Wow - check out this post on Re-hypothecation - I never heard of it until about 24 hours ago - but reading about it makes me sick. How can businesses get away with doing this shit? The regulators should be sacked.
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And on a trading forum members are reading their broker contracts and some are discovering clauses that allow their assets to be Re-hypothecated!
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Here is a good description of it from the Reuter’s article,
…hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.
Why do this? It’s in part about who gets to show what assets as still being on their books while others get to use said assets as collateral for their own loans. Which brings us to ‘re-hypothecation“. Who says an asset that has been “hypothecated” once can’t be “re-hypothecated”? Well actually no one. The UK and the US authorities have spent a decade removing any restraint of Hypothecation to bring us to where we are now.
So, Bank 1 has an asset. It badly needs cash because it’s nearly broke. It hypothecates its asset to bank 2. Bank 2 also needs/wants a loan.So it turns to bank 3 and says, I happen to have a lovely asset which I hypothetically control, would you like it? Bank 3 says great. So bank 2 gets its loan which it probably uses to make other loans, while the asset it got from bank 1 is re-hypothecated to bank 3. Now bank 3 hypothetically controls the asset. Bank 3 turns to bank 4 and does the same. We now have 4 banks three of whom hypothetically control the original asset which is in fact still where it started, in bank 1 – a bank which was in such trouble it had to hypothecate its assets. Along the way, however, three banks have used the asset to get themselves loans and all of those loans rest on hypothetical control of the original asset. A pyramid of loans and obligations rest on a single asset whose control is now not at all clear should any one along the chain need to assert their control or need it bank to pay off their debts – should anything go wrong in the the ventures into which they put the money they borrowed on the strength of the ‘asset’. And THAT my fellow citizens is why the bankers insist they get paid so much.
…hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.
Why do this? It’s in part about who gets to show what assets as still being on their books while others get to use said assets as collateral for their own loans. Which brings us to ‘re-hypothecation“. Who says an asset that has been “hypothecated” once can’t be “re-hypothecated”? Well actually no one. The UK and the US authorities have spent a decade removing any restraint of Hypothecation to bring us to where we are now.
So, Bank 1 has an asset. It badly needs cash because it’s nearly broke. It hypothecates its asset to bank 2. Bank 2 also needs/wants a loan.So it turns to bank 3 and says, I happen to have a lovely asset which I hypothetically control, would you like it? Bank 3 says great. So bank 2 gets its loan which it probably uses to make other loans, while the asset it got from bank 1 is re-hypothecated to bank 3. Now bank 3 hypothetically controls the asset. Bank 3 turns to bank 4 and does the same. We now have 4 banks three of whom hypothetically control the original asset which is in fact still where it started, in bank 1 – a bank which was in such trouble it had to hypothecate its assets. Along the way, however, three banks have used the asset to get themselves loans and all of those loans rest on hypothetical control of the original asset. A pyramid of loans and obligations rest on a single asset whose control is now not at all clear should any one along the chain need to assert their control or need it bank to pay off their debts – should anything go wrong in the the ventures into which they put the money they borrowed on the strength of the ‘asset’. And THAT my fellow citizens is why the bankers insist they get paid so much.
And on a trading forum members are reading their broker contracts and some are discovering clauses that allow their assets to be Re-hypothecated!
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