next »

[womanofproperty]

Anyone following this? It doesn't look pretty:

http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/

[aandsdean]

There was an interesting article about Corzine this AM in the NYT.  It's pretty fascinating.

The one I'm really enjoying, though, is the Olympus scandal....

[womanofproperty]

I'm finding the NYT article and a lot of the other articles interesting for what they leave out. There's no mention of re-hypothecation, which seems to be at the root of the problem. Instead they seem to  buy into the idea that

In its final days, MF Global tapped its customers’ accounts to meet its own financial obligations, people briefed on the matter have said. The act violated a fundamental Wall Street regulation that firms never commingle customer money with company funds.

If true, that would be sad but not that surprising or alarming. However, that doesn't seem to be what was happening. As the article I linked to noted:

Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy.

Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name - a legal loophole that may mean that MF Global clients never get their money back.

and

Puzzling many, though, were the huge sums involved. How was MF Global able to "lose" $1.2 billion of its clients’ money and acquire a sovereign debt position of $6.3 billion – a position more than five times the firm’s book value, or net worth? The answer it seems lies in its exploitation of a loophole between UK and U.S. brokerage rules on the use of clients funds known as "re-hypothecation".

I would expect that Corzine knew about the practice of re-hypothecation and the "hyper-hypothecation" MF Global engaged in, but I don't really care whether he did or not. It's the extent to which this type of shadow banking was normal at this firm (and others) that is scary.

[prytania3]

I've been following it. What a mess. How the hell do you lose 1.2 billion?

[womanofproperty]

MF Global didn't "lose" the funds.

MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.

If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill.

MF Global seems to have moved the funds off the balance sheet using repo-to-maturity borrowing and re-hypothecating the 1.2 billion (used the client funds as collateral). And although their clients might have thought they were just parking their money with MF Global, the agreements they signed allow MF Global to do just that. US rules, though lax, do set some limits on re-hypothecation. However UK rules don't - if the client doesn't specifically set a limit on re-hypothecation, too bad for them - so many firms just use their European subsidiaries so they didn't have to comply with U.S. restrictions.

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

MF Global isn't the only firm that re-hypothecates and what it did appears to have been legal. This practice isn't confined to one firm.

A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

Shadow banking. It's not just about Corzine.

I hope people remain blissfully unaware of this, but I'm afraid we may start hearing as much about re-hypothecation as we did about credit default swaps.

[fizmath]

Apparently MF Global selectively robbed certain clients' accounts.  The wealthiest investors got their money out while smaller investors lost everything.  One of my favorite pessimists Gerald Celente lost a few hundred grand with MF global.