I am a newbie to the world of global finance – 1 year ago I did not even know what the ‘Reserve Currency’ was nor what Alan Greenspan did to release the next major depression on the world by thinking somehow ‘this time it will be different’ and release the leash off the commercial & investment banks.
I learned some of the basics while on the Knowledge to Action Forex training course which taught me many good things about how to trade Forex and how you need to manage your own finances – makes sense when we have people like Alan Greenspan.
But after I read book after book on how a financial crisis starts (over the centuries) I am slowly but surely coming to the conclusion that humans are totally stupid.
It seems that throughout history its basically the same set of parameters (‘fuel’) that are setup and the same stupid humans who think ‘this time it will be different’ and ignite the fuse that sets the world on fire.
Do you think I am overreacting? Okay then have a read below of this fantastic description on what ‘Re-Hypothecation’ is from one of my favorite authors. The extract below is from ‘Rumours, disasters and re-hypothecation‘ post on Golem XIV blog.
Here is a good description of it from the Reuter’s article,
…hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.
Why do this? It’s in part about who gets to show what assets as still being on their books while others get to use said assets as collateral for their own loans. Which brings us to ‘re-hypothecation“. Who says an asset that has been “hypothecated” once can’t be “re-hypothecated”? Well actually no one. The UK and the US authorities have spent a decade removing any restraint of Hypothecation to bring us to where we are now.
So, Bank 1 has an asset. It badly needs cash because it’s nearly broke. It hypothecates its asset to bank 2. Bank 2 also needs/wants a loan.So it turns to bank 3 and says, I happen to have a lovely asset which I hypothetically control, would you like it? Bank 3 says great. So bank 2 gets its loan which it probably uses to make other loans, while the asset it got from bank 1 is re-hypothecated to bank 3. Now bank 3 hypothetically controls the asset. Bank 3 turns to bank 4 and does the same. We now have 4 banks three of whom hypothetically control the original asset which is in fact still where it started, in bank 1 – a bank which was in such trouble it had to hypothecate its assets. Along the way, however, three banks have used the asset to get themselves loans and all of those loans rest on hypothetical control of the original asset. A pyramid of loans and obligations rest on a single asset whose control is now not at all clear should any one along the chain need to assert their control or need it bank to pay off their debts – should anything go wrong in the the ventures into which they put the money they borrowed on the strength of the ‘asset’. And THAT my fellow citizens is why the bankers insist they get paid so much.
The people that create and use these weapons of mass destruction are the ones that cause the rest of humanity to suffer. Can we not try and learn from the mistakes of past depressions?
Maybe not – its been like this for 100′s of years by the look of it.
And just this morning on ZeroHedge.com ‘The Gold “Rehypothecation” Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold‘.
God save us.