Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies!

Reggie Middleton's picture

I have been doing a series of TV interviews focusing on risk in the
banking system. Of note is the topic of the latest discussion, which is
basically how MF Global collapsed while losing $1.2 billion of customer
funds. The answer to the question appears to be in hypethecation, and
re-hypothecation of securities - actions whose counterparty risks lay
off balance sheet. Reuters reports MF Global and the great Wall St re-hypothecation scandal

fact, by 2007, re-hypothecation had grown so large that it accounted
for half of the activity of the shadow banking system. Prior to Lehman
Brothers collapse, the International Monetary Fund (IMF)
calculated that U.S. banks were receiving $4 trillion worth of funding
by re-hypothecation, much of which was sourced from the UK. With assets
being re-hypothecated many times over (known as “churn”), the original
collateral being used may have been as little as $1 trillion – a quarter
of the financial footprint created through re-hypothecation.

Hence, when MF Global conceived of its Eurozone repo ruse, client funds
were waiting to be plundered for investment in AA rated European
sovereign debt, despite the fact that many of its hedge fund clients may
have been betting against the performance of those very same bonds.


well as collateral risk, re-hypothecation creates significant
counterparty risk and its off-balance sheet treatment contains many
hidden nasties. Even without circumventing U.S. limits on
re-hypothecation, the off-balance sheet treatment means that the amount
of leverage (gearing) and systemic risk created in the system by
re-hypothecation is staggering. 

transactions are off-balance sheet and are therefore unrestricted by
balance sheet controls. Whereas on balance sheet transactions
necessitate only appearing as an asset/liability on one bank’s balance
sheet and not another, off-balance sheet transactions can, and
frequently do, appear on multiple banks’ financial statements. What this
creates is chains of counterparty risk, where multiple re-hypothecation
borrowers use the same collateral over and over again. Essentially, it
is a chain of debt obligations that is only as strong as its weakest

collateral being re-hypothecated to a factor of four (according to IMF
estimates), the actual capital backing banks re-hypothecation
transactions may be as little as 25%. This churning of collateral means
that re-hypothecation transactions have been creating enormous amounts
of liquidity, much of which has no real asset backing. 

The lack of balance sheet recognition of re-hypothecation was noted in Jefferies’ recent 10Q (emphasis added): 

 “Note 7. Collateralized Transactions
pledge securities in connection with repurchase agreements, securities
lending agreements and other secured arrangements, including clearing
arrangements. The pledge of our securities is in connection with our
mortgage?backed securities, corporate bond, government and agency
securities and equities businesses. Counterparties generally have the
right to sell or repledge the collateral.Pledged securities that
can be sold or repledged by the counterparty are included within
Financial instruments owned and noted as Securities pledged on our
Consolidated Statements of Financial Condition. 
We receive securities as collateral in connection with resale agreements, securities borrowings and customer margin loans. In
many instances, we are permitted by contract or custom to rehypothecate
securities received as collateral. These securities maybe used to
secure repurchase agreements, enter into security lending or derivative
transactions or cover short positions. 
At August 31, 2011 and
November 30, 2010, the approximate fair value of securities received as
collateral by us that may be sold or repledged was approximately $25.9
billion and $22.3 billion, respectively. At August 31, 2011 and November
30, 2010, a substantial portion of the securities received by us had
been sold or repledged. 

We engage in securities for securities
transactions in which we are the borrower of securities and provide
other securities as collateral rather than cash. As no cash is
provided under these types of transactions, we, as borrower, treat these
as noncash transactions and do not recognize assets or liabilities on
the Consolidated Statements of Financial Condition. 
securities pledged as collateral under these transactions are included
within the total amount of Financial instruments owned and noted as
Securities pledged on our Consolidated Statements of Financial

to Jefferies’ most recent Annual Report it had re-hypothecated $22.3
billion (in fair value) of assets in 2011 including government debt,
asset backed securities, derivatives and corporate equity- that’s just
$15 billion shy of Jefferies total on balance sheet assets of $37


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). 

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. 


volume and level of re-hypothecation suggests a frightening alternative
hypothesis for the current liquidity crisis being experienced by banks
and for why regulators around the world decided to step in to prop up
the markets recently. To date, reports have been focused on how Eurozone
default concerns were provoking fear in the markets and causing
liquidity to dry up. 

have been focused on how a Eurozone default would result in huge losses
in Eurozone bonds being felt across the world’s banks. However,
re-hypothecation suggests an even greater fear. Considering that
re-hypothecation may have increased the financial footprint of Eurozone
bonds by at least four fold then a Eurozone sovereign default could be

banks direct holding of sovereign debt is hardly negligible. According
to the Bank for International Settlements (BIS), U.S. banks hold $181
billion in the sovereign debt of Greece, Ireland, Italy, Portugal and
Spain. If we factor in off-balance sheet transactions such as
re-hypothecations and repos, then the picture becomes frightening.

it gets worse. You see, Lehman's collapse was much larger than that of
MF Global, and did much more damage. On top of it, it was marred with
obvious and purposeful misrepresentation, yet they broke no signficant
laws or regulations...


Lack of Legal Sanction Now Stands as a Roadmap of Unaccountability for Other Investment Firms

Seton Hall University School of Law’s Center for Policy & Research
has issued a report: Lehman Brothers: A License to Fail with Other
People’s Money, which examines in-depth the investigation of Lehman
Brothers’ business practices undertaken by the U.S. Bankruptcy Court 
Examiner in the largest bankruptcy ever filed. The Center focused
primarily on Lehman’s risk management and asset valuation— two aspects
of company worth not readily available or discernible to the investing
public— and notes that Lehman’s conscious violation of internal risk
limitations as well as it’s conscious failure to accurately value assets
was, alarmingly, found insufficient as a matter of law by the Examiner
to trigger legal sanctions against Lehman Brothers or even a reprimand.

the face of mounting losses, Lehman doubled down its bets like a CEO at
a blackjack table gambling with someone else’s pension money, and
backdated risk limits to disguise the truth that its business was
collapsing” commented Professor Mark Denbeaux, Director of the Center
for Policy & Research.  “The truth is, considering the actual value
of the assets they were using to gamble, no self-respecting casino would
have even taken their bet. Of course it all fell like a house of

Fellow and report co-author, Eric Miller agreed, noting, “According to a
Senior Management member with principal responsibility for asset
valuation, they valued assets ‘with a gut feeling’ and, unbelievably,
without even ‘thinking about’ whether or not the assets could be sold
for the values placed on them. There was also a failure to make
appropriate write-downs of realized losses in valuation because of what
another Senior Management member charged with valuation ‘unambiguously
asserted’ was a clear understanding that Lehman had imposed a ‘cap on
such write-downs.’ The end result was not surprising.”

January 2008, Lehman Brothers, heavily invested in by pension plans
such as the California Public Employees’ Retirement System and the New
York State Teachers Retirement Plan, traded at a high of over $65 per
share.  At that time, Lehman reported record numbers of nearly $60
billion in revenue and more than $4 billion in earnings.  However, a
mere eight months later, Lehman’s stock was trading at under $4 per
share, and on September 12, 2008, Lehman filed for Chapter 11
bankruptcy, with losses to investors, both small and large, totaling
billions of dollars.

Bankruptcy Court appointed an Examiner to investigate and report on
Lehman’s business affairs, with particular regard to “any fact
ascertained pertaining to fraud, dishonesty, incompetence, misconduct,
mismanagement, or irregularity in the management of the affairs of the
debtor, or to a cause of action available to the
estate.”  Center Fellow and report co-author, Sean Kennedy noted, “The
Examiner’s findings, taken at face value, reveal that the legal system
that allowed Lehman’s failure, amounting to billions of dollars of other
people’s money, will, without substantive changes to the regulatory
framework, permit similar failures in the future.”

Fellow John Gregorek added, “This lack of legal sanction now stands as a
road map of unaccountability for other investment firms, which, like
Lehman and MF Global, believe they can use economic downturns as a
business opportunity and amounts to a free pass to make deadly
investments with other people’s money.”  

MF Global ran into a liquidity squeeze while betting on the European debt that I have warned my subscribers for two years to avoid like the plague. Lehman did the same betting on real asset derivatives. Goldman is doing the same thing, no?

As excerpted from the model that powers BoomBustBlog subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?


you can see, Goldman traded its derivative book risk for sovereign risk
- just in the nick of time to catch the tail end of a derivative
crisis  & the start of a sovereign debt crisis. Excellent job
fellas! Goldman has literally doubled its sovereign assets, starting the
exact year that I started warning in the Pan-European Sovereign Debt Crisis series.
BoomBustBlog subscribers covered this scenario over a year ago. This
balance sheet capital flows chart shows Goldman ramping up on sovereign
debt risk at EXACTLY the wrong time - now! Whose money are they using to
do this? Silly, most likely yours...

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011),

To further illustrate my point, I direct all to the BoomBustBlog subscriber document File Icon Goldman Sachs Q3 update Final wherein you will find on page 8...


Yes, the exposure to that stuff off balance sheet is ratcheting up. Don't say Reggie didn't warn you in advance. Click here to subscribe to our proprietary research. Global REIT pressure reports on tap to come out next...

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tankster's picture

Reggie lost me with his health club videos. WTF.

GMadScientist's picture

Quick, let's rehypothecate some CDO-squared and see if we can make a blackhole!

hivekiller's picture

Interview of Jim Willie on the financial system and MF Global.


Roger Knights's picture

I remember that line from a surfer song, "Wipe out! (chortle)"

falak pema's picture

Its called malady du bonheur! But it has a habit of turning into Malady du Cauchemar! That's what adds spice to life when you are the Caliph of Wall Street and you have lots and lots of enemies, notably Ali Reggie and the forty Bloombustblog.coms.

The Big Ching-aso's picture



Ya know, banking dominoes are some big MF'ers.     They're like stone henge size, man.

Wakanda's picture

"There is NEVER just ONE roach!!!"

Dunno Reg.  I been known to roll more than one.

Darth..Putter's picture

You haven't heard of Adopt-A-Bug?  It' the new rage charity this season.  Every country is doing it.

machineh's picture

'VIE'? [last charts]

Sorry, don't know that acronym, and can't be arsed to look it up.

English, please!

cramers_tears's picture

Variable Interest Entity - FASB supposedly says these types of assets are to be consolidated on the controlling entity (in this case, GS) or primary beneficiary's balance sheet... however hypothecation/re-hypothecation pretty much usurps all standard accounting rules and procedures...  That's why the last chart's reference "unconsolidated VIE"...  Just more "Fraud as Business Model" bullshit...

Go Speed Reggie... Go Speed Reggie...  Go Speed Reggie Go-ooooo... (To the Speed Racer Song)

Lord Peter Pipsqueak's picture

You should get really worried when you hear Prince Alwaleed has taken a big stake in Goldman at a massive discount to the market.

Sudden Debt's picture

Let's all hope that Goldman Pig gets gutted one day!



Wakanda's picture

I wouldn't touch that rotten pork even if I was starving.

Mr Pink's picture

I prefer my calamari breaded and deep fried

scrappykoala's picture

If you bet agaisnt Goldman your an idiot. They own and run the planet. Never fuck with the big boys you get ran over. And by the way I hate them and wish they would go down but lets not forget who is in charge and who's former employees are now presidents and running the fed and so forth.

FreeNewEnergy's picture

Fuck Goldman Sachs and anybody who evr worked for them, especially the criminal traitor, Hank Paulson, who sold his soul for $700 billion in TARP.

Hope the flames of Hades burn your fucking eyelids off, Paulson, you scum-bag.

Sandmann's picture

Goldmabn has already sold Paradise to Hades

Gully Foyle's picture

Why is any of this news? It seems to be the practice dujour. I would imagine that anyone dealing in finance is running some book cooking of some type.

As soon as one entity sets a precedent everyone needs to copy it to keep even.


The Big Ching-aso's picture


 'You're', 'your', okay whatever.   We get the drift.

The Big Ching-aso's picture



One cockaroach is one cockaroach too many.     Raid the basturds before they contaminate our once pristine financial sewers any further.

NuYawkFrankie's picture

Is it true that cockAroaches are an Asian delicacy?

Hey - at least you'll never go hungry ;) 

Winston Smith 2009's picture

That opportunity has long since passed, I'm afraid.

Zero Govt's picture

You see, Lehman's collapse was much larger than that of MF Global... was marred with obvious and purposeful misrepresentation, yet they broke no signficant laws or regulations.

Sure about that Reggie? ..theft and fraud not "significant" laws??

Both these US entities (Champagne Charlie gambling joints) usurped US Law (breaking a rule there surely?) by siphoning client funds from the US to London to gamble and leverage. Does it not constitute theft and fraud if your customer statement says you've money in your US account when it's actually been sent across the Pond to double-down on Eurozone debt?

When Gerald Celentes brokers statement comes through the post every month stating he has six figures in his account and he discovers those funds have been sent (and spent) on another continent, is that broker not producing a financial statement that is both a gross misrepresentation of the facts and fraudulent??

When the broker calls him up for "more money" and he replies there's plenty of money in my account according to the last statement you sent me in the post. And the borker says no there isn't, we "need some more to cover someone elses bets gone bad" as it wasn't really there at all, when did Celente 'lose' title to the money he did deposit? Is the broker not committing a second fraud and theft demanding more money to cover what was misappropriated and supposed to be there all along???

A good point by Martin Armstrong i was reading last night is that clients never gave either Lehmans or MF'ing Gobbel any authority to ownership of their funds

On that basis the crook, sorry NY liquidator, and stiffing agent, sorry NY Judge has zero authority to claw any customer monies for the NY derivative gangsters. Customer monies NEVER pased TITLE to MF Global. JP Morgan under the Law has zero title to customer money and will just have to take a big kick in the balls (tough shit Dimon, eat shit Dimon). Client funds are client funds. Period. End of

And the NY Judge that stiffed him made the point a corporation has no right to silence and corporate offciers (ie. Corzine) has no Constitutional Rights either and can be therefore lifed in prison until they die... let's see him apply the rules to Corzine as he did/stiffed Armstrong

Corzine testified he didn't know what was going on. But it was lying scumbag Jon Corzine who, according to a dicky bird, flew down to see SEC Chair, Mary Shapiro, to lobby (succesfully) against the SEC putting in a new rule to prevent financial firms siphoning off customer funds and pissing them away at Las Vegas (or London) Casinos 

Both MF'ing Corzine and the SEC's Shapiro are covered knee deep in blood. Another US Regulator has left the pitch leaving the goalposts wide open to lunch it up large with hook the crook Corzine who promptly runs through the open goalposts left open as he lobbied Shapiro to do running his bag of $1.2Bn looted customer monies

Don't see any "significant" Laws being broken there Reggie?!! 


FEDbuster's picture

Ann Barnhardt (who closed her firm in response to this theft by Jon Corzine/MFG) in a recent interview by Jim Puplava

Zero Govt's picture

Thanks FEDbuster, couldn't read your link on my Apple but probably have already as I have AB's website now and pop in regularly

She's a good'un, she's made a stand and a second one, she's refusing to pay anymore tax to the parasitical scum destroying America (ie the US Govt) ...we should all follow her lead

FEDbuster's picture

I sent it in to the ZH "tip" email.  I hope "Tyler" will post the highlights and a link to the full interview, it's very good.  She says the whole thing is going down due to the fact there is no rule of law in the markets.  She is a straight shooting, no BS woman.  She said in the interview, "one should only invest in things you can stand in front of and defend with an AR-15, paper shares, contracts and 401-Ks will be worthless".

Zero Govt's picture

she's right the Rule of Law is not working but she's wrong therefor to think installing the Rule of Law will fix what isn't working, which is the Rule of Law 

I generally work on the premise if it works, don't fix it

our pitiful Western thinking (problem solving) seems to think if Govt isn't working, or the Rule of Law, let's replace it with more Rule of Law or less Govt

I think if these systems aren't working you don't repeat the error (system)

Ann needs to understand the mononpoly versus the competition (free market) mechanism. The reason the markets aren't working is that they are all large monopolies. We have Chicago for example for commodities. All monopoly systems are infiltrated by monopolists and corrupted

The Judicial system in NY is a monopoly and sure as eggs it is totally corrupt. Nobody stands a snowball in hells chance up against the Big NY financial gangsters of a fair trial. It's been that way for 100 years

The solution is freedom (no rules) and competition. Competition brings you solutions (positives). Law brings you only retribution (negatives).

Instead of the Chicago monopoly which is increasingly destructive of commodities trading we need lots of smaller commodity exchanges right across the country all competing to provide better service on different levels. Variety, vbrancy and progress versus Chicagos corruption, incompetence and stagnation

If one competing exchange becomes corrupted there's a dozen others for consumers to fall back on (systemic robustness, low systemic risk). When Chicago collapses, as it will in corruption and turmoil, the whole system implodes (systemic risk 100%)

Ann had nowhere to go... she hed to shutter her business... the monopoly system is a stagnating market of ever decreasing circles (precisely what is destroying every sector of Europe and Americas economy right now) ...and its monopoly Law-Judical system is aiding that decline because monopolies put the unproductive (parasites) at the top of the food chain

FEDbuster's picture

She spoke at the end of the possibility of a new exchange starting in Dallas, giving traders a different place to trade.  I think most of her business was cattle hedging?

Zero Govt's picture

Dallas is a good stat but why not many more?

i hear US tobacco farmers are being screwed by the big monopoly US tobaco companies.. some have started selling abroad to Asian markets ...go for it... go international, go direct to your customers and avoid the exchanges

they'll have to soon when the Chicago monopoly implodes in its own greed and corruption anyway!

JW n FL's picture



Goldman Sachs Electronic Trading. New thinking: better trading. Why settle for vanilla? Watch the VIDEO


SillySalesmanQuestion's picture


Goldman Sachs customer service: After we have fucked you in the'll never be constipated again...


Goldman Sachs Customization:  If you trade with us we will customize OUR trading strategies to the fullest to make sure you lose ALL of your money.


Goldman Sachs executon quality: We take pride in killing you completely, more than once if necessary... three times daily if preferred..death by fiat and fraud...

JW n FL's picture



UBS says Kyle Bass / ZeroHedge is RIGHT!! Guns, Gold and Canned Goods BITCHEZ!!

Uploaded by on Dec 12, 2011

Watch the full Keiser Report E222 on Tuesday. This week Max Keiser and co-host, Stacy Herbert, discuss virtual dollars and American plots and tinned goods and small calibre weapons. In the second half of the show, Max talks to Detlev Schlichter about elastic money and financial crises.

JW n FL's picture



UBS says Kyle Bass / ZeroHedge is RIGHT!! Guns, Gold and Canned Goods BITCHEZ!!

Uploaded by on Dec 12, 2011

Watch the full Keiser Report E222 on Tuesday. This week Max Keiser and co-host, Stacy Herbert, discuss virtual dollars and American plots and tinned goods and small calibre weapons. In the second half of the show, Max talks to Detlev Schlichter about elastic money and financial crises.

Rainman's picture

The financial system is one huge collection of digital bucket shops. It can't possibly end well.

Zero Govt's picture

the financial system is Ivy League in-breds living a Chmpagne Charlie lifestyle they were born to lead (forever) ...when their bets go 'horribly wrong' they turn to theft and fraud to cover their inept worthless arses.. it's not really thieving you see when its the little peoples money and funds the greater cause which is their continued obnoxious existence on the Ivy League cocktail circuit

some people have to earn a living, this NY scum just steal it

spooz's picture

Permitted by "contract or custom"?  What about the CFTC rules regarding commingling of customer segregated funds in futures accounts?  Because they have a contract, or there is a "custom" amongst thieves, that makes it okay to break rules? I still don't see how failing to segregate customer funds is legal in any way.  The Thompson Reuters piece on rehypothecation implies that what Corzine did was legal because it was permitted by law.  I disagree. And if he tries to use the hoocoodanode excuse, Sarbanes-Oxley says he should have.

Per Jeffries: "In many instances, we are permitted by contract or custom to rehypothecate
securities received as collateral. These securities maybe used to
secure repurchase agreements, enter into security lending or derivative
transactions or cover short positions."

Stuck on Zero's picture

Can my wife and I rehypothecate our meager bank accounts into billions?

Deadpool's picture

To late. Fractional reserve banking means your bank has already done it for you without you participating.

Buckaroo Banzai's picture

Wow it's almost like Goldman is blowing itself up ON PURPOSE.

Can you say "Bust-out Scheme"?

Deadpool's picture

never forget Goldman is the Fed's bank (as is JPM). the stuffing of the world's toxic waste into their closet and under their rug with no risk of loss of principal with Fed's backing is obvious.

dracos_ghost's picture

Thank god we got rid of Glass-Steagal otherwise there would be problems in the banking sector.

canuck's picture

ah yes, I was waiting for Reggie to swoop in...

willien1derland's picture

Reggie! Reggie! Reggie! Reggie!

Ukraine's Banking Sector about to collapse? - Reggie, any thoughts?