Finds the answer is: “very“
Before the 2007–09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn’t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.
It also draws a bunch of boxes with arrows between all of them:
Naturally this should come as a complete shock to those who failed kindergarten or to all those who still don’t understand that Hedge Funds are merely leverage-facilitating counterparties that allow Primary Dealers to net out trillions in gross margin positions (via repo, reverse repo, securities re (and re-re-re-re) pledged as collateral vs securities received as collateral and though all the other shadow banking leverage and rehypothecation conduits that virtually nobody seems to understand even though Matt King explained it all in September 2008) to zero, even though same Primary Dealers are really on the hook for about $4 trillion in exposure at last count, none of which is reflected on their balance sheets and the clueless regulators continue this epic, undercapitalized charade to continue.
More importantly, US taxpayers just spent a few tens of thousands of dollars (fresh just created by the Fed itself so think of this as fiat recycling) on this cutting edge research: surely this will generate at least one government jobs in the next NFP report, and boost Q2 GDP by at least 0.01%.
Full San Fran Fed paper for the frontally lobotomized can be found here.
via Zero Hedge http://ift.tt/1m3aOdG Tyler Durden