And Now, A Present: "Are The Brokers Broken?" - A Reprise

Tyler Durden's picture

Often times we are asked "why does Zero Hedge prefer to provide information in piecemeal increments and isolated snapshots (of irregularity) rather than write comprehensive articles (or even a book) that explain, from beginning to end why everything is broken - the end?" There are two answers - a short and a long one. The short answer is that finance, more so than any other field, changes so rapidly that the nuances are always and constantly on the margin, which in turn is stable only for the period of time that it is observed, and then it becomes part of "technical analysis." (Indeed, the Schrodinger wave function collapse is just as alive and well in finance as it is in the quantum arena). As such, we adhere to the paradigm describing the distinction between giving a man a fish and teaching a man to fish: we believe that it is far more useful to demonstrate all that ways in which the market (and global economy) works, or rather doesn't, than engage in extended exercises of vanity, which serve as much to stroke the author's ego, and demonstrate one's knowledge of SAT words, as they do to elucidate the matter at hand. By sharing our own views of events as they transpire in real time, be they right or wrong, we hope to provide our readers with the "connect the dots" patchwork required to evaluate relevant financial events as they occur in real time, instead of describing them in the in vitro vacuum of moody brooding. (As for a book, we are more than confident enough "independent" bloggers out there will succumb to the very system their protest against, and pen a few hundred pages on the goal-seeked topic of their choosing - the last thing the vast upcoming book pyre needs is our own intellectual self-pleasuring). The long answer is far longer, and, ironically, deserves a post of its own. But this is neither the time nor the place. What then is the purpose of this post is to break away from our tradition, but also not to recreate the wheel, as many others find delight in doing. Instead, as a special present to our readers, we share the seminal analysis by Citigroup's Matt King from September 5, 2008, titled "Are The Brokers Broken?" which in one place explains, better than anyone else has ever done, why the system is terminally broken, and why the best anyone can hope for is to keep kicking the can down the road until it all comes crashing down.

The report, which came out ten days before the Lehman collapse, was according to some, one the primary catalysts for the collapse of Lehman and the subsequent near collapse of the entire house of cards, as it explained better than anything to that point (and arguably since), just how hollow and broken the one all important component of modern finance - the multi-trillion shadow banking system is.

Sure enough, once the majority of analysts and traders out there, who for the most part are simple automatons who only push buttons all day and can barely see beyond the 8th screen on their Bloomberg terminal, comprehended the irreparable nature of the systemic break in terms even they would understand, the panic commenced, and resulted in a full blown run on every form of liquidity which also happens to be synonymous with quote unquote bank: yes, Lehman, on the simple visible side, but far more importantly, on money markets, that primary conduit (along with repos) of the shadow banking system. It was this, far more than the Lehman collapse (whose end they had greenlighted), that stunned the powers that be, who did not anticipate any of the aftershocks that would start cascading through the US shadow banking system which according to our estimates is about $15 trillion most recently (well above total traditional liabilities which are still below $14 trillion) , while according to others when one adds the rehypothecation "value" of various commingled assets, could be up to $4-6 trillion larger.

So while we all partake in the spirit of goodwill to man and festive joy (however brief), if for no other reason than because "we should", our present to our readers is that most important gift - knowledge, and the understanding of the truth behind the headlines which the traditional media will never provide, for fear of the all out panic that would ensue if the general public, just like the specialized financial industry, in the days after September 5, 2008, were to understand just how futile the actions of the Fed and the global banking cartel are when presented with all the facts.

In summary: the following report was 100% correct when it first came out and predicted the Lehman, and all other collapses; it is even more correct now, as nothing has changed, only the stakes have now gotten that much ('infinitely' some would say since every central bank is now all in on preserving the fake reality that is artificial central planning) greater. Unfortunately, because nobody listened and nobody learned from the events in late 2008, the next time around there will be no redo.

To understand why, read on (pdf).


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Manthong's picture

Nice blast from the past.. thanks.

“now leaves regulators worried, given the scale of repo’s importance.”

Maybe the regulators aren't worried this time around because they are all on the payroll.

I have a suggestion for the name of the next policy maneuver.

I propose it be called the Progressive Overnight Notational Zirp Interchange.

Oh regional Indian's picture

This is what I find interesting about news reportage and analysis in general.

It now seems to be common knowledge that AIG and MFG both failed due to excessive leverage, specifically in their London units where it is apparently legal to hypothecate the same collateral a hundred or more times over, to different parties. Or so MAx Kieser and Stacy told me.

What the heck is the point in any of these long winded discussions and papers and arguements?

There is a fractional collateralization scam being played out in London. Kill that loophole perhaps? First? That is huge. It has caused two humongous, system threatening shocks.

Are the brokers broke. No they are not, they are over-hypothecated.



LowProfile's picture

Are the brokers broke. No they are not, they are over-hypothecated.

Which actually means they are broke * 100.

LeonardoFibonacci's picture

To Lowprofile:  Hate to disappoint you, but brokers are still buying $250k Ferrari's by the truckloads!

e_goldstein's picture

I wonder why, you can't eat Ferraris.

KickIce's picture

I'm sure they are still charging commisions but if they are indeed losing money how much longer can they keep their clients.  I believe we saw this scenario played out several times in 2008 as well.

Sudden Debt's picture

Problems explained / Simplistic view

This rather brilliantly cuts thru all the political doublespeak we get.
This puts it into a much better perspective .

This shows how long daddy government can still fund the banks fucked up behavior:

* U.S. Tax revenue: $2,170,000,000,000
* Fed budget: $3,820,000,000,000
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000

Let's now remove 8 zeros and pretend it's a household budget:

* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts: $385

TheSilverJournal's picture

Sudden debt, Rick Santelli basically agree with your numbers. If someone needs a video of it, click here to Watch Rick Santelli Make Government Math Easy.

strangeglove's picture

Intrest on debt 142710.00 @ .00025%=$35.0

Lobster for dinner

KickIce's picture

Yeah, but I'm still the boss and have a kick ass health plan compared to my peasants.

ZeroPower's picture

Wierd, our brokers over here are the ones buying us a friday lunch of wahtever we want (ordered in, of course) week in week out, just so that the next time someones looking for a fill on xy equity or credit product, we do it through Tullett as opposed to BGC as opposed to Cantor as opposed to THE LIST GOES ON. These brokers have nermous lawsuits against each other already, just because they try and win clients back since a lunch doesnt exactly keep a trader satisfied for long...

So no, i dont actually think brokers are buying Ferraris by the truckload.

KickIce's picture

No, it means the ponzi will continue as long as there is not a run on PMs and food commodities stay reasonably priced.

 Commodity prices are key to this ponzi as is not waking the sheeple

Rynak's picture

food commodities stay reasonably priced.


KickIce's picture

With the amount of money printed I'd have to say very reasonable.

Rynak's picture

You're not living in one of the countries to which inflation is "exported", hmm?

How about - 33% foodstuffs price inflation in one year? VERY REASONABLE? WTF? Technically, this is something in-between "typical fiat rip-off inlation" and "hyperinflation" (and together with static wages, in-between business as usual, and hyper-stagflation).

When does stuff stop being "very reasonable" to you - when it goes BOOM!?!?

Manthong's picture

Those edible iPads are coming down in price a bit.

GeneMarchbanks's picture


The point of these 'long winded discussions', is that they are exceptionally helpful for those of us who are interested in the actual inner-workings of shadow banking. The hyper re-hypothecation scam has been a revelation into the horribly flawed logic with which this cotton candy 'financial innovation' fiasco.

Since much of the resources have now been fully backed into the financial sector in London, the rest of the UK has been marginalized as has been evident for the past thirty years or so. Cameron has to stand behind the collapsing banking oligarchs no matter what. Good-bye UK.

Al Gorerhythm's picture

I feel you ORI. After replying angrily to a poster about his demands of proof of manipulation of the PMs markets and you replied to my post offering empathy over my frustrations, it got me thinking about the anger in my reply and it made me realize that some of us have known or understood "The Game" for some time. What I have to remember is that the awakening has only just started and that there are literally billions of folk who don't have the message yet. It will be a long road and I just have to put aside my frustrations and hope that articles like this get the attention of one more sheep.

Are the brokers broke? The global reply to that is; if the world's monetary system is predicated on credit or debt or promises to settle accounts, rehypothecated promises, leveraged promises, and that account was opened on credit, and the credit was accepted without the means to settle (just like the $US since 1971), then the account holder is bankrupt from the start. How will the entire world settle a promise that has nothing backing the promise? It literally can't and we were warned by many.

It is obvious that the system is a sham but you can only see the sham if you accept the system as it really is and not how it has been portrayed. That takes a quantum leap.


Rusty_Shackleford's picture



Are the brokers broke? The global reply to that is; if the world's monetary system is predicated on credit or debt or promises to settle accounts, rehypothecated promises, leveraged promises, and that account was opened on credit, and the credit was accepted without the means to settle (just like the $US since 1971), then the account holder is bankrupt from the start. How will the entire world settle a promise that has nothing backing the promise? It literally can't and we were warned by many.

The force is strong with this post. 



There is no spoon.

buckethead's picture

This is my first exposure to this article. I must say, the language within would have been indiscernible to me just a few months ago. Reading ZH among others is a means for laypersons like me to educate ourselves.

I'm truly grateful for the re-run. It also helps to remind me that even within these corporations there are good people willing to call it like they see it.

I suppose that is what Tyler(s) is/are to begin with.

As grateful as I am for this site, part of me wants to take the blue pill.

Seeing a glimpse of truth is frightening.

StychoKiller's picture

In essence, Shakespeare was right:  "Neither a borrower, nor a lender be."

Debt-Is-Not-Money's picture

Quite correct.

With the exception of our coin on which no interest is due, there is no money!


ZDRuX's picture

There's limits on how many times you can rehypothecate something in the U.S. - the difference is in London you can do it virtually an unlimited number of times.


Rehypothecation is not "necessarily" a bad thing as its used in finance all the time to provide things like leverage accounts (you deposit $1000, but get to play with $3000). But there has to be a limit on this, and unlimited rehypothecation is an obvious and clear problem, especially when it comes to physical assets used as collateral by multiple parties.


For example your house is used as collateral by YOU, and then rehypothecated by the bank since it's on their balance sheet as "possibly" being theirs, so they use it as collateral as well. This is where it all starts becoming a cluster fuck as there's only a limited number of physical assets, but 10 "potential" claimaints to that asset.

mkkby's picture

Excellent.  Thanks ZH.

It would be great to see something similar on 2 other current topics -- derivatives and hypothecation at brokers.  Then mere mortals might actually understand the broker business.

rajat_bhatia's picture

Man! You just couldn't resist, could you? Let just one day be filled with intoxicating Hope.. however fucked up the world may be...

I think I need to buy a gun's picture

there is some hope out there,,,,,mcdonalds stock has a great trend line and walmart appears like it just broke out,,,,these two retailers appear to have a fantastic future right now

lynnybee's picture

Yup, WALMART does have a great future ....... in other countries.     I'm deliberately avoiding WALMART like the plague.    It's obvious they don't need my money; after all, CHINA awaits.    This country has been WALMARTIZED .    Let someone else support that company ...... i'm out.     what little i have left goes straight into local business or physical metal & foodstuffs.   

mkkby's picture

Too late for that.  The big retailers have taken out most of the locals.  It's about time people started learning that.  Their own greed to save a few fiat cents resulted in the walmatization of USSA. 

OTOH, it was entirely predictable for stupid TV hypnotized sheep to go where they were herded.

Tijuana Donkey Show's picture

Two words: flea market. Avoid local sales taxes, regs, and registration, and get ready for your black market future. We have ICE agents running around at ours, big brother is watching.......

WonderDawg's picture

Lynnybee, I'm with you. I think we're on the cutting edge of a movement that will gain traction with more and more people.

Theosebes Goodfellow's picture

You nailed it, Lynnybee. Let me advise that people begin now to develop those relationships with local retailers. When TSHTF they might be highly selective with whom the choose to do busniess. It would be most wise for you to be one of them. The future of economies is not global, it's local and way smaller than you can guess.

Spigot's picture

Each $ spent at a big box store yeilds about $2 in economic activity for the community. Each $ that "goes local" (ie - is recirculated as local purchases for local goods and services yeilds $7 in economic activity for the community.

By doing repeated, habitual bargain hunting at places like Walmart we have been spending ourselves poor.

We need to understand how we have, by our minor, daily purchasing habits, ruined this country...

...and then change that mind set and rebuild our communities.

Each of us can do that, now. We must in order to win back our economic freedom.

RiverRoad's picture

It's a comforting thought to know though that the big international US companies are getting screwed right now with their money earned overseas sitting there in Euros.  They desperately want it back here tax-free, of course, which ain't happening so far even though Jeff Imelt suddenly became Obama's BFF.

nowhereman's picture

Until you can't afford the gas to get there.

Debt-Is-Not-Money's picture

Maybe thats why the Dollar Stores are becoming more popular (I don't shop at them or own shares). This only shifts the cause of the problem from Wal-Mart to a different source, local businesses are still screwed.

LowProfile's picture


I hope that the public is educated to the point that they understand the crime of debt-based money, that the whole thing collapses literally overnight, and then a lightning-fast reform is implemented, with a functioning, constructive system put in place.

What the Hell were you hoping for?

boattrash's picture

rajat...The fuc@#$% Hope was elected about 3yr ago. Many/most of us detest that word now. Thanks, and Merry Christmas to ya!

ThrivingAdmistCollapse's picture

Yes it is very detestable.  The one has brought about the collapse of American Power in the world.

CalibratedConfidence's picture

Spot on Tyler.  The underground world of intelligence thanks you for your contributions and continued awesomeness.  Thank you also for the foresight to remain annoymous and focus on "connecting the dots".  Rock on through 2012 ZeroHedge!

GeneMarchbanks's picture

'As for a book, we are more than confident enough "independent" bloggers out there will succumb to the very system their protest against, and pen a few hundred pages on the goal-seeked topic of their choosing - the last thing the vast upcoming book pyre needs is our own intellectual self-pleasuring'


francis_sawyer's picture

Don't call 'em 'BROKErs' for nuthin...

youLilQuantFuker's picture

Are the brokers broken? How can I read on? This is what I see:

Nothing. Broken. No link. Room for improvement.