Watching for the next financial crisis by keeping an eye on the repurchase market. MF Global and the great Wall St re-hypothecation scandal. Back to Current Awareness Your source for up-to-the-minute insights and analysis that matter to you.
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MF Global warning: Financial markets have not been fixed. The October 31 bankruptcy of MF Global Holdings Ltd., a broker-dealer on Fifth Avenue in New York City, is important news for all Americans because it is a warning: The Dodd-Frank Act, which Congress passed 16 months ago to protect Americans from another financial crisis, is not working.
Instead, one thing that does seem to protect Americans is size. The MF Global bankruptcy was triggered by one of the same key Wall Street gambles that rocked Bear Stearns & Co., Lehman Brothers Holdings and others in 2008 and froze credit markets, that brought Long-Term Capital Management hedge fund to its knees in 1998 and Orange County in 1994, and that threaten European banks today: Repurchase (repo) loans. These nuclear weapons are still as dangerous as ever. Yet MF Global’s 2008-style failure – while tragic for its employees (2,894 on September 30), investors, clients, suppliers, and others – is having little impact on Main Street.
Why? MF Global’s relatively limited impact is not going unnoticed. Revisiting Rehypothecation: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again) Yves here.
One of our ongoing frustrations at NC is when the media and blogosphere get up in arms about what we think are secondary issues. We’ve been loath to comment on a Thomson Reuters article that claimed that rehypothecation of assets in customer accounts was the reason MF Global customer funds went missing. The reason we’ve stayed away from this debate is that the article, despite its length, did not provide any substantiation for its claim. While it did contend that US customer accounts were set up so as to allow assets to be rehypothecated using far more permissive UK rules, and described how rehypothecation could be abused, it did not provide any proof that this was what took place at MF Global.
Note that this does NOT mean we are saying that rehypothecation did not play a role, merely that the article was speculative. But there is plenty of reason to be worried about rehypothecation. We thought the earlier Richard Smith post would again be of considerable interest to readers.