How Shadow Banks Rule the World

Using similar arguments, lobbyists from other areas of finance have already managed to keep their customers largely out of the discussion. For example, the FSB is not treating so-called private equity firms as shadow banks yet. Their classic business consists of borrowing money from banks and taking over companies, and then burdening those companies with the debt.

That doesn't threaten the stability of the entire financial system. However giants like the Blackstone Group, founded by billionaire Stephen Schwarzman, have long since turned into asset management companies, investing in almost anything available on the financial markets.

Paul Schott Stevens, too, would prefer to keep his clientele away from the scrutiny of regulatory authorities. The 59-year-old descendant of a family of butchers from the southwestern state of Baden-W├╝rttemberg is the top representative of an industry that is as powerful as it is obscure. He is the president of the Investment Company Institute (ICI), which represents money market funds.

The funds collect money from conservative investors, including pension funds, insurance companies and ordinary savers. This money is lent for very short periods -- weeks or months at the most -- to banks, municipalities or companies. The lending takes the form of purchases of short-term bonds.

Most money market funds, which control almost $5 trillion in investment capital, are headquartered in the United States. In 2008, they put the fear of God into regulators and politicians when one of the companies, the $62 billion Primary Reserve Fund, bought up large quantities of short-term debt securities from Lehman Brothers. After the investment bank went bankrupt, the fund had to be liquidated. The Illusion of Security

It came as a shock to customers in the industry because money market funds had long been viewed as a safe investment, precisely because, on the surface, they are often very similar to banks. They even issue credit cards and checkbooks in the United States.

When it became clear that security is an illusion, the one thing happened that regulators in the financial world fear most: Investors went into a panic and emptied their accounts. The government was forced to issue a guarantee for the money market funds. If it hadn't done so, it is quite possible that the next worldwide financial quake would have been triggered. This is because the industry is a major financier of banks, including European banks.

US money market funds sent the financial world into turmoil once again in 2011, when they withdrew billions of euros from French banks that had become the subject of market speculation in the euro crisis. This time it was the international central banks that came to the rescue, providing the banks with a fresh injection of dollars. French banks, in particular, were dependent on the steady flow of short-term capital from the money market funds. In many cases, the banks would turn around and relend the money for long-term purposes, such as aircraft leases.

Regulator Andresen wants to put a stop to such events. "If the money market funds run into problems, they immediately transfer the risks to the banks -- and vice-versa," he says.

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