Hypothecation is Plan B?

MF Global is/was a disaster, but the main thing people want to know is "where the hell is the $1.2bn?"

I stumbled upon this good blog post by someone I have no idea is. But it makes sense, so I will repost some of it.


http://www.golemxiv.co.uk/2011/12/plan-b-how-to-loot-nations-and-their-banks-legally/

Here is an excerpt:

MF Global imploded when it could not get the short term funding it needed. There were two kinds of funding MF Global relied upon for its liquidity/cash flow: repo and hypothecation. For those not familiar, Repo is when a bank or brokerage ‘sells’ an asset for cash but with the agreement that it will re-purchase – hence ‘repo’ – the asset at an agreed date for an agreed price. It is not really a sale but a loan. Repo is the oxygen the financial world breathes. Repo is a $10 Trillion market.
The other main source of the essential short term funding was Hypothecation. This is when a bank or brokerage pledges an asset to a ‘lender’ in return for cash but the asset remains in the possession of the borrower. What the ‘lender’ gets is hypothetical control of the asset. Although the asset never actually changes hands, the new ‘owner’s’ hypothetical control of the asset allows her  to do what she wishes with the asset. Including re-hypothecating the asset to another bank or brokerage. If she does so then the hypothetical control passes to yet another ‘owner’. Even though physically it remain where it started.

What the author goes on to describe is that back in 2005 a law (or amendment to banktrupcy law) was created which allowed this:

So when a bank goes bankrupt, BEFORE even the most senior bond holders, the repo lenders and derivatives traders can remove, or keep all the assets pledged to them.

I highly suggested taking 10 minutes to read the full article because it very well might describe how $1.2bn vanishes out of thin air. Something tells me holding assets close to home might be a good idea.