The Shadow Banking System has gone. That's why the -Credit- crisis will linger

...what is broken is not the large banks' willingness to extend credit.

What is broken is the shadow banking system in which the big banks played a significant but supporting role. The shadow banking system has been the driver of credit creation for the past two decades. It is not clogged; it no longer exists. And it cannot be recreated by overpaying for Citibank's bad loans. The shadow banking system is that complex interplay of banks, hedge funds, structured investment vehicles, mono-line insurers, derivative products companies and the likes of AIG-Financial Products.

Consider that AIG-FP alone had insured over $400 billion of mortgage securities. Most of these securities were "owned" by banks, but it is a mistake to classify the banks as lenders. The banks didn't think they were lending; they thought they were providing funding only to the extent someone like AIG was there to take the risk.

Schemes designed to get banks lending again overlook the financial developments of the past 20 years. If we want to return to 1988, when for instance Citibank held its credit-card assets on its own books, we will quickly discover that the capital of the banks, even if unimpaired by bad debt, will finance only a much smaller amount of credit.

The real problem is much more difficult than coaxing banks to lend. The shadow banking system evolved over 20 years and imploded in just six months.

AIG-FP and the other institutions that made super-cheap credit available cannot easily be recreated. Geithner's plan seems to miss this point.

--- James Keller in Barrons, 4.4.09 (my italics)