a man who had remained as unknown as his foundation before the collapse. His wealth evaporated in a few days.

Liquidity fears intensify

It is time for trouble with the shadow banking system as the good times come to an end as central banks aggressively increase borrowing costs and the steady flow of capital ceases.

This means that it is easy for a shadow financial institution to lose liquidity. Speaking to Politico, Verena Ross, head of the EU’s securities regulator, notes that as money flows into the shadow banking system, “some of the problems that exist there are starting to show.” It is easy to see that after a series of relatively small and easily controlled crises, the problem could start in shadow financial institutions and spread to the wider financial system. It also happened, or at least could have happened, when the Russian invasion of Ukraine caused price fluctuations in the futures markets, creating a lack of liquidity for European energy companies. The problem was easy to derail.

And this applies not only to the EU securities regulator. which warns. Others sounded the alarm, warning that shadow banks could cause or exacerbate the crisis. Jérôme Reboul, Director General of Regulatory Policy and Directorate General of International Relations of the French Securities and Exchange Commission, notes that successive interest rate hikes could cause short-term liquidity shortages, leading to a forced sale of securities.
He points out that this could lead to the launch of a “self-sustaining mechanism,” a mechanism by which the sale of securities will cause prices to fall, increase pressure on investors and multiply their liquidity needs.

All of this is already on record and regulators are beginning to worry about the contagion that shady financial institutions have built up over the past few years that could explode and send shockwaves around the world in the global financial system. And, as Politico points out, it’s disturbing that many people understand that the shadow banking sector can be an accident, but there is no plan to deal with it.

Lawrence Summers

The former US Treasury Secretary warns that “we are in a period of heightened risk and earthquakes do not happen suddenly. Vibrations first. He clarified that he does not go so far as to predict a financial crisis, but believes that “just as people were worried in August 2007, there should be a lot of anxiety now.”

Greensill lent $7.4 billion to construction company Gupta. It collapsed, resulting in losses for Credit Suisse.

John Caravan

Referring to prevailing concerns about the possibility of a financial crisis, John Caravan, Senior Analyst at Oxford Economics, noted that “risks to financial stability are mounting and it seems increasingly likely that the Fed will have to address concerns about financial system stability before any inflation targets have been met.

Japanese Softbank lost $17 billion of its market value and increased the fall of high-tech companies.

Verena Ross

The head of the EU securities regulator, Verena Ross, stressed that we are seeing a decline in capital inflows into the shadow banking system, meaning that “we are seeing some of the usual drivers of a crisis, a liquidity problem, over-leveraging and a high degree of interconnectedness.” And he added that these are “usual signs of problems that you need to look for in order to identify the source of possible risks.”