M
morganist
Thank you Wikipedia for that answer.
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
The weekly: Greece to default/restructure THIS weekend? thread
- Thread starter TGregg
- Start date
Thank you Wikipedia for that answer.
Quote from Martinghoul:
... followed by a general wringing of hands and a bemoaning of how our financial system is oh so terribly fragile and "frighteningly apocalyptic". Not that I am suggesting that it's not, but you ain't gonna fix it by stating the obvious (i.e. the banking system is global and interconnected) and not offering any constructive alternatives.
The best part of this is that, for Western Europe at least, the banking system has been "global" and interconnected since about 1200.
Stupid is as stupid does. Ditto for ignorant, especially about history.
M
morganist
Quote from Martinghoul:
The author starts off by suggesting that the MF Global client money was somehow "misplaced" or "misused" and re-hypothecation is the culprit. Then the author states that apparently it's not re-hypothecation itself that's the problem, but rather the degree to which a broker can engage in this practice (i.e. if it's 140% of the liability and below, as per US regulation, it's OK; if it's above 140%, as per UK rules, it's very bad). There follows a discussion of precedent and how re-hypothecation had been used by big bad Leh and is used by Jefferies (I guess they're pretty bad as well), as well as other nasties. Finally, the author makes a conclusion that re-hypothecation poses a systemic risk.
Here's my two main issues:
a) Where is the explanation of the claim that it was the UK rules that allow this rampant re-hypothecation that are somehow dangerous? Why is 140% OK and 250% (using the figures in the example) toxic?
b) Where is the actual explanation of how EXACTLY re-hypothecation is to blame for the missing client funds? Is it the last sentence, where the author says that it's 'cause CFTC now prohibits the practice of buying foreign sovereign debt? That's just plain silly.
Re-hypothecation is a generic practice that's widely used, under all sorts of legal frameworks. There is nothing inherently wrong with it (clearly, many other institutions that practice it are viable, as suggested in the article itself). We can certainly argue about whether quantitative limits should be applied and what systemic risk the practice poses. However, there is NOTHING whatsoever in the article that suggests that re-hypothecation had anything to do with missing client funds. Moreover, re-hypothecation doesn't even necessarily imply excessive leverage, which is purely a function of risk management and managerial prudence. IMHO, blaming re-hypothecation for all the MFG issues is akin to blaming any and all sexual intercourse for an occasional outbreak of STDs.
Finally, this is what so annoys me about modern journalism. This article is a typical example of a "financial tabloid", HeroZedge style of writing. A bold statement, but no specific explanation or proof; followed by a general wringing of hands and a bemoaning of how our financial system is oh so terribly fragile and "frighteningly apocalyptic". Not that I am suggesting that it's not, but you ain't gonna fix it by stating the obvious (i.e. the banking system is global and interconnected) and not offering any constructive alternatives.
Isn't the big point of this that the value of the rehypothecated assets are not worth as much as they thought they were? Rather than the rehypothecation in itself?
I am sorry, even if the above were true, I don't see what that has to do with either the article or my comment...Quote from morganist:
The crisis in Greece an Europe and pretty much the whole financial crisis. The simple fact is the assets the banks were basing the collateral on are not worth what they thought they were.
Mghoul, thanks for the belated response. You made two criticisms: one, that it is an argument of degree between the U.S. regulation and the U.K. regulation of rehypothification, and two, that the author did not explain the mechanics of rehypothification to trace who ended up with the missing MFG funds.
The first criticism is a straw man argument, becuase the article is not an argumennt of degree of regulaton of rehypothification...it merely shows the difference to explain why funds were moved to the U.K. jurisdiction. It is interesting to note that where rehypothification was prohibited...in Canada; no customer money was lost.
The second criticism has some validity. The author could have done better to make a tracing explanation of where the money went...who had competing claims on the collateral...and who used those claims to get paid at the expense of some other claimant...presumably the customers. You are right; that is not well explained. I disagree that this invalidates the substance of the article that rehypothification apprears to have been involved in the movement of funds from the U.S. to the U.K. and cannot be ruled out as playing a role in the lost customer funds.
Lets just let this play out and see what comes out of the investigation. When we know what happened to the money we can see the role of rehypothification.
With regards to the comment on Greece and public market....your comment was correct in the absolute but it ignored the substance of what was being discussed...so, I appreciate it as a pissant comment that is beside the point and distracts more than it contributes.
Morganist is right to point out that the value of collateral is everything. Debt in all forms, even currency, exists only with regard to the pretext of some value in collateral, or some access to assets by the guarantor....when the value of the assets that back up the debt are devalued the debts on that collateral have to be written down, and the competing claims on that collateral value have a musical chairs problem.
The first criticism is a straw man argument, becuase the article is not an argumennt of degree of regulaton of rehypothification...it merely shows the difference to explain why funds were moved to the U.K. jurisdiction. It is interesting to note that where rehypothification was prohibited...in Canada; no customer money was lost.
The second criticism has some validity. The author could have done better to make a tracing explanation of where the money went...who had competing claims on the collateral...and who used those claims to get paid at the expense of some other claimant...presumably the customers. You are right; that is not well explained. I disagree that this invalidates the substance of the article that rehypothification apprears to have been involved in the movement of funds from the U.S. to the U.K. and cannot be ruled out as playing a role in the lost customer funds.
Lets just let this play out and see what comes out of the investigation. When we know what happened to the money we can see the role of rehypothification.
With regards to the comment on Greece and public market....your comment was correct in the absolute but it ignored the substance of what was being discussed...so, I appreciate it as a pissant comment that is beside the point and distracts more than it contributes.
Morganist is right to point out that the value of collateral is everything. Debt in all forms, even currency, exists only with regard to the pretext of some value in collateral, or some access to assets by the guarantor....when the value of the assets that back up the debt are devalued the debts on that collateral have to be written down, and the competing claims on that collateral value have a musical chairs problem.
M
morganist
Quote from Ed Breen:
Morganist is right to point out that the value of collateral is everything. Debt in all forms, even currency, exists only with regard to the pretext of some value in collateral, or some access to assets by the guarantor....when the value of the assets that back up the debt are devalued the debts on that collateral have to be written down, and the competing claims on that collateral value have a musical chairs problem.
Yes but it is worse than that the calculations on retrun are based on principal investment. This is likely to cause catastophe.
Quote from morganist:
Yes but it is worse than that the calculations on retrun are based on principal investment. This is likely to cause catastophe.
None of which is what brought down MF Global. Their business model was obsolete. Someone there decided, at the very end, to try what in American football is called a "Hail Mary pass" to try and save the poor thing. Didn't work.
In other words, this may (and it has yet to be proven) have contributed to the actual timing of their downfall. Maybe. But MF Global had big big problems that predated this, and predated Corzine.
I believe that is part of what martinghoul has been trying to point out. None of us really knows what actually happened there, but if the euro sovereign debt crisis was any part of it at all, it was only as a contributing factor at the end.
Kind of like burning a piece of rotten wood. If it hadn't been burned it might have just finished rotting and become a part of the topsoil. Burning it just speeds that up a bit.