Wednesday, December 7, 2011

Zerohedge on Why Jefferies is MF Global's AIG

I wouldn't want to be Jefferies' CEO in the morning.  Tyler Durden has likely just taken down the brokerage with this scathing report on Jefferies' $22.3 billion in re-hypothecated (re-hypothecation is when a bank re-uses collateral posted by clients to back their own traders and borrowings) assets- on total balance sheet assets of $37 billion. 
And Tyler doesn't stop with Jefferies- Zerohedge throws down the gauntlet on 10 banks and brokerages over the re-hypothication issue- with none other than JP Morgan leading the pack with $546.2 Billion worth of re-hypothecated assets. Yep, you just read that right- JP Morgan has over $1/2 TRILLION of collateral backing up its $90 Trillion derivatives book that is actually client collateral!!!

According to Jefferies' most recent Annual Report it had re-hypothecated $22.3 billion (in fair value) of assets in 2011 including government debt, asset backed securities, derivatives and corporate equity- that’s just $15 billion shy of Jefferies total on balance sheet assets of $37 billion.
Oh Jefferies, Jefferies, Jefferies. Barely did you manage to escape the gauntlet of accusation of untenable gross (if not net) sovereign exposure, that you will soon, potentially as early as tomorrow, have to defend your zany rehypothecation practices. One wonders: will Sean Egan downgrade you for this latest transgression as well? All the better for Leucadia though: one more million shares that Dick Handler can sell to Ian Cumming.
Yet Jefferies is just the beginning. It gets much, much worse.

With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).
Read Zerohedge's entire report here: