UK. Rehypothecation should be banned - or at least capped.

[morganist]

Quote from bwolinsky:

The caps effect will, in practice, limit liquidity in the capital markets.

There is nothing positive about that because rehypothecation will remove liquidity that any regular firm will provide and follow their own risk management policies. An artificial cap won't help because it will prolong the existence of inefficient firms that should cease to exist and cease to exist faster than if inefficient firms are prevented from meeting their own demise faster than they otherwise would have.

The firms that know how to use rehypothecation properly will be less profitable, even if it might prevent small systemic risks of firms without useful risk management controls. More liquidity will always be preferred to less, in every case. Less liquidity and inefficient overregulation reduces the efficiency of the capital markets when failure is the best regulator.

The cap will not prevent failure, but prolong the existence of firms that are <i>inefficient.</i> Letting inefficient firms fail faster is better than letting inefficient firms fail more slowly. The societal impact of failure is better than prolonging customer relationships with firms that will fail anyway.

I have to disagree with this and state that the problem is far worse than just failure and inefficiency of banks. If one bank is inefficient it will bring down others.

Rehypthecation sets the precedent to a domino effect of debt. This is the real danger here not whether the market is efficient or not. The days of working better or worse are gone. Under the current conditions we should be looking at trying to limit the risk of contagen of the financial crisis or reducing the effects of a collapse.

 

[bwolinsky]

Quote from morganist:

I have to disagree with this and state that the problem is far worse than just failure and inefficiency of banks. If one bank is inefficient it will bring down others.

Rehypthecation sets the precedent to a domino effect of debt. This is the real danger here not whether the market is efficient or not. The days of working better or worse are gone. Under the current conditions we should be looking at trying to limit the risk of contagen of the financial crisis or reducing the effects of a collapse.

If your complaint is with banks risk management issues, I can tell you that those were eliminated with Dodd/Frank when they disallowed proprietary trading. Such systemic risks were removed when they explicitly made it illegal for banks to engage in trading prop. The firms you would also affect would be brokers and IA's. Banking risks of rehypothecation fall under proprietary trading rules that have already been removed from the system.

Limiting rehypothecation with a cap is unnecessary if you're concerned with banks, because banks cannot speculate anymore and that was more of an overregulated knee jerk reaction than with banks specifically.

Not sure if the disagreement is with my rationale or with whether removing liquidity is a bad thing. Trust me, it's always a bad thing, but if it's the banks you're worried about, this has already been legislatively addressed.

 

[bwolinsky]

Quote from bwolinsky:

If your complaint is with banks risk management issues, I can tell you that those were eliminated with Dodd/Frank when they disallowed proprietary trading. Such systemic risks were removed when they explicitly made it illegal for banks to engage in trading prop. The firms you would also affect would be brokers and IA's. Banking risks of rehypothecation fall under proprietary trading rules that have already been removed from the system.

Limiting rehypothecation with a cap is unnecessary if you're concerned with banks, because banks cannot speculate anymore and that was more of an overregulated knee jerk reaction than with banks specifically.

Not sure if the disagreement is with my rationale or with whether removing liquidity is a bad thing. Trust me, it's always a bad thing, but if it's the banks you're worried about, this has already been legislatively addressed.

Sorry, I missed "UK, rehypothecation."

The argument is no different, that country just doesn't have a Dodd/Frank law to the best of my knowledge.

 

[Swan Noir]

Did any of the lenders get hurt in the MF Global debacle?

Quote from morganist:

This is a bank we are talking about. When have they ever been on top of their game?

 

[bwolinsky]

Quote from Swan Noir:

Did any of the lenders get hurt in the MF Global debacle?

If they had done it under CFTC rules governing bankruptcy, then they would have, but they're unscathed following SEC SIPC liquidation procedures.

 

[Random.Capital]

Quote from bwolinsky:

No matter what the rationale, there is nothing positive whenever it involves removing this liquidity.

I disagree with this. Inappropriate levels of "liquidity" are a key component of bubble valuations.

I don't agree with artificial limits on liquidity - I also don't agree with creation of artificial liquidity created by "clever" credit policies.

That said, I think all this misses the big picture. Taking away implied and explicit taxpayer backstops - and really meaning it, meaning allowing big big institutions to fail - will allow the market to determine a more suitable level of rehypothecation on its own without imposing difficult to enforce regulations.

It'll be a bit messy, certainly, but then, markets are supposed to be messy.

 

[morganist]

I think you guys are missing my point. The point I am making is the risk to banks from sovereign debt is colosall. This debt if it becomes toxic which it will will create more bad debt if there is a continuation of rehypothecation. It is too late to stop the majority of the loss but it will stop it from spreading. In the UK there is no limit on rehypothecation. This coupled with the exposure to EU sovereign debt loss is a disaster waiting to happen.

 

[morganist]

I found this paper on the situation.

http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf

Anyway if you read page 4 the first sentence states there is no limit to rehypothecation in the UK or protection for the assets rehypothecated.

You should read this paper. If you read one paper this week or month on the financial crisis and debt contagen make it this one.