Rehypothecation – A Controversial Yet Important Tool in the Banker’s Arsenal

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One of the most feared terms among financial conspiracy theorists lurking on sites like Zerohedge, is “rehypothecation”. Know-it-all libertarians, anti-banker nuts and a variety of ill-educated lunatics in the darkest recesses of the internet scream that rehypothecation is a dangerous practice that puts the entire economy at risk, is a form of fraud, and is partly what lead to the collapse of Lehman Brothers and MF Global. To respected financiers however, rehypothecation is not a scary term at all, but rather an essential practice underpinning the financial system, and providing lucrative opportunities for the savvy and prudent investor.

So what exactly is rehypothecation, and what makes it so controversial in the alternative financial-sphere? Well, put simply, rehypothecation is a practice in which financiers use collateral that was pledged to them by borrowers, in their own transactions, usually for financial gain. It’s as simple as that. If a borrower pledges securities or margin to a brokerage firm, that firm might decide to pledge that collateral as further collateral in their own brokerage account. And the next broker might choose to do the same, allowing the same collateral to be pledged over and over again in countless transactions. Cool huh? Instead of just sitting there, backing up just one loan or agreement, collateral can now be used in hundreds of deals, meaning that hundreds of people are all relying on the same collateral being available in the case of a default. Sweet.

Rehypothecation ingeniously frees up useless collateral and allows many more deals to occur than would otherwise be possible. This multiplier effect generates billions of dollars in profits for savvy financiers, and consequently billions in tax revenue, billions for pension funds and billions in charity. Whatever allows investment bankers and traders to make money also benefits society, because these profits always flow back to the people.

When you understand how simple and commonplace rehypothecation is, you start to see just how crazy the critics of this common sense practice really are. It’s a practice that has been used for decades, and is still unregulated in London, where it is every-day business to use the same collateral for many transactions, helping to oil the works of one of the world’s most advanced financial systems. It’s sad that people who know so little about finance, and have never worked a day in their lives on Wall Street, would criticize a practice that has been carried out by professionals since before they were born. This is another example of how excessive free speech allows uneducated conspiracy theorists to spread misinformation to millions of people, and inspire tremendous hatred for bankers, an already persecuted group. Rehypothecation is not a dirty word, but an age-old old practice, contributing billions to the economy and keeping the financial system that we all depend on humming smoothly and generating growth and prosperity for every day people across the world.

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24 Comments on "Rehypothecation – A Controversial Yet Important Tool in the Banker’s Arsenal"

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richandrenee

If there was anything untoward about the rehypothecation of assets by the banks – I’m pretty sure that the regulators would be all over it.

The Federal Reserve’s regulations are sensibly applied to guarantee financial stability – anyone who claims otherwise is an alt-right conspiracy theorist!

Bruised Betty
Bruised Betty

Just herd that golds going wright down. Lucky for me old man cause he gave me a bit of biffy last night but now hes sorry and said hes gonna by me a ring.

Anon
Anon

I think there was a flashback (the little kids shivering part) of BLM’s early years.

The joys of Black Parenthood. Toughen them up when they are young, and they will be nobodies tool when they get older.

Unless they die young from assorted gun violence, knife violence, brick violence, rock violence or stair violence, and of course drugs. Can’t forget drugs.

Even if they die young they still will be nobodies tool.

Disclaimer: Tire iron violence is reserve for Whites and Oreos as non-Oreo Blacks usually don’t have cars.

Pbier

Thanks for highlighting again how excessive free speech is abused by uneducated conspiracy theorists. Free speech is too important an institution to allow it to be abused; it needs to be properly regulated and monitored and censored where appropriate.

richandrenee

#HateSpeechIsNotFreeSpeech

Pbier

Thanks, Rich, looking forward to your next article.

In the meantime, your reference to hate speech reminds me of an ongoing online spat between the accredited historian, Mary Beard, and the very hateful Nassim Nicholas Taleb of Black Swan fame. Beard was defending a BBC education video about the rich ethnic diversity of Roman Britain (featuring plenty of sub-Saharan Africans, which we know must have been around in Roman Times). Taleb refuses to see reason, unfortunately: https://www.theguardian.com/uk-news/2017/aug/06/mary-beard-twitter-abuse-roman-britain-ethnic-diversity

richandrenee

Gosh that’s shocking how hateful and untruthful Taleb is!

Diversity is our strength and it’s a historical fact that it was also the Romans strength.

We’re going to reach out to Mary Beard and see if we can get an interview.

ExpatLogger
ExpatLogger

Reach out, reach out, Rich.

Mary Beard is a distinguished progressive historian, and it’s an insult to call her a “batty old broad”.

Anon
Anon

It’s not like Rome fell after the Romans allowed non-Romans to enter the legions and discipline went all to hell.

trav777

#butChildPornIs

Black Lives Matter

Janet Yellen is doing a bang-up job regulating the banking industry. I can’t wait to see what other innovations the banks have been up to during the next market crash.

Anon
Anon

Earlier in the year it took a day to get 200 hits, then it took a day to get 150 hits. Currently it is taking a day to get 100 hits.

My chief concern is that this will disrupt my neutral position. With the staff giving me regular thumbs down, I need the occasional thumbs up from nameless passers by in order to maintain my neutral rating (currently my thumbs up and thumbs down are running neck and neck).

Without any nameless passers by, my neutral unbiased commentary will invariably turn negative.

Some days you just HAVE to dwell on the negatives.

Black Lives Matter

Earlier in the year you were a pathetic loser. Now you’re still a pathetic loser.

Anon
Anon

You forgot to mention

a pathetic loser on DEATHWATCH!

hungrypirana
hungrypirana

I’m still waiting for MBD’s birth certificate. I also need to see his personal balance sheet. Does he practice what he preaches? How much re-hypothecation is behind his wealth?

Anon
Anon

He’s Jewish

That means that while claiming he is vegan, every day he goes out for a steak dinner, letting his minimum wage slaves try to keep this site alive, while schmoozing with everyone he knows for better options.

His current best bet is to open a convenience store in order to skim money from food stamps. BLM will be his token black counter person.

Ponzi Schemowitz
Ponzi Schemowitz

Wow MDB, I had no idea how rehypothecation could be so beneficial to the Accredited economy. It just goes to show you how unimportant capital really is when just a little bit of it can be used to create so much money for salaries, investments, and charity. Anyone who would dare criticize this is just showing their NAZI, misogynistic, hateful credentials.

crazyMan
crazyMan

You’ve got to be crazy, got to have a real need! and have to be on what ever Pink Floyd was on when they wrote the lyrics to this legal form of extortion and money laundering.

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