Yesterday Was a Run on the Shadow Liquidity System from SeekingAlpha.com by Paul Kedrosky

Yesterday Was a Run on the Shadow Liquidity System
from SeekingAlpha.com by Paul Kedrosky


Back in 2008 when banks and the like were busily going to zero the phrase that captured much of what was going on best was that it was a "run" on the shadow banking system. By that it was meant that, for the first time, the non-bank banks -- sell-side firms, creators of CDOs, and the like -- who were busily creating credit outside the traditional banking system finally had a run on them. Rather than, however, depositors en masse withdrawing their deposits, which is the way a run worked in traditional banking (or did until we had deposit insurance), the run on the shadow banking system involved the withdrawal of overnight funding via the repo market. The result, however, was the same, with shadow banks quickly having insolvency crises, with unhappy results for Lehman, Bear, and others that we all saw.

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