Hyper Re-Hypothecation

Dear Contra_Folk,
Say What? Your supposedly “just like cash in the bank” AAA Money Market Mutual Funds (MMF’s) are likely next to reveal some funny money custodianship and transparency issues with rotting collateral off the books from hidden UK-based repo holdings.   The MMF’s are very likely going to have to take market haircuts to their debt holdings at some point, maybe even impact the almighty $1.00 NAV value – all overnight.
Break the Buck – Never Say Never
“With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.
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.”

Written with contributions from Jack Bunker and Nanette Byrnes.
 (This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com. ) 
What this means to you and me is the financials have been using a backdoor, UK-based, non-public re-hypothecation scheme designed to REPO 105-like off balance sheet (thus non) disclosure of less quality assets held in this secret format, but again, only if held in the UK domestic market which is the only global market that allows re-pledging of pledges.  Only available in London you say, pity!
All paths lead to London,
p.s. Money Market Funds Primer: Money market funds have been perceived as relatively low risk, compared to other mutual funds (and most other investments). By law, they can invest in only certain high-quality, highly rated short-term investments issued by sovereign governments, corporations, and state and local or municipal governments. Money market funds try to keep their net asset value (NAV) — which represents the value of one share in a fund — at a stable $1.00 per share. But the NAV may fall below $1.00 if the fund’s investments perform poorly or suffer an unexpected repricing haircut.  Investor losses have been rare, but they are possible.

About ContraManFund

Fictional (maybe not if you are an accredited investor) trading of a long/short contrarian-driven investment model portfolio based upon current economic environments and counter-intuitive trends. Legal Disclaimer The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. Please consult your own investment advisor before making any investments anywhere, and always do your own due diligence before undertaking any individual investment.
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