Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20
Gold Gann Angle Update - 10th Jan 20
Gold In Rally Mode Suggests Commitment of Traders (COT) Data - 10th Jan 20
Disney Could Mount Its Biggest Rally in 2020 - 10th Jan 20
How on Earth Can Gold Decline During the U.S. – Iran Crisis? - 10th Jan 20
Getting Your HR Budget in Line - 10th Jan 20
The Fed Protects Gamblers at the Expense of the Economy - 9th Jan 20
Last Chance to Get Microsoft Windows 10 for FREE! - 9th Jan 20
The Stock Market is the Opiate of the Masses - 9th Jan 20
Is The Energy Sector Setting Up Another Great Entry? - 9th Jan 20
The Fed Is Creating a Monster Bubble - 9th Jan 20
If History Repeats, Video Game Stocks Could Soar 600%+ - 9th Jan 20
What to Know Before Buying a Land Rover Discovery Sport in 2020 - 8th Jan 20
Stock Market Forecast 2020 Trend Analysis - 8th Jan 20
Gold Price at Resistance - 8th Jan 20
The Fed Has Quietly Started QE4 - 8th Jan 20
NASDAQ Set to Fall 1000pts Early 2020, and What it Means for Gold Price - 8th Jan 20
Gold 2020 - Financial Analysts and Major Financial Institutions Outlook - 8th Jan 20
Stock Market Trend Review - 8th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Rehypothecation of Collateral

Stock-Markets / Financial Markets 2013 Oct 09, 2013 - 10:47 AM GMT

By: BATR

Stock-Markets

Before you get a headache or a pain in your side, rehypothecation is not as difficult to understand as spelling the word. Definition of 'Rehypothecation':

“The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees.


In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades. While rehypothecation was a common practice until 2007, hedge funds became much more wary about it in the wake of the Lehman Brothers collapse and subsequent credit crunch in 2008-09.

In the United States, rehypothecation of collateral by broker-dealers is limited to 140% of the loan amount to a client, under Rule 15c3-3 of the SEC.”

Well, now that it is clear, isn’t it? Still need a better explanation, watch the video Rehypothecation.

Look at the practice as a giant musical chairs orchestra, conducting a continuous symphony. As long as the tune plays, the multi pledged collateral is safe from foreclosure.

Consider that the entire fiat paper financial system is based upon a promise to pay. The original capital plus the interest juice is incorporated within the pledge from the borrower to the lender. However, in the real world only the super privileged and connected negotiate market rate or below, loans without collateral. For the rest of the garden-variety beggars that need to go hat in hand to scrounge money, they had better be willing to put up security for the note obligation.

Of course, unsecured credit card usury rates are the exception to manageable interest rates.

In the realm of high finance the rules for swinging deals takes on surreal implications when leveraging, gearing and syndication pooling share the risk by pledging security instruments to gain loan approval.

The complications are that such guarantees often do not hold unencumbered rights to the underlying security. Obtaining insurance coverage to warrant the value of the collateral is one way to satisfy the lender. Add to this expose the practice of re-insurance when the original underwriter books out their portions of the default risk to another more daring insurer.

While the security industry rules limit the percentage of rehypothecation, do not forget this is the same fraternity that invented the practices of derivatives and swaps.

Do you really believe that any set of rules will prevent the security brotherhood from comingling customer funds? Maybe putting Jon Corzine, the MF Global Holdings guru in charge of regulation enforcement would bring clarity to a complex system of double-dealing.

Sure, such an expert on circumventing the law would be the optimum sheriff to round up the rehypothecation bandits. Well, just understand the significance that the lawyers and barristers acknowledge, in the WGMR report.

"Cash is fully fungible, making it difficult to segregate from other assets, lawyers point out. Full title to the cash is given to the dealer, and all the customer has is a contractual claim for repayment of an equal amount of cash, meaning it would effectively rank as an unsecured creditor in the event of a default. In contrast, securities posted as collateral under a security interest arrangement can be segregated and traceable."

Oh golly, the smoking gun verbalized by the officers of the court . . .

The depositor relinquishes their ownership of funds to the security dealer. When the music is over, turn out the lights. Maybe the message from the Jim Morrison’s song is a warning to investors and borrowers alike. Just close the door on the opaque scheme to overestimate the underlying value of collateral security.

When the only recourse to recoup your losses rests upon an unsecure creditor status in a bankruptcy, the capital formation of the economic system ceases to function. Conversely, before the borrower rejoices that the financial institution takes a mortal hit to their balance sheet, the collapse of liquidity brings hardship to the entire economy.

Common sense in banking is gone. Indemnity protection in securities is worthless. If left to the financial elites to rescue the paper monitory structure, the gnomes of default will just rehypothecate the entire system by claiming the same ownership, of all-collateral as the financial dealers take full title to your cash.
This is how you have become the unsecured creditor of your own assets. When You Wish Upon A Star, Anything your heart desires – REHYPOTHECATION - Will come to you.

Source : http://www.batr.org/negotium/100913.html

Discuss or comment about this essay on the BATR Forum

http://www.batr.org

"Many seek to become a Syndicated Columnist, while the few strive to be a Vindicated Publisher"

© 2013 Copyright BATR - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors

BATR Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules