In its 85th anniversary issue, Bloomberg's Businessweek did a feature entitled, "85 Years, 85 Ideas, which chronicles the 85 "most disruptive ideas" of the last 85 years. Coming in at number 37 on the list is "Shadow Banking" and the birth of money market funds. It says, "1970 The Reserve Fund, the first money-market mutual fund, is launched by financial consultants Bruce Bent and Henry Brown. Shadow banking isn't shadowy like the illicit, underground economy. It's shadowy like Me and My Shadow -- attached to regular banking at the heels and doing all of the same things at the same time. Want to borrow money? You can get a loan from a bank -- or you can do it the shadow way in the "repo" market by selling some Treasury bonds and promising to buy them back in a week for a slightly higher price, which represents the interest. Want to save money? You can deposit your cash in a bank -- or you can do it the shadow way by, say, investing in a money-market mutual fund or taking the other side of one of those repo transactions. Shadow banking took a while to make itself understood. Three years in, the Reserve Fund had only $1 million in assets. Then the New York Times wrote about it in 1973, and the funds began to pour in. Paul Samuelson, the Nobel laureate, was so impressed by the invention of Bent and Brown that he said they deserved a Nobel of their own. Variations on the theme quickly followed. In 1977 Merrill Lynch, Pierce, Fenner & Smith introduced a money-market mutual fund that you could tap by writing checks or using a credit card. Banks were outraged by the challenge to their core business. Then came repo, short for repurchase agreement. Securitization is also part of the shadow banking system.... Shadow banking [has] survived the damage to its reputation [since the 2008 crisis]. Its share of global financial assets slipped from 26 percent to 23 percent and has since rebounded to 25 percent, according to data compiled by the Financial Stability Board, an international body of regulators."
