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No Elephants Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Nov-18-12 10:23 AM
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How Shadow Banks Rule the World
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By Martin Hesse and Anne Seith, SPIEGEL
Nov. 18, 2012

Beyond the banking world, a parallel universe of shadow banks has grown in the form of hedge funds and money market funds. They're outside the reach of conventional financial regulation, prompting authorities to plan introducing new rules to prevent the obscure sector from triggering a new financial crisis. But in doing so they risk drying up an important source of funding to banks and firms.

In the financial world, there is a narrow divide between heaven and hell. Frenchman Loc Fry realized this when he was 33. He was a rising star in the banking world, managing the trade in complex loan packages for an investment bank. According to his business card, he was the bank's "global head of credit markets." But then one of his employees gambled away about 250 million ($317 million), and suddenly Fry was without a job.

That was in 2007. A number of investment bankers experienced a similarly precipitous fall in the turbulent years of the financial crisis. But, like Fry, many reappeared before long and became more successful than ever, in the world of the so-called shadow banks. These are companies that engage in business similar to that of ordinary banks, but without being subject to the same strict regulation.

Fry launched a hedge fund in London. These notorious investment firms collect money from customers and speculate with a wide range of securities. Today Fry makes the kinds of investments that are too risky for his former colleagues. He lends the money of his customers to companies whose creditworthiness isn't good enough to qualify for loans from ordinary banks, and he also buys especially risky loan packages from lenders. As a result, he is able to achieve double-digit returns in the midst of a crisis.



Much more at: http://abcnews.go.com/International/shadow-banks-rule-w...
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