Margins, re-hypothecation and MF-Global

A wrinkle on margin account mechanics. You know that securities in your margin account can be lent (at interest) without your knowledge, often to short sellers. The broker can borrow the assets themselves and use them as collateral against money borrowed, this is allowed in the US.  Re-hypothecation is the infinite loop where one pool of assets is borrowed and lent, re-borrowed and re-lent. This is permitted in the UK. MF Global did this in the UK in droves. The infinite loop went to such an extent that margin call amounts exceeded the value of the assets. For more details, click here.

An updated version from The Big Picture in the Washington Post,Dec 18, 2011, here.It is just amazing how anyone can continue to spout the “deregulation is good” mantra in the face of such relentless evidence.