My Pimco colleague Paul McCulley has labeled it the
"shadow banking system" because it has lain hidden for
years, untouched by regulation, yet free to magically and
mystically create and then package subprime loans into a
host of three-letter conduits that only Wall Street
wizards could explain.
The "shadow banking industry" essentially consists of the commercial paper, repo, and other over the counter markets where bonds are traded on a short term basis. Essentially, banks and corporations that have 10s or 100s of millions of dollars lend it to each other, using bonds as "collateral" (protection against default). This market is now bigger than the regular banking industry, and there is evidence that the demand for investment-grade bonds to use as collateral was a contributor to the growth of the securitization industry and the sub-prime bubble.
