Reuters: Eurozone sovereign default could be apocalyptic, picture becomes frightening

Salient points and a new term entering the public lexicon, "re-hypothecation". It will live next to the infamous terms such as CDO and CDS.

The last part first and repeated at the end:

LIQUIDITY CRISIS

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening.

newsandinsight.thomsonreuters.com...

MF Global and the great Wall St re-hypothecation scandal
12/7/2011

By Christopher Elias (UK)

...
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.
...

RE-HYPOTHECATION

By way of background, 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.

...A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default.
...

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.
...

U.S. RULES

Under the U.S. Federal Reserve Board's Regulation ... assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated....On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).
...
BEWARE THE BRITS: CIRCUMVENTING U.S. RULES

Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules.
...
OFF BALANCE SHEET

As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

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.
...
HYPER-HYPOTHECATION

With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. 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).

...
LIQUIDITY CRISIS

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening.
...

2012 will become most interesting since all the western nations will be in austerity mode. The US Super Committee has failed and due to the massive overspending, trillions in unavoidable spending cuts are coming to the US. Europe has already started to impose austerity measures and more is coming in 2012.

Now we're discovering the deep deep leverage of nothing done by; banks, central banks, and shadow banking

There's money at rest, and money in motion. Credit lines (leverage) keeps money moving. Once money stops moving then institutions, governments, and companies rapidly start shutting down.

Interesting article especially given its timing. I'm getting deja vu reading it and thinking about the verbal abuse they handed out back in 2007-2008. The problem this time is that a lot of people are on the ball and not because they want to, but because its all they have left to defend themselves with.

I think that we're going to see a lot more articles like this in the coming few days as supposedly the EU could collapse within 48 hours if today's summit fails.

23 agreed, and the rest said no....

Now what????

We are four short.....

So are they EU or not????

About time for this crash, before our braindead career poleticians make more monopoly money to bail out their corrupt banksystem. This system is used to steal your money with the inflation.

Danish poleticians used 4 months of the resent election discussing cuts on elder peoples saftynet worth 2,5 billion euro. Now due to this "crisis" they used 2 hours to agree on sending 5 billion to save those "bankrupt" banks in Greece, Italy and other places... makes me sick!

It will just be a matter of time before the fall of the world's financial system will happen. From what I hear in the grapevine, there is a new financial system waiting to be introduced that will be totally different from the way we do financial transactions now. Something that is fair to all. Let the collapse of the present financial system commence!

reply to post by wavemaker


Awww, gee..... not completely integrated, computerized, electronic commerce....

Perhaps?????

Noooooo!!!!!

Think that'll raise a few eyebrows..... donchathink?????

Yeah how about his being the new system?

Consider....

Revelation 13:16-17:

And he causes all, both small and great, rich and poor, free and slave, to receive a mark in their right hand, or in their foreheads:

And that no man might buy or sell, except he that had the mark, or the name of the beast, or the number of his name.

reply to post by surrealist


Exactly my point....

Wise one...

"let those who are wise understand"

reply to post by Dbriefed


Oh it will be bad, for sure .. but don't let the media scare you people, they are trying to get the Europeans shaking in their lil euro boots so that they bend over backwards and let the EU and ECB have their way with them. They want European sovereignty and will stop at nothing to get it. Even if they have to tear down their own system, because they know in rebuilding it after the calamity of self made destruction they will only get more power. Never let a good crisis go to waste.

reply to post by surrealist


Sounds like a Credit Score.

I posted this in the New World Order forum, thought I'll post it here too for a bit of context:

‘Let’s enforce world law and constitute a world Government’

In the midst of rising terrorism and conflicts that have became an issue of global concern, an initiative has been taken by the chief justices, judges and legal luminaries from different countries who gathered for a press conference in the Capital to support the demand for Enforceable International Law. They laid emphasis on the need to elect a world parliament which will frame world laws that will be implemented by a world government and world court will interpret them.

Around 150 participants from 65 countries including India were participating in the 12th International Conference of Chief Justices of the World....

The press conference was headed by Justice AS Qureshi, chairman of the reception committee, New Delhi and a former judge of Gujarat High Court. “World judiciary can force the leaders of the world to come together and form a world parliament to enforce world law and constitute a world government,” shared Justice Qureshi while addressing the legal dignitaries and media at the Constitution Club.

....Qureshi observed, “I’m happy to see that over the last 10 years, there is an increasing participation by judges from Latin America, Asia and Africa. This is the reflection of increasing awareness among the people. But I must say that there is still lack of participation by the European countries. There is an urgent need to realise the importance of unity of humankind and peace in the world. Thus, there is an urgent need for a legally constituted law-making body for enacting enforceable international or world law that is applicable to all the countries of the world at the same time. As only it can ensure unity of humankind...."

Justice Benjamin Odoki, Chief Justice of Uganda, said, “The future of over two billion children in the world can’t be ignored. It is imperative for their bright future that we take steps to enact world law as soon as possible.”

Meanwhile Justice Fredrick Egonda-Ntende, Chief Justice, Supreme Court, Seychelles, observed, “It is a wonderful opportunity for the judges of the world to be a part of a noble cause and to strive for democratic new world order with a world Government.”

This globalist mob are waiting for Europe to get with the times, and they're probably sitting back and watching the spectacle as Europe is being brought to its knees, fully malleable and ready to join in on a world government, parliament and judiciary totalitarian system with enforceable international laws. It's the beginning formations of the system I mention above.

i1090.photobucket.com...

reply to post by surrealist


That right there is exactly why I despise "progressives", I'm a believer in Sovereignty.

In layman's terms, say a friend borrowed $20 from you and put their $10,000 gold watch up as collateral. Hypothetically you could own a $10,000 watch. Friend goes and borrows $20 from his neighbor, and uses that same watch as collateral.

Say you borrowed $200 from your uncle to loan to ten friends who each had a gold watch, re-hypothetically your uncle would be able to claim $100,000 gold watches as assets. Say you borrowed $200 from your sister, and hypothetically she also claims the $100,000 gold watches as assets.

Uncle goes off and buys a $10,000 car using $100,000 of collateral, and goes broke. No one has $20 yet to repay the loans, but the car dealer wants all the gold watches. Sister and neighbor also claims ownership of the gold watches. Hyper-hypothetically there are three people who have $300,000 in gold watches from $420 in loans.

Hypothetically.

www.zerohedge.com...

The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold

(HSBC) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client."
...

“HSBC has received conflicting instructions regarding ownership and disposition of the property,” it said. “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”

A second story in the story is a question of whether gold that backs GLD is real. HSBC is the custodian of they physical assets of GLD.

...is whether gold in the GLD warehouse, supervised by HSBC, is truly theirs, or has it all been hypothecated from some other broker who never really had the asset or the liquidity, and so on in what effectively can be an infinite chain of repledging one asset to countless counterparties.

If there is doubt about the presence of physical gold to back the GLD symbol, this could crash GLD, and support the notion that gold purchases need to be of physical gold.