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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
nope-1004's picture

Canadian banks are sitting on a mountain of shit.  None of them will admit anything, they're all playing hide and hide.  No seek, just hide - like cowards.  They know the toxicity of their holding and how closely tied to the global ponzi they are, but they'll never admit it publicly.

Once a sniff of this reality hits, housing will crumble, CMHC will fold, and the taxpayer will be on the hook, just like everywhere else in the world.  And Jon Corzine will walk, probably on a red carpet, next time he's in public.


lolmao500's picture

And the liberals and the conservatives (both Bilderberg/bankers puppets) will sign our death warrant... giving trillions to the bankers.

Health care? Forget it. Pensions? Forget it. You ain't getting nothing.

It'll be hell.

Freddie's picture

I don't recall any conservatives involved in MF Worldwide just Democrat Corzine (who bankrupted NJ), Bill Clinton (making $50,000 a month of MF Worldwide) and their Democrat muslim pal.

Bansters-in-my- feces's picture

CONseratives in Canada are a little different than USA CONservatives.

But they have one thing in common,they are corrupt.

john39's picture

all political parties are infiltrated and corrupted.  this collapse is not an accident.  time is running short.

marsdefIAnCe's picture

I know a lot of people on ZH like the doom porn, but the latest global financial crisis was 666 years ago when the Italian system collapsed.  "Lighting of Heaven" is Barak O Bammah in Hebrew.  Obama is Osama, the two-headed beast of Revelations 13.  He's been on the national scene for 7 years, since '04.  We're about 1000 days into his Presidency, the 1260th being the eve of July 4th.  This story has already been foretold.  If you're surprised by any of the plays you're not as bright as you think you are.


Nobel Peace Prize + chairs UN Security Council + Pakistan/China/Iran/Russia/WW3 + Fukushima meltdown hitting Babylon + Stuxnet disabling many other plants globally / German nuke sites getting shut down + Gulf Blue Plague + S 1867 + FEMA camps activated for 72 hr notice + Talmud of Jmmanuel + Khazars + Fake Osama raid + "My first 100 days will be so successful I will complete them in 72"



A L I E N's picture

Interactive Brokers has a rebuttal on Elite Trader to some of the accusations:

"Wow - pretty serious accusations here but how many of you really understand what hypothecation is? This is all about margin and stock loan. Remove the ability to hypothecate and you might as well suck out a massive amount of liquidity from the system.

First, let me get this out of the way. The accusations or assumptions that IB client money is used to fund Timber Hill are completely false. The companies are separate.

Client money is segregated. However, if you utilize margin and are long shares, IB can lend some of those shares out to others. These are not risky loans as there are limits on how much can be lent and they can be recalled at anytime and marked to market real time. Those are the rules, they are fair, not risky and add a ton of liquidity into the system.

The comments and fears presented here are a classic over-reaction to margin lending. Do not put IB or other firms on the same plate as MF. IB has a very strict policy when it comes to margin and deficits (ie. real time liquidations) and a very conservative risk management and investment policy. Many clients scream that they want more margin and that the stock loan list isn't long enough and now many of you are calling the kettle black. Before believing everything you read, do your homework and then decide if the practice is risky. Some banks are silly when it comes to greed and what they lend out. Others are not. IB has a long history of being conservative and risk adverse. Our large capital base and handling of client credit should also provide additional comfort. Many of the comments and assumptions on this thread are baseless.

Let's not over-react and create fear where their should be none - and I say this in regards to the comments on the other firms mentioned in this thread as well.

I need to put in a days work now so do not expect any replies for quite some time from me. I agree this is something that needs further clarification so you can be better educated on the subject as well as placate the unfounded fears expressed here. However, this this discussion should be for the industry and not single out IB."


OldPhart's picture

uh-huh...ummm, why does your pic look like a troll?

AldoHux_IV's picture

Pic looks like Zangief, but not the real point-- it seems like a standard vague response from a representative of a firm who may not know what's going on entirely with the firm's practices.

With so many of the activities off-balance sheet it's really a he said she said thing until they blow up and well that's a wee little too late to find out the truth.  I'd like to see the CEO of IB or any other firm mentioned in writing they are practicing conservative risk management and what their [re]hypothecation methods are and then allow an independent 3rd party to audit the off-balance sheet activites just to see who's lying and who's not.

Obviously it's going to require more information than a 'trust us'.

sqz's picture

While I still have no idea the specific link between this article and the Bundesbank in the article of yesterday, I do admit, this information is ... deeply concerning.

Ultimately, the central banks will have no choice but to accept all collateral and print like never before. The liquidity gaps and interconnections created by even minor adjustments to the size of collateral pool and its uses will otherwise become unmanageable. Simply trying to change the financial environment to be sustainable is going to cause enormous disruptions to the money supply. CBs must be feeling incredibly powerless and vulnerable as they are forced to swallow the capital markets whole!

Intermediaries will have some extremely tough questions to answer regardless.

fajensen's picture

The central banks could also NOT print, let the non-assets blow up, the banks with it, put the bankers in camps, then freed from the liablities of the shadow banking system, new banks could be created without infinite capital requirements. 

The new banks should be utilities. Heavily regulated, boring, measly profits, drab offices and no slutty secretaries.

Squid-puppets a-go-go's picture

and mass nationalisations will be the rearguard action. I hope they strip the oligarchy of all their fucking real assets and illegalise their fake ones

and before anyone has a crack at me for endorsing nationalisations, submit to this: for the majority of the time in the grand economic cycle , nationalisations are folly and counter productive. In 6-9 months time we will be at that one degree of arc, unlike the other 359, where nationalisations will be prudent, unavoidable and beneficial.

It's not like there's anything left of capitalism to sheild from nationalisation.......

Oh regional Indian's picture

Nationalization is step D-1 to communism. FUll blown that is. Ask us Indians. Everything has always been nationalized and we are a goddamn basket case of a country.

And as for this mess, I said it yesterday, feeling very prescient... hypo-thecated? Hypo is as big or bigger than most/many banks, have huge downside risks in European Housing in general. 

Bring on the collapse already. It's happened in all but name. Like a sand castle meeting a tsunami.




carlnpa's picture


Disagree on nationalization, it will be required to reset the system.

We need to avoid nationalization of losses, claw back ill gotten gains and profits.

Nationalization along the lines of the Bank of NorthDakota would be for the public benefit.


The creation of money and the flow of money should be for the benefit of the people, not just the elites.


JW n FL's picture



Department of Energy 2011 (International) Outlook


We are all FUCKED! (this will only be news to a few of you idiots)


Department of Energy Press Page.


Video presentation.



The PDF short report (direct link).



how about some back ground?

This is for the attention deficit crowd, 1 minute and 45 seconds long and in cartoon medium.



this one is a little longer.. and maybe more for the grownups.. to all of my Friends here.. this is Jeff Rubin, again.. no need for you guys / gals to have to suffer it again.




Al Bartlett on energy consumption versus population

Uploaded by human4832 on Dec 7, 2009

Prof. Al Bartlett discusses his perspective on energy consumption versus population growth. Unending population growth is the root cause of our increasing demand for energy.

This is from a panel discussion with Professor Al Bartlett and former Colorado Governor Dick Lamm at the October 2009 ASPO-USA Denver, Colorado symposium on peak oil. For more information and additional panel videos, see www.AlBartlett.org . Also see www.ASPO-USA.org .



The Most IMPORTANT Video You'll Ever See (part 1 of 8)

Uploaded by wonderingmind42 on Jun 16, 2007

2 million views for an old codger giving a lecture about arithmetic? What's going on? You'll just have to watch to see what's so damn amazing about what he (Albert Bartlett) has to say.

I introduce this video to my students as "Perhaps the most boring video you'll ever see, and definitely the most important." But then again, after watching it most said that if you followed along with what the presenter (a professor emeritus of Physics at Univ of Colorado-Boulder) is saying, it's quite easy to pay attention, because it is so damn compelling.

Entire playlist for the lecture: http://www.youtube.com/view_play_list?p=6A1FD147A45EF50D



David Rockefeller speaks about population control.



Bill Gates on energy: Innovating to zero!


Fracking  Contaminates Towns Water Supply


It was a little town with no one of importance in it.. and we need the energy more than another nowhere, piece of shit, red neck infested, town in the middle of bum-fucked-Egypt!


JW n FL's picture



Capital Account: William K. Black on MF Global and Jon Corzine Culpability (12/08/11)


supafuckinmingster's picture

AAhhhhhhhhhh coulda shoulda woulda............wouldn't it be fucking wonderful if things could be as they should be? But they're fucking not, and ruthless fucks at the top of the 1% aren't gonna let us claw back gains and profits, aren't gonna let us create money for the benefit of the people. The people are here, in their twisted eyes, to serve them. And if things are gonna change it's gonna take a whole lot of violence. It shouldn't have to....it would be nice if it didn't have to but it FUCKING WILL. 

Spastica Rex's picture

Your writing style reminds me of Buckminster Fuller.

Totentänzerlied's picture

Nationalization of finance is analogous to the devil switching his pitchfork from his right hand to his left. Finance and government have been married and fused for millenia, regarding them as separate entities is dangerously naïve. "Just this one time and never again" and "it's only temporary" are the siren songs of despots and tyrants. The only things to which it is a solution are unacceptably slow wealth extraction and insufficient serfdom.


zorba THE GREEK's picture

I'm glad ZH is keeping this piece as the lead article. I read it last night and read it again this morning and

I going to read it again tonight. The implications from this are mind boggling, but it does make the Fed's

actions seem more logical now. No sovereign nation or major financial institute can be allowed to fail anywhere

in the Western World because it would mean total collapse of the house of cards within days.

AldousHuxley's picture

Shit already failed.

Fed just covering shit up with rose petals while government scrambling to clean it all up with oil, but China and Russia says dont' touch our bitches in Syria and Iran. BTW, China has STEM grads to hack drones while US has retards texting OMG all day.

dizzyfingers's picture

"BTW, China has STEM grads to hack drones while US has retards texting OMG all day."

Pithy word picture/mirror of US society now, mindless twits are the next big adult power/voting block, with all of that demographic truth's terrifying implications. 


dizzyfingers's picture

"...total collapse of the house of cards within days..."

Timed for Christmas/New Year holiday? Hmmm?

The Big Ching-aso's picture



Whores, trollops, and sluts.   The lot of them.   Let boils erupt pustules of fetid gangrenous fluid from their poisoned uteruses.

These bitches are ready for the shit pile.   Useless and dangerous.   Helluva combination.

topcallingtroll's picture

Hey Al IEN

Does interactive brokers have a subsidiary in the united kingdom?

If so, then everything you just said was a lie and these client funds have been re hypothecated and leveraged four times, and it is off balance sheet so it cant be found.

Michael's picture


Woman says she performed oral sex on married Newt Gingrich

"A woman who worked for Newt Gingrich’s first successful congressional campaign in 1977 is sharing allegations of an adulterous affair with her boss in an attempt to stem the rise of the current GOP front-runner.

Anne Manning says that she had an adulterous relationship with Gingrich 34 years ago. At the time, he was married to his first wife, Jackie Battley, and campaigning for Congress with the slogan “Let Our Family Represent Your Family.”

Manning told the National Inquirer that she performed a sexual act on Gingrich in a Washington, D.C. hotel room, but adds that they didn’t have sex so that “he could say he had not slept with me.”'


Michael's picture


Documents: ATF used "Fast and Furious" to make the case for gun regulations

"Documents obtained by CBS News show that the Bureau of Alcohol Tobacco, Firearms and Explosives (ATF) discussed using their covert operation "Fast and Furious" to argue for controversial new rules about gun sales.


In Fast and Furious, ATF secretly encouraged gun dealers to sell to suspected traffickers for Mexican drug cartels to go after the "big fish." But ATF whistleblowers told CBS News and Congress it was a dangerous practice called "gunwalking," and it put thousands of weapons on the street. Many were used in violent crimes in Mexico. Two were found at the murder scene of a U.S. Border Patrol agent.


ATF officials didn't intend to publicly disclose their own role in letting Mexican cartels obtain the weapons, but emails show they discussed using the sales, including sales encouraged by ATF, to justify a new gun regulation called "Demand Letter 3". That would require some U.S. gun shops to report the sale of multiple rifles or "long guns." Demand Letter 3 was so named because it would be the third ATF program demanding gun dealers report tracing information.


On July 14, 2010 after ATF headquarters in Washington D.C. received an update on Fast and Furious, ATF Field Ops Assistant Director Mark Chait emailed Bill Newell, ATF's Phoenix Special Agent in Charge of Fast and Furious:


"Bill - can you see if these guns were all purchased from the same (licensed gun dealer) and at one time. We are looking at anecdotal cases to support a demand letter on long gun multiple sales. Thanks.""


Michael's picture

The Only Hope for the European Union is for its people to adopt in its entirety, the US Constitution, immediately!

The countries would be relegated to statehood status, but they will retain all rights not given exclusively to the federal government. Let me tell ya, that's still a lot of rights the states retain.

By the way, a private Federal Reserve is still unconstitutional in the European package, as are income taxes.


Sandmann's picture

An alternative would be for British Government Officials to fly in and sequestrate US Government Assets seized from The Crown by terrorists and rebel movements........in the meantime, the Us could prepare for the Coming Meltdown when Geithner admits that he is an Agent of Goldman sent to rescue its deals in Greece and Turkey and Spain.

Ghordius's picture

thanks for the comic relief

AldousHuxley's picture

if you go to capitol and there is restroom for US congressmen and women. Go to the toilet and you will see two things:


(1) toilet paper with US dollar design

(2) toilet paper with Constitution design


You don't have any rights my friend. Even communists now have US style constitutions.  GUNS > PAPER

DaveyJones's picture

how could he do that to that vulnerable woman. Blindness is one of the most challenging disabilities

Socratic Dog's picture

Well gee that's much more important than the imminent total collapse of the world's financial system.

You bloody idiot.

Manthong's picture

Sounds like a resume enhancement nowadays.

A L I E N's picture

Those aren't my words, I just quoted from that site.. thought it was interesting

I believe they do have operations in the UK.

Also another post on the site says in the customer agreement IB does allow re-hypothecation as well as hypothecation:

"Interactive or its Affiliates may deposit collateral, securities and/or other Customer property with third parties and may pledge, re-pledge, hypothecate or re-hypothecate Customer collateral, securities and/or other Customer property, either separately or together with other securities and/or other property of other Customers of Interactive for any amount due to Interactive in any Interactive Fully-Disclosed Account in which Customer has an interest"

Doña K's picture

Today, Corzine during questioning, he mentioned that one of the largest insitutional shareholders (owners) is Fidelity and other institutions like it.

We should then worry that these institutions may be the next dominos?

I am taking out my IRA just in case.

Stay alert my friends 

Voluntary Exchange's picture

Yep TP you nailed it!  

What needs to be known on a case by case basis is if a firm has subsideraries or associated entities in UK, and if so how much hypothication and off books liability exists, and how that relates to a particular firm if you are in Say, the USA or Canada.  

But even if your firm is "clean", with so many "big fish" out there already carrying a fatal dose of UK hypothecation "radiation" do you think your clean firm can survive in the market ecosystem when all those fish start to die? Are you starting to get nervous yet?  

chubbar's picture

Just FYI for everyone, I dug out my copy of a brokerage agreement I have with Scottrade. Paragraph 61 has language exactly per the above quote allowing for the hypothecation or re-hypothecation of securites. It does also have language in addition to that which says losses or gains from those activities will not accrue to the individuals account. It goes on to make this statement.

"We are required under SEC rule 15c3-3 to retain in our possession and control all fully paid-for securities. Securities used as Collateral for Margin Loans are not fully paid for and therefore are not subject to the same obligation."

I'm hoping that this language is the difference between having an investment account and a zero balance when TSHTF.

XitSam's picture

And rules preventing comingling prevented MFGlobal from going under.

Curve Watcher's picture

Umm, I think I'd look up their definition of "Margin Loan" before I got too hopeful or went to bed tonight.  Years ago, my (ex)broker tried to get me to take out a margin account secured by the fully-paid for stock he'd just bought for me.  Said it was "standard" -- that all the kids had one.  You might have a margin account and not even know it.

Papasmurf's picture

Is there any rule of law anymore when $1B can go missing and there are no indictments?  I'm not sure SEC15c3-3 is relevant in the long term.

chubbar's picture

I tend to agree with you papasmurf and no, it's definitely not a margin account (and yes, they did try to put me in one). I just have a straight up account with them but it isn't going to kill me if they steal it, not going to help either though. If these retail stock brokerages go tits up because of this type of calamity we'll all have bigger problems to be worrying about!

Use of Weapons's picture

Some banks are silly when it comes to greed and what they lend out. Others are not.

Was this designed to be read by kindergarten children?

"Silly" is a bit of an understatement given the situation.

Taint Boil's picture

You lost me at "hypothecation" Starting to get Zero Hedge overload ... think I'll head over to TheOilDrum.com

onthesquare's picture

in reading the conditions of the agreement set up by MF.  It seems it was only a matter of time before the system would become abussive and hyper-hypothecate.  Anyone who would agree to such a risk was, in themselves, banking on an un-ethical outcome.  The ship is sinking and there are only enough life boats for 1/10.

DevilsPrinciple's picture

It would appear that A lien has plagiarized a thread comment  from the IB board under the SN of DEF.The  IB " rebuttal" if one could refer to it as that, is a grouping of non sequiturs.

"I need to put in a days work now so do not expect any replies for quite some time from me. I agree this is something that needs further clarification so you can be better educated on the subject as well as placate the unfounded fears expressed here. However, this this discussion should be for the industry and not single out IB."


"Before believing everything you read, do your homework and then decide if the practice is risky. Some banks are silly when it comes to greed and what they lend out." 


Evidently A Lien, many HAVE done their homework. When you actually have something worth learning about, perhaps we will be ready to listen.

chubbar's picture

What is your position in IB? My guess is that this level of transaction is so far above your paygrade that you are oblivious to it. This story isn't about a bunch of regional office managers getting together and cooking the books.