The Rehypothecation of Everything You Know & Love

From Wikipedia“Rehypothecation is a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing.”

Don’t you just love it when our culture, grasping for meaning in the swirling toilet bowl, grabs onto – instead – the nearest floating object, no matter how foul.  Today, our bowl is, of course, full to overflowing with what I’ll call “the latest revelation“.  It’s as if the world is suffering a digestive disorder.  But, then, revelation can be like that, can’t it?

So, “rehypothecation” has now plopped into the bowl….and, why it’s got all kinds of momo and is even growing in gravitas.  Try it, I’m sure you’ll like it.  All of which is to say, “welcome to the party” to all of those who don’t believe in the destructive power of infinite leverage and, well, of associated circular valuation (as I’ve called it). 

For speculative observations on the subject, interested readers can see this article and this article at ZH, as a good beginning.  From the latter:  “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.”

All of which is to say, we have no relevant measures of asset or debt risk, of the cost or value of money and, thus, of the value of anything on the planet.

The latest take on the subject from Kyle Bass in his latest interview at CNBC (always well worth our attention), can be viewed here

His take includes these pertinent and pithy comments:

  • “in the end, the picture is so large and the leverage in the banking system is so enormous that when you start delevering there is no way out of this scenario…”
  • “and remember, this problem has been misdiagnosed for the last three years…in the beginning with Greece it was just a liquidity problem, I don’t remember when it actually morphed from a liquidity problem into a solvency problem, but we’re talking about injecting a lot of liquidity into a solvency problem…”

All of which is to say, this problem will get worse and it will get monetized in some form or fashion.  The unknown part of this “solution” will be who get’s monetized and when. 

And now, a few related concepts to keep on your radar:

  • “Capital mobility and capital flight” (i.e. bank runs and associated currency collapse)
  • “Stability liquidity in a default environment” (i.e. monetization, incipient contagion, selected winners and losers)
  • “Shorter/Shortening Collateral Chains” (i.e. incipient contagion at a quickening pace) 

Plop, plop, plop.



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