The small country of Latvia is now in the midst of a bank run, for the very same reasons that MF Global (former) customers are not getting their money back.
Here's a video of what is now a bank run in Latvia with a limit of $95 a day being the maximum withdrawal.
Here's where the story started to get legs last week as the disecting of MF Global has revealed some interesting things in the shadow banking system, but they weren't linited to MF Global and still aren't. Ironically this is the same fundamental reason for Lehamn's failure.
As Reuters reported last week, brokerages have found a loophole in US law that essentially allows them to create a fractional reserve effect using customer's accounts. The MF Global client money didn't disappear, if fell into the hole of a phrase you will be hearing a lot more about,"hypothecation' and "Re-hypothecation".
MF Global and the great Wall St re-hypothecation scandal
It's not just MFG, but according to Reuter's your own brokerage may be involved...
Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).
Nor is lending confined to between banks. Intra-bank re-hypothecation is also possible as evidenced by filings from Wells Fargo. According to disclosures from Wachovia Preferred Funding Corp, its parent, Wells Fargo, acts as collateral custodian and has the right to re-hypothecate and use around $170 million of assets posted as collateral.
Through UK subsidiaries, your funds deposited with a broker such as Interactive Brokers might be in the UK being "re-hypothecated", essentially circumventing US law and creating huge leverage that they then trade with, the collateral is the funding in YOUR account and as it is leveraged WAY beyond the collateral (account funds) available.
Interactive Brokers was the first to come out and deny wrongdoing, but not necessarily denying repothecation. In their "denial" statement, they say the following:
"More specifically, regarding hypothecation and the level of such activity at IB: - The hypothecation and re-hypothecation of customer assets is a standard and essential practice, which U.S. brokers employ in the course of financing customer activity. The rights to do so are longstanding, have been explicitly provided by regulation and one should not be surprised to see boilerplate consent language in each broker’s customer agreement acknowledging this."
Also apparently engaged in the practice is one of the model portfolio shorts, JEF.
At this point, the gross over-leverage these banks and Prime Brokers are engaged in is a powder keg, MF Global was the canary in the coal mine as mentioned before for a variety of reasons, but as we are now finding out as the MF Global funds didn't just go missing in their final days, they fell victim to re-hypothecation, a practice that IB claims is "boilerplate" in standard brokerage agreements. The scary thing is (much like in 2008 when no one knew what banks had what liabilities), this practice can be on or off the balance sheet, so some brokerages may implode without there ever being a hint that they were involved in this shady practice via UK subsidiaries until it is literally too late as MF Global clients are now finding out.
I would recommend reading the piece from Reuter's legal department above and become somewhat familiar with the 2011 2.0 scandal as it is not likely that MF Global will be the first and last.
No comments:
Post a Comment