http://www.freerepublic.com/focus/f-news/2818536/posts
MF Global Collapse May Have “Apocalyptic” Consequences For The Eurozone
http://www.zerohedge.com ^ | December 07 2011 | Tyler Durden
Posted on Saturday, December 10, 2011 12:58:44 AM by Para-Ord.45
Why The UK Trail Of The MF Global Collapse May Have “Apocalyptic” Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else
In an oddly prescient turn of events, yesterday we penned a post titled “Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?” in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete “lock up in interbank liquidity” and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an “apocalyptic” event (not our words... read on). Why was this prescient? Because today, Reuters’ Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman’s terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of “repo-to-maturity” of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world’s entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of “hypothecation, and re-hypothecation.” In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly “stable” institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things, and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.
As Reuters points out, it was not so much the act of creating “repos-to-maturity” that imperiled MF Global, but what is a secret gold mine for those privy to it - the process of re-hypothecation of collateral.
[h]ypothecation 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.
In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. 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.
In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).
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.
Under the U.S. Federal Reserve Board’s Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client’s liability to the prime broker. For example, 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.
In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.
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.
Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation.
Potentially as simple as having MF Global UK Limited, an English subsidiary, enter into a prime brokerage agreement with a customer, a U.S. based prime broker can immediately take advantage of the UK’s unrestricted re-hypothecation rules.
This is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished.
A prime broker need not even require that an investor (eg hedge fund) sign all agreements with a European subsidiary to take advantage of the loophole. In fact, in Lehman’s case many funds signed a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but margin-lending agreements and securities-lending agreements with LBIE in the UK (normally conducted under a Global Master Securities Lending Agreement).
These agreements permitted Lehman to transfer client assets between various affiliates without the fund’s express consent, despite the fact that the main agreement had been under U.S. law. As a result of these peripheral agreements, all or most of its clients’ assets found their way down to LBIE.
And now we get back to the topic at hand: MF Global, why and how it did precisely what Lehman did back then, why it did this in London, and why its failure is a symptom of something far more terrifying than merely investing money in collapsing PIIGS bonds.
( EXCERPT)
Crossposted from thee Drone thread.
http://www.freerepublic.com/focus/news/2818540/posts?page=53#53
Shortly after this story broke, I came up with this theory and developments only tend to support it.
Ever since Obama was immaculated, he has been putting his “Devout Muslim” Brothers in top, high security positions in nearly (if not every) government agency. No doubt they have the highest security clearances and access to ALL of our defense and security intel.
Those 12 CIA informants who Iran caught and executed not long ago were probably ratted out by one of Obama’s Islamic quislings in the CIA, FBI or wherever they had access to the names and contact information for those doomed informants. Locals will now think twice before they cooperate with our CIA again, no matter what they are offered.
My theory is that one of these Islamic plants gave their “brothers” in Iran the encryption codes for the remote control and probably even the set up for the control console and frequencies used. Probably access codes to the satilite repeaters and everything else they needed to electronically hijack this drone and bring it in for a landing right where they probably wanted it.
They have probably had this technology for some time now but were waiting for one of our more sophisticated drones to wander into their trap to use it.
Sure; the drone got “hacked”... but the hackers had a lot of help from inside our side.
Up until now these drones have been pretty effective, but don’t be surprised if all of a sudden Muchmett knows exactly when they are coming and where they are at all times, and can take them over and turn them against US any time they want to.
A few drone launched hellfire missiles taking out OUR high value leadership assets is going to be awfully embarassing and a major propaganda coup for the Muchmetts... but I fully expect it to start happening any day now - possibly in some rather surprising places... like L.A. or Detroit... or Washington DC for instance.
When it happens, don’t be surprised if you hear “Allahu Achbaw” ringing through the halls of our Pentagon. Or rather, it WAS our Pentagon, until it was sold out from under us.
When you give the enemy top security clearances and the keys to said Pentagon, what do you expect?
....especially when our enemy’s best friend is in our White House directing the whole show and the American people and military are too stupid, afraid, and/or lazy to do anything about it.
53 posted on Saturday, December 10, 2011 2:51:21 AM by George Varnum (Liberty, like our Forefather’s Flintlock Musket, must be kept clean, oiled, and READY!)