Posts filed under “Derivatives”
Our story thus far: The Commodity Futures Modernization Act of 2000, sponsored by Texas Senator Phil Gramm as a favor to his wife Wendy (who sat on the Board of Directors of Enron, which wanted to trade energy derivatives without oversight) was rushed through Congress in 2000. Unread by Congress or their staffers, it was…Read More
“The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit default swaps.” > Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called…Read More
This weekend, I saw Margin Call on DVD. Jeremy Irons plays a CEO of a small Goldman Sachs like company. A young analyst at the firm discovers that their highly-leveraged, massive mortgage bets are based on a VAR formula that’s flawed. It failed to consider volatility ranges beyond historical distributions. With the market swinging, his…Read More
If ever there was a word that you’d expect to find in a Harry Potter novel, it’s re-hypothecation. This a classic example of financial people inventing impenetrable terminology to make their business look like a black art. “Oooh, re-hypothecation, it must be magic!”
Well it isn’t.
The term “re-hypothecation” came up a lot during the MF Global meltdown; It’s quite a common term in the securities market – but what does it mean?
To explain re-hypothecation, we have to explain hypothecation. And hypothecation is pretty simple. It’s when you lend someone money and let the borrower keep the collateral.
Re-hypothecation: How it’s related to MF Global
Marketplace Jan 4, 2012
“Bank of America Corp. may face billions of dollars more in liability for faulty mortgages if a judge agrees with insurer MBIA Inc. that the lender must buy back loans even if the errors didn’t cause a borrower’s default…If New York Supreme Court Justice Eileen Bransten and judges in similar cases across the country rule…Read More
The (sizable) Role of Rehypothecation in the Shadow Banking System Singh, Manmohan ; Aitken, James July 01, 2010 ~~~ This paper examines the sizable role of rehypothecation in the shadow banking system. Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to its prime broker to be used again as collateral…Read More
> My Sunday Washington Post column is out this morning. Today, we look at The systemic risk revealed by MF Global’s collapse. As has been the case so many times, the details of this debacle are found in the regulatory changes lobbied for — and recieved — by Corzine and the MF Global legal crew….Read More