Re-Hyothecation Scandal

[AAOI]

It looks like this could be the biggest scandal/shoe to drop since subprime. Scary to think about the implications to this.

 

What does everyone make of this? Any thoughts?

 

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

 

http://m-currents.westlawbusiness.com/Article.aspx?id=3a6afdcc-59b3-46f4-9fb1-c126ab1f0f2a&cid=&src=&cid=74920079999999&src=PE111206005&sp=

 

http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe

 

 

 

 

 

[racemize]

this seems ridiculous--is there any way of knowing if your current broker is doing this?  How do you know if your investments are safe?

[AAOI]

Exactly! This recent interview is interesting in that regard. Ann seems a little crazy to say the least but much of what she says regarding the CME in particular is worth paying attention to.

 

http://www.financialsense.com/contributors/2011/12/02/ann-barnhardt/interview-transcript

 

 

[racemize]

Exactly! This recent interview is interesting in that regard. Ann seems a little crazy to say the least but much of what she says regarding the CME in particular is worth paying attention to.

 

http://www.financialsense.com/contributors/2011/12/02/ann-barnhardt/interview-transcript

 

Wow, she went full systemic collapse at the end there.

[AAOI]

Indeed she did! It's time for a new glass/steagall

 

http://brontecapital.blogspot.com/2008/10/1934-securities-exchange-act-and-all.html

 

 

[link01]

Exactly! This recent interview is interesting in that regard. Ann seems a little crazy to say the least but much of what she says regarding the CME in particular is worth paying attention to.

 

http://www.financialsense.com/contributors/2011/12/02/ann-barnhardt/interview-transcript

 

i'm not sure how to interpret this part:

 

<<This has never happened before. This was a complete breach of fiduciary duty by the Chicago Mercantile Exchange itself to the point that it literally has destroyed the entire paradigm. I got to the point where I could no longer tell my clients that their free cash customer funds, not even exposed to the market place—just their cash sitting in their account, non-margined—was not safe. I couldn’t tell them that their money was safe>>

 

does she mean the cash in their account was non-margined, or that it was cash in a non-margin account that she felt wasnt safe either?

 

because as the 1st paragraph from the brontecapital article listed below states:

 

<<When you sign up to a margin account in almost all cases you pledge your securities to the broker with the ability for them to repledge. >>

 

my understanding is that with a cash account at a brokerage- a non margined acct- your securities cant be pledged or loaned out, & are thus safeguarded from the kind of theft that she's talking about at mf global.

 

[stahleyp]

She seems like she is a bit of a conspiracist to me. For instance, "A great example of this is someone like Harry Reid. When he entered Congress, Harry Reid had a low six-figure net worth. He now has an eight-figure net worth. And he's never done anything except be a United States Senator. The salary I think of which is something like $170,000 a year. How does that happen? How does a man with $170,000 a year salaried position go from having a six-figure net worth to an eight-figure net worth? That doesn’t make any sense unless he is doing nefarious, illegal, insider trading type deals."

 

Accoring to this, he's quite a bit less than 8 figures. "Indeed, Reid’s personal wealth, estimated in 2009 at $3.1 million to $6.7 million, has been built largely on his investments in land and real estate — including several mining properties he owns in and around his hometown of Searchlight, Nev. As Southern Nevada boomed over the past two decades, Reid's personal wealth grew, too.

 

 

http://www.politico.com/news/stories/1010/43684.html

 

This is something I don't know much about but I'm certainly trying to read more too. I do know that sometimes the few, small voices are the ones that are right.

 

 

[AAOI]

Link01 - that was my understanding and the distinction you bring up is the key one and I'm not sure. I plan on calling CME and asking them what specifically happened and the related details. If cash in cash accounts (i.e. non margin accounts) was taken then that is some pretty scary stuff.

 

Stahlyp - Agreed, she definitely seems like a card carrying member of the black helicoptor crowd. Thanks for the link. Her seemingly gross exaggeration regarding Senator Reid's wealth makes me want to dismiss everything else she said out outright - probably should have taken that position when she started ranting on the potential for a civil war :)

[AAOI]

http://ftalphaville.ft.com/blog/2011/12/09/788551/shadow-banking-and-the-seven-collateral-miners/

[Aberhound]

I responded to the scandal by asking my broker (RBC Dominion) if they are willing to covenant not to re-hypothecate. Then I checked SEDAR to see if I could find CEF.A's bullion storage agreement with CIBC which is purported to have Re-Hypothecated $70B in London (did that include the bullion?). I could not find the agreement even though it is clearly a material agreement. The prospectus says the bullion is unencumbered. I emailed the fund to ask for a copy of the agreement and to confirm that unencumbered means that the bullion is not part of the security for the $70B and CIBC has no re-hypothecation rights on the bullion. Then I wondered if I had given re-hypothecation rights when I signed my mortgage. I couldn't find such a provision and there is statutory law in BC confirming the common law which preserves the equity of redemption so even if my home is pledged I could probably redeem by paying the borrowed money. Maybe that is why the Canadian government owns much of the mortgage paper? Then I thought of the huge foreign borrowings by Australian banks for the mortgage lending which is purportedly leveraged 50:1 with the mortgage insurers levered purportedly 100:1. I could find no re-hypo clause in the Australian mortgage terms but there is a provision not in BC law granting the entire title to the bank when there is any mortgage debt outstanding.

 

So I wonder about a priority battle in Australia where you borrow money on your house and almost pay it off when your bank fails. The bank had pledged your title in London where the derivatives have priority. Does JPM takes the position they own your house when there is a shortfall in bank assets vs liabilities just like they take the position that they own MF client monies which was part of MF's security for MF's London borrowings?

 

Re-hypothecation rights might mean you won't own assets you think you own. Check your contracts.

[biaggio]

Its like we have a bunch of teenagers running these things.

 

I have a question- is cash in bank account or brokerage accounts at risk here? It seems by definition it is the money they hold as collateral that they can hypothecation + re-hypothecate.

 

Is this a form of investing float?

 

Makes you want to run out + buy hard assets that you can store under your mattress.

[Mark Jr.]

Both RBC and CIBC are listed as HYPER-HYPOTHECATORS.

 

I barely understand what this means. I don't trade on margin, but I have margin-enabled accounts (because to be able to buy options you need a margin account).

 

Does this mean my securities can be already pledged? What about my cash?

 

 

[racemize]

Both RBC and CIBC are listed as HYPER-HYPOTHECATORS.

 

I barely understand what this means. I don't trade on margin, but I have margin-enabled accounts (because to be able to buy options you need a margin account).

 

Does this mean my securities can be already pledged? What about my cash?

 

I'm in a similar situation with Fidelity, but my understanding is that they don't have their own bets.  They also are privately held, so I would imagine they would want to keep their own money too.

[bathtime]

Oh dear, video of Ann Barnhardt burning a copy of the Koran (after she bookmarks selected pages with strips of bacon):

 

[AAOI]

http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf

[racemize]

I just called Fidelity.  It appears that hypothecation/re-hypothecation is pretty standard with any margin accounts (e.g., including brokerages other than Fidelity).  Accordingly, I switched my investment account back over to a cash account, which I am told cannot be re-hypothecated.