Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else

Tyler Durden's picture

Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.

In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things,  and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.

But first, a detour to London...

As readers will recall, the actual office that blew up the world the first time around, was not even based in the US. It was a small office located on the top floor of 1 Curzon Street in London's Mayfair district, run by one Joe Cassano: the head of AIG Financial Products. The reason why this office of US-based AIG was in London, is so that Cassano could sell CDS as far away from the eye of Federal regulators as possible. Which he did. In fact he sold an unprecedented $2.7 trillion worth of CDS just before the firm collapsed due to one small glitch in the system - the assumption that home prices could go down as well as up. Yet the real question is why he sold so much CDS? The answer is simple - in a world of limited real assets, the only way to generate a practically limitless cash flow annuity would be to sell synthetic insurance on a virtually infinite amount of synthetic underlying. Which he did. Only when it came time to pay the claims, AIG blew up, forcing the government to bail it out, and set off the chain of events where we find ourselves now, where every day could be the developed world's last if not for the ongoing backstops, guarantees and bailouts of the central banking regime. 

What is greatly ironic is that in the aftermath of the AIG collapse, the UK was shamed into admitting that it was its own loose, lax and unregulated system that allowed such unsupervised insanity to continue for as long as it did. As the Telegraph reminds us, "Conservative Party Treasury spokesman Philip Hammond called for a public inquiry into the FSA’s oversight of AIG Financial Products in Mayfair. “We must not allow London to become a bolthole for companies looking for a place to conduct questionable activities,” he said. “This sounds like a monumental cock-up by the FSA,” said Lib Dem shadow chancellor Vince Cable. “It is deeply ironic,” he added, that Brown was in Brussels last week calling for tougher global financial regulation just as the scandal over the FSA’s role in one of the key regulatory failures at the root of the global panic emerged as an international issue." It is ironic because the trail in the MF Global collapse, where it is yet another infinitely leveragable product that once again comes to the fore, once again goes straight to that hub for "questionable activities" - London.

But before we explain why London is once again to blame for what was not only the immediate reason of the MF Global collapse, but could well precipitate the next global collapse, a quick look at rehypothecation.

As Reuters points out, it was not so much the act of creating "repos-to-maturity" that imperiled MF Global, but what is a secret gold mine for those privy to it - the process of re-hypothecation of collateral.

[h]ypothecation 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.


In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default.


In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).


Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.

So far so good, assuming there was regulation, and assuming if regulation failed, that the firms that blew up as a result of their greed would truly blow up, instead of being resurrected as TBTF zombies by a government in dire need of rent collection and lobby cash (because with or without regulation, if those who fail are not allowed to fail, then the whole point of capitalism is moot). But... there is always a snag.

Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.


But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).


This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.


In 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.

So let's see: a Prime Broker taking posted collateral, then using the same collateral as an instrument for hypothecation with a net haircut, then repeating the process again, and again... Ring a bell? If you said "fractional reserve lending" - ding ding ding. In essence what re-hypothecation, and subsequent levels thereof, especially once in the shadow banking realm, allows Prime Brokers is to become de facto banks only completely unregulated and using synthetic assets as collateral. Curiously enough it was earlier today that we also penned "ECB Confirms Shadow Banking System In Europe In Tatters" in which we explained that since ECB has to expand the eligible collateral it will accept, there is no real collateral left, meaning the re-hypothecation process in Europe has experienced terminal failure.  Yet the kicker is that the "safety haircut" only occurs in the US. Not in the UK. And therein lies the rub. In the UK, the epic failure of supervision has allowed banks to become de facto monsters of infinite shadow banking fractional reserve leverage - every bank's wet dream! Naturally, Prime Brokers have known all about this which explains the quiet desire to conduct re-hypothecation out of London-based offices for every US-based (and Canadian) bank. Reuters explains:

Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules.


Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation.


Potentially as simple as having MF Global UK Limited, an English subsidiary, enter into a prime brokerage agreement with a customer, a U.S. based prime broker can immediately take advantage of the UK’s unrestricted re-hypothecation rules.

While we already mentioned AIG as an example of the lax UK-based regulatory regime, it is another failed bank that is perhaps the best example of levered failure but in the specific re-hypothecation context: Lehman Brothers itself.

This is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished.


A prime broker need not even require that an investor (eg hedge fund) sign all agreements with a European subsidiary to take advantage of the loophole. In fact, in Lehman’s case many funds signed a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but margin-lending agreements and securities-lending agreements with LBIE in the UK (normally conducted under a Global Master Securities Lending Agreement).


These agreements permitted Lehman to transfer client assets between various affiliates without the fund’s express consent, despite the fact that the main agreement had been under U.S. law. As a result of these peripheral agreements, all or most of its clients’ assets found their way down to LBIE.

And now we get back to the topic at hand: MF Global, why and how it did precisely what Lehman did back then, why it did this in London, and why its failure is a symptom of something far more terrifying than merely investing money in collapsing PIIGS bonds.

MF Global’s Customer Agreement for trading in cash commodities, commodity futures, security futures, options, and forward contracts, securities, foreign futures and options and currencies includes the following clause:


     “7. Consent To Loan Or Pledge  You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”


In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements. With these transactions taking place off-balance sheet it is difficult to pin down the exact entity which was used to re-hypothecate such large sums of money but regulatory filings and letters from MF Global’s administrators contain some clues.


According to a letter from KPMG to MF Global clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited had over 10,000 accounts. MF Global disclosed in March 2011 that it had significant credit risk from its European subsidiary from “counterparties with whom we place both our own funds or securities and those of our clients”.

It gets even worse when one considers that over the years the actual quality of good collateral declined, meaning worse and worse collateral was to be pledged in these potentially infinite recursive loops of shadow banking fractional reserve lending:

Despite the fact that there may only be a quarter of the collateral in the world to back these transactions, successive U.S. governments have softened the requirements for what can back a re-hypothecation transaction.


Beginning with Clinton-era liberalisation, rules were eased that had until 2000 limited the use of re-hypothecated funds to U.S. Treasury, state and municipal obligations. These rules were slowly cut away (from 2000-2005) so that customer money could be used to enter into repurchase agreements (repos), buy foreign bonds, money market funds and other assorted securities.


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.

At this point flashing red lights should be going though the head of anyone who lived through the AIG cataclysm: in effect the rehypothecation scenario affords the same amount of leverage, and potentially even less supervision that the CDS market. Said otherwise, the counteparty risk of daisy chaining defaults is on par with that in the case of AIG.

As 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.


Re-hypothecation 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 link.

And the kicker:

With 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.

It turns out the next AIG was among us all along, only because it was hidden deep in the bowels of the unmentionable shadow banking system, out of sight (by definition) meant out of mind. Only it was not: and at last check there was $15 trillion in the shadow banking system in the US alone, where the daisy chaining of counteparty risk meant that any liquidity risk flare up would mean the AIG bankruptcy was not even a dress rehearsal for the grand finale.

But where does one look for the next AIG? Who would be stupid enough to disclose the fact that they have essentially the same risk on their off-balance sheet books as AIG had on its normal books? Once again, we turn to Reuters:

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


    “Note 7. Collateralized Transactions
    We 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. The 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 Condition.


According 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 billion.

Oh Jefferies, Jefferies, Jefferies. Barely did you manage to escape the gauntlet of accusation of untenable gross (if not net) sovereign exposure, that you will soon, potentially as early as tomorrow, have to defend your zany rehypothecation practices. One wonders: will Sean Egan downgrade you for this latest transgression as well? All the better for Leucadia though: one more million shares that Dick Handler can sell to Ian Cumming.

Yet Jefferies is just the beginning. It gets much, much worse.

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).

And people were wondering why looking through the balance sheet of Canadian banks revealed no alert signals. It is because all the exposure was off the books! Hundreds of billions of dollars worth. As for JPM and MS amounting to nearly a trillion in rehypothecation... well, we are confident the market will be delighted to start pricing that particular fat-tail risk as soon as tomorrow.

Yet it is Reuters' conclusion that strikes home, and is identical to what we said last night about the liquidity lock up in Europe and what it means for the shadow banking system, although from the perspective of an inverted cause and effect:

The 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. 

That's precisely right: the shadow banking system, so aptly named because its death rattle can never be seen out in the open, is slowly dying. As noted yesterday. But lest we be accused of hyperventilating, this time we will leave a respected, non-fringe media to bring out the big adjective guns:

To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up....Most 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 apocalyptic.


U.S. 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.

And there you have it: in this world where distraction and diversion often times is the only name of the game, while banks were pretending to have issues with their traditional liabilities, it was really the shadow liabilities where the true terrors were accumulating. Because in what has become a veritable daisy chain of linked shadow exposure, we are now back where we started with the AIG collapse, only this time the regime is decentralized, without the need for a focal, AIG-type center. What this means is that the collapse of the weakest link in the daisy-chain sets off a house of cards that eventually will crash even the biggest entity due to exponentially soaring counterparty risk: an escalation best comparable to an avalanche - where one simple snowflake can result in a deadly tsunami of snow that wipes out everything in its path. Only this time it is not something as innocuous as snow: it is the compounded effect of trillions and trillions of insolvent banks all collapsing at the same time, and wiping out the developed world and the associated 150 years of the welfare state as we know it.

In this light, it makes far more sense why, as we suggested yesterday, the sanest central bank in Europe, the German Bundesbank, is quietly making stealthy preparations to get the hell out of Dodge, as it realizes all too well, that the snowflake has arrived: MF Global's bankruptcy has already set off a chain of events which not even all the world's central banks can halt. Which is ironic for the Buba - what it is doing is "too little too late." But at least it is taking proactive steps. For all the other central banks in the Eurozone, and soon the world, unfortunately the deer in headlights image is the only applicable one. And all because of unbridled greed, bribed and corrupt regulators sleeping at their job, and governments which encourage the TBTF modus operandi as the only fall back one, which in turn gave banks a carte blanche to take essentially unlimited risk.

We are all about to suffer the consequences of all three.

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Ghordius's picture

Damn, Tyler, you are too early according to my expectations! You are breaking the UK story too early! Why can't you just wait until the EUR has reached 1.3000?


The UK story - (starting with the British Press going wild since November about the EZ) with the highlights:

- about how the City of London has a special charter that make it a separate part of the realm (including a "minder" of the status in Parliament)

- how bank-heavy, mortgage-heavy, financial liabilities-heavy, leveraged it is (just touched here)

- how lax regulations are (just touched here) - Mr. King is already asking for dictatorial powers of regulation from Parliament ("If I don't like the way you bank, you are out" - his words he wants to be able to say)

- how fragile the British Pound is (which could bury the "small currency is beautiful" meme currently cursing around) - again Mr. King is preparing for a big storm

- and, of course, the little thing that by British Law all swans belong to the Queen, be them black or white

Tyler, you are too early! You really want to be the first of the pack, eh? ;-!

Sandmann's picture

City of London has a special charter


with its own strange little Police Force and its own funny practices

pods's picture

Yep, and the BOE and a big old building for the Rothschilds too.


Girl Trader's picture

There's a great discussion of the City of London and its status in Treasure Islands by Nicholas Shaxson.

Cathartes Aura's picture

I've said it before, and it still rings true for me - those who arrange the game pieces over centuries have no boundaries, no nationstate imaginary lines to restrict their movements, be it body or fiat or resources. . .

the City of London has a special charter that makes it a separate part of the realm

of course it does, it's like the "district of columbia" is to amrka, a place where the "laws" don't apply to those who are privy to the hidden corporate agendas.

it's already a global "world" and nationstates are fictions we are schooled to believe in, and to fear stepping out of line - "the City of London" is the global banking headquarters, and amrka does the resource theft and "law" enforcement via global military (how many nationstates does amrka occupy? *ponder*). . .

once your mind embraces this, many other things make perfect sense.

pods's picture

In the 10 ring as always CA!


dizzyfingers's picture

"amrka does the resource theft and "law" enforcement via global military (how many nationstates does amrka occupy? *ponder*)"

Been thinking A LOT about this very thing... must never allow US kids to leave the homeland again, it's bad for the country when the brightest and best are sent to die somewhere else rather than live and take part in the society here. Think about it folks, if anything is counterproductive, it's the military.

"WAR IS GOOD FOR BUSINESS: INVEST YOUR SON" ...OR YOUR DAUGHTER...OR BOTH!! (please cut, past, and pass this on)

Mauibrad's picture

The Congressional hearing today is a big jerk off.  Has even one Congressman or Corzine even mentioned Re-Hypothecation?  They are talking all around it without talking about the known problem.  This is why these things happen and don't get solved, Congress are a Bunch of Dumba$$e$!

CompassionateFascist's picture

No, they are all invested in the same Ponzi. And theyll ride it to the bitter end.

LeonardoFibonacci's picture

Erect the gallows, lads.  Once a century or so, it becomes obvious its time to use them again.

URZIZMINE's picture

This is why Jon C  can't find the cash. He hasn't read his own companies "investment agreements"


High Plains Drifter's picture

 canuuks took a bite on this shit sandwich? tell me its not so...........

ISEEIT's picture

Fair disclosure.

Do not panic and ASS-ume that this is D-day. ZH is a public service. Tyler explains your future. He has not/ does not proffer timing. We are in general fucked. The average and typical human is likely to have a life that sucks with possible random good fortune.

Plan accordingly and know the game you are playing.

Cursive's picture


House of cards waiting to fold at the slightest breeze. Wait for it....

Mr Lennon Hendrix's picture

They folded.  What you are seeing is a hologram.

Zadok's picture

Hey Cursive, nice avatar!

Deo vindice's picture

Well, as they say...

"Two heads are better than one"

DormRoom's picture

I'm still pissed the Fed loaned out 7.7 Trillion @ 0.5% to the big banks and bought back @ 3%.  ECB is probably going to do the same.

Starving Artist's picture

Actually they only loaned about $1.2 trillion IIRC. I think 7.7 was the secret program cap.


DormRoom's picture

still, underwater home owners can't get a deal like that from their bank.  It's just really irritating to know that the system rewarded the thieves, and miscreants while honest ppl continue to suffer.


Still no arrests, as school boards shut down schools, and shorten the school year because of the economic fall out.  They've stolen the future of so many.

Mr Lennon Hendrix's picture

Yeah, yeah, Bernanke apologizes.  What is he to do?

And the trillions, multiply by 10 for fractional reserve lending.  Fiat Ponzi.  Booyah, Jim!

dizzyfingers's picture

..."shut down schools"

Everyone in every community where that's happening paid for those schools and should reopen them and teach in the classrooms. Guess what they should teach -- current events, only, all day everyday, pointing out every change as our society decays because of central banksters, so that every child cannot but help see it for what it is. That's the way to fix what's broken -- teach the children all about it RIGHT NOW before they escape into society with empty heads and no perception of what is happening and why.

If someone had done that for my generation.... oh how different things would...well, might...be.

Get out there, people -- occupy those government schools.

navy62802's picture

Correct. This was pointed out in Bloomberg's rebuttal to the Bernanke's criticism yesterday.

Tyler Durden's picture

When you get a $1 billion revolver from the bank, it is still a 1 billion revolver (as in committed capital) even if you just use $0.01 of it.

In other words, the bank (or the Fed in this case), has put $1 billion at risk ($7.7 trillion in this case).

Melin's picture

What I never understand is why the incredible corruption is blamed on sleepy regulators with too few regulatory tools at their disposal.  If only there were more regulators and regulations, we'd finally get that "free market" we're pining for, right?

Get government out of the economy.  It's not possible to have free markets and government regulators just like it's not possible to have your cake and eat it too.

Tyler Durden's picture

It is not about regulation. What it is about is perverting the incentives of risk and reward. If failure is an option, there is no need for regulation. If failure is impossible, such as now, regulators merely aid and abet the death of pure capitalism.

But you are right: the less intervention, the purer the capital markets. Unfortunately, for a rent-seeking behemoth of a government (such as the one we have now which issued $100 billion in debt every two weeks), the only stable source of under the table revenue (read "lobby" or bribes) is the financial regime.

Which also is the government's handy scapegoat when things turn rough.

It is not Wall Street's fault government has become a monster, and more importantly, a monster which the people have let usurp all power in exchange for promises of (insolvent) welfare payments and mind numbing primetime TV.

What OccupyWallStreet and the rest have to realize is that while Wall Street is a symptom of all that is broken and flawed in modern society the cause, the real cause, is us.

But it is always easiest to point fingers...

High Plains Drifter's picture

yes it is our fault. the buck stops here as they say.  we fell asleep on the walls of the city and the enemy walked in. we are responsible. citizenship is a terrible burden , one that most amerikans do not wish to carry......when good men remain silent, evil flourishes.   we see now in the high places incarnate evil. evil men flourish and do what they want.  now they won't listen to us anymore. there is no redress of grievances. none. they do what they want when they want.  so it is. so it has been and so it will be.....

Mr Lennon Hendrix's picture

It is more than that.  We are cheering the evil man on as he destroys our city.  We are mad.  Mad on Fluoride, meth, and soda pop.  We got high off of the Pusherman's delivery, and we are addicted to the madness.  There is nowhere else to run, so now we laugh and laugh our balls off.

Element's picture


Wall Street is just a lowly parasite eeking out a misery-creating 'living' within Rothschild's central banking butt-crack.

We have it on record that the Rothschild's always intended to create central banks which lend to Govt, especially and particularly to Govt, specifically to capture a political system and national finances, to milk the country dry. Who watches the watchers if the Govt is regulator and also the biggest client?

That's how this whole game got rolling.

All that's different this time, is the TBTFs created massive private debts first, via central bank policy, with a dupe's (GW Bush) nod-and-wink, then they bought down Lehman's via shorting it, to get a 'systemic crisis', then the Govt of GWB took Hank Paulson's Henny-Penny demand and turned these deliberately created unrepayable private debts on BANK balance sheets, into public debt obligations on the taxpayer's balance sheet.

This is the kind of debt with direct political and systemic strings and which the really big boys who own the central banks LOVE to milk to death.

Private debt just means the bank is porked if you default.

Public debt can be bled dry for decades

(so no, they will not actually want any sort of political Frau Merkelesque EU intervention or treaty where deficits don't grow larger than REAL GDP, so they'll ensure this does not come about politically, or succeed if it does--it's still print or snuff for eurolande)

So the real trick is to force govt to keep borrowing and selling assets for penny's on their printed $$$.

Govt is the sucker, the paid dupe and the traitor, yes, oh yes, but the Govt is not the criminal mastermind behind it all.

Look deeper into the butt-crack and you'll find who is ... (though best to not point a finger still).

SWRichmond's picture

So the real trick is to force govt to keep borrowing and selling assets for penny's on their printed $$$.

Asset-stripping the taxpayer.  Exactly.

SWRichmond's picture

Tyler: Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.

This article is a great one, and is one everyone should read.  I'm sending to everyone who hasn't pissed me off lately.

Zadok's picture

+100 green arrows for you Tyler!

Can we also dispense with the articles that seem to have the premise that the Federal Reserve is trying to do good but...?

The enemy is us, unfortunately the 'us' is a bit loosely termed because I don't recall hearing much of what needed to be said, nor have I supported in any way what has happened.  

However, I am enduring the consequences of this reality.  


Zadok's picture

Can we dispense with one more thing, technical analysis in the context of utterly manipulated markets.  We might as well have a water witch cross the wires over the Bernank's head to discern the future of the market.  Manipulation of the market is to make it do something it would not otherwise do, that negates the very purpose of technical analysis which is to discern what the markets will do.  

In the absence of agreement on this, I will just resort to ignoring nonsense.  

Sorry, may be a bit off topic.  

Good article, thought provoking and interesting new information.

Thanks ZH.

Tyler Durden's picture

People enjoy the illusion of control that patterns provide.

Hence charts.

CvlDobd's picture

I see a lot of charts here.

I use charts but I do not believe they have any predictive value. Just risk to reward setups. Markets are gonna do whatever TPTB want. I just try to lower the risk with the chart when entering a position.

Mr Lennon Hendrix's picture

Knowing the manipulation makes reading charts easy.  If you know when they like to sell (like yesterday) then you know when they will sell.  I will explain:

When you see the price of the Trinity drop (gold/silver/platinum) in unison, equitie will follow.  Easy trade; it has worked since before the Flash Crash.

When you see the Trinity rise in unison, equity will rise.  It has worked since the "Spring" of '09.  Easy trade.

Get some.

Deo vindice's picture

We're really in uncharted waters. Who has a chart for that?

Calmyourself's picture

I use and understand charts to know what happened their predictive value has become null..

giddy's picture

...that's if one only sees established patterns... true analytics is seeing things anew... can't put new wine into old bottles... or 2011 data into 2006 models...

flattrader's picture

I don't know which of the Tylers is "speaking" right now, but I'll assume it is the "well-conditioned" Tyler.

I know the the predator class has completed its work when they get us to blame ourselves.

Yes, if we blame the victim, the perp ultimately walks free.


Totentänzerlied's picture

He who cannot command shall obey. The people refuse to command thus they obey. Our masters know the wisdom of these words, and we live the result.

That a victim is not always innocent is no contradiction, particularly when the victims outnumber their attackers by many orders of magnitude.

wandstrasse's picture

the cause, the real cause, is us.

normally it is blatant sycophancy to support arguments of the boss, but this time I simply HAVE TO. The root cause for all this mess is a population (including myself) which exchanged artificial wealth (out of the debt printing press) for their future and their freedom. Both is lost now. How conscious was the population about what happened? How conscious could they/we have been, 20,30,40 years ago? I have no idea.

OldPhart's picture

I was more comatose than concious over the last thirty years.  However, I was always someone who had little fondness for credit and paying interest.  I'm 52 and got my actual first credit card about seven years ago.  Up until the debit card system I paid cash direct or bought a twenty-five cent money order.

In my twenties my caution was reinforced when others convinced me to use travelers checks on a trip.  Trying to get those suckers accepted without making a $20 purchase was virtually impossible.  It ruined the trip and cured me of the use.

I bought my first actual new car at the age of 35, at a fixed rate, at a payment I could afford.  I bought a house with $0 down, for $75k in 1998 at 7.5% fixed 30 year.  At the close I wound up getting $1,500 in cash somehow.  Since then I've never pulled equity, couldn't even conceive of it, never refinanced, never did much at all.  My payment with principal, interest and insurance runs less than $750 a month.  I have no second, and have been paying $800 to $1000 per month to bring down the cost of interest as fast as possible.

We've never bought big boy toys.  Didn't buy our first computer until the prices had dropped into the hundreds of dollars instead of thousands.  And didn't buy the kids video games until those prices had dropped quite a bit, too.  When we did buy we paid cash or used the debit card cash equivalent.

My 2005 car was paid off early by paying more than required.  The 1948 truck was a gift from my dad (since it's what I learned to drive in), my youngest son was given a truck by his grandparents as they retired to cruise the world.  My oldest son has had the luck of Midas due to skill, hard work, dedication, and taking advantage of legitimate opportunities his character opened up.

I purposefully took a job near home, foregoing about $50k annually, so I could do things I wanted with those I want to be with.  I live like I make less than $40k per year though I make about half as much more because that's how we've been living since I was 18.

We are, and will always be, considered the white trash in the neighborhood because we have little concern for image.  My front yard is desert sand, literally, because I don't want to pay to water grass. 

Last time I peeked out the backdoor the backyard was a mess of tumbleweeds, dried up sticks and random shit blown in. 

We use a wood fireplace for heat because I can get through the winter with three and half cords of wood that costs $500 if I buy all at once.  Otherwise I'd be shelling out $12k to replace the internal AC/heater.  In the summer we use fans and open windows to cool off.  Granted, it gets miserable around 120 degrees...but it's a dry heat.

As my mother in law was dying I checked into a HELOC for emergency use.  They wouldn't even consider it for the relatively tiny amount I was asking for.  During the years that banks were throwing credit at people in the form of home refi's I'd occassionally waste somebody's time getting into the details of the loans they proposed.  Around 2005 my $75k home had a 'value' exceeding $360k.  I just wanted to transfer my outstanding principal and pay a lower interest rate.  They wanted me to draw a minimum of $20k out and I'd get 6% interest.  No deal.

Now my house has a 'value' of about $100k, realistically sell for $75k, and I owe around $43k (citimortage played around quite a bit with my extra payments until I started paying attention).

The point is we weren't extravagant, we didn't borrow excessively, we bought a home to live in not as an investment, and we plodded along unglamourously until we are one of the few families here surrounded by a sea of foreclosures.


We had no strategy.  We couldn't figure out how people half our age were able to afford a house, cars, toys, big screen TV's, etc.  Made us feel bad about ourselves for the longest time and even had marital strife over it.  In short, we were comatose for twenty five years or so.  And what we did see confused the shit out of us.  It just didn't seem right somehow.

The bail out early in 2008 (forget who it was) shook me to groggy conciousness.  The bail out at the end of 2008 was a bucket of ice water on my back.  I woke up and was pretty pissed about being woken up that way.  Since then I've been trying to learn all the stuff I tried to avoid.

I've been to countless websites every night, initially jumping inand arguing only to get my ass handed to me, neatly, for being a dumb-ass.  Then I started listening and learning and paying attention.

Of all the sites I've been to, countless times, since November 2008 the quality of commenters, contributors, and the moderator, Tyler, blew me away with the depth of obvious depth of knowledge and the level of arguments made.  I lurk here throughout the day and most of the night.

At the moment I have three loans to be paid off.  The mortgage and two student loans.  One of which will be paid off next Friday, the other has about $1,200 left and I'll start applying the paid off loans payment to it in addition.  So that should be done around June.  Then those payments will be added to the mortgage.

According to the original amortization schedule, my mortgage balance puts it into somewhere in 2017.  My next goal is to start pushing actual monthly payments ahead rather than just pay down principle.  If I make two or three additional full payments per year, that gives me an increasing buffer in case something happens.  Citimortage doesn't care what the principal balance is (well, they do because they want to steal my equity), they only care that monthly payments are accounted for.

I am a financial dumbass. 

All the products, structures, abbreviations, returns, ratios...are all the equivalent of my five years of spanish back in the Stone Age.  Familiar, misty, often garbled and long forgotten.