Coming Confidence Crisis for Brokerage Industry!?! ~ Hypothecation/Rehypothecation

The Golden Truth

Once people understand what hypothecation/rehypothecation is - if they care about their money they will, that is - the MF situation could lead to a confidence crisis in the brokerage industry.

The Golden Truth

Almost everyone who opens a margineable brokerage account, from little guys to sophisticated hedge funds, knowingly or typically unknowingly also signs a hypothecation agreement, which enables the brokerage firm to take the securities in your margin account and re-pledge them as collateral to obtain bank financing for your margin account.  It looks like MF was taking this collateral and obtaining financing but using that money for other purposes - like investing in short term Greek sovereign paper paying 50% now that pays 100%, which means MF's investment was wiped out and now the bank that provided the funds for those investments has the customer securities as collateral for the MF trade and the customer is screwed.  Please note, I don't know for sure that is exactly what happened, but I'm 90% certain that is generically what was going at MF and why at least $700 million in customer cash and $1 billion in collateral is missing and possibly more.

The Golden Truth

I will say that based on the most recent news flowing out of Jeffries securities, if you have an account there I would move it.  Jeffries was downgraded by Egan-Jones recently to BBB-.  S&P has not budged.  Usually the ratings agencies are way behind the curve in downgrading financial firms.

The Golden Truth

Jeffries has an unsavory history and culture.   The current CEO originally worked as a junk bond trader directly for Michael Milken at Drexel Burnham.  Remember that saga?  A lot of ex-Drexel guys who didn't get thrown in jail ended up at Jeffries.  If you keep your brokerage account there just remember that "when you lie down with dogs..."

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