The Hidden “Banking” Crisis Nobody Is Talking About
The Great Recession of 2008 first wiped out the savings and loan industry which reduced dramatically the number of lenders in the US.
Then, the Treasury department further consolidated the lending industry by moving bank assets, which are basically loans into the largest banks. The 10 largest banks went from owning 50% of banking assets to 75% of banking assets (They were worried about banks being too big to fail so their solution was to make them even more too big to fail!)
So the number of lending institutions shrank by literally thousands of institutions.
Yet loans kept increasing? Who is doing all this lending?
Banks are highly regulated which means two things:
• They have very high costs due to the regulation
• They can’t lend as easily due to high reserve requirements
But hedge funds don’t have either of those two constraints. So they can be:
• More flexible in their terms
• Can make decisions quicker
• Can make loans more cheaply
• Don’t really have to report what they are doing
So, there is this massive pool of money, nobody knows how big, that has taken over much of the functions of normal banking. These are called shadow banks.
Commercial real estate loans are one of the areas I believe will be a trigger for the next financial crisis. Right now, banks have 70% of commercial real estate loans but shadow banks have about 30%.
Big commercial real estate firms turned negative in 2022. The big Canadian commercial real estate company stopped making payments on $734 million in LA property loans and the short sellers are targeting other big commercial real estate companies like Vornado.
A combination of higher interest rates, falling values, and tightening lending standards is bad for the industry.
This is not an immediate crisis since the real estate companies have lots of equity. But the relentless attack on their business model could lead to a crisis in 2024 with the beginning of it starting right now.
So who are they borrowing from? Largely shadow banks.
Now here is the rub.
Where do the shadow banks get their money from? First from equity investors but then the shadow banks go into the debt market and sell bonds and also borrow from banks.
So a shadow bank crisis would spread to the bond market and also to the large banks. Of course, the large banks would be bailed out by the Fed but much of the money the shadow banks have borrowed is from overseas banks so look for them to be hit even harder than the US banks.
The US government has made these risks even worse due to the “Inflation Reduction Act” and other fiascos. These acts were set up to create private/public partnerships but the public part has been largely lacking because governments have too much debt. So they have passed on concessions to the private shadow bankers to shoulder the extra burden thus creating more risk in society.
How much more risk? We don’t know. They are called shadow banks because they operate in shadows not in bright sunlight.
In effect, there is a shadow bubble in shadow banks and that will lead to a real debt crisis in the coming year.
How do we make money on this?
We could short sell the big commercial real estate firms. That is the most direct way to do it.
Check out joining my Stock Navigator program to see exactly how I will make money from this coming crisis. Click here to learn more and apply.