Anyone ever got themselves tied into knots over the thought of asset rehypothecation in the economy? It's what brought down MF Global and there were supposed to be stop-gaps put into place. I really haven't been able to find any in depth analysis of the level to which those measures were put into place.

I think at one point, I saw a stat that any given US Treasury was likely pledged 7 or 8 times as collateral (simultaneously on different contracts) in repo markets and other security financed transactions.

To some degree, it's what blew up the UK Pension system in 2022. If you can draw a relationship between the absolute availability of collateral as opposed to the value of the collateral you have control of. I think what I'm getting at is - collateral only works when you own what you think you own.

If rehypothecation is as big of a problem as I think it is, especially in the non-bank banks (shadow banking), that's a giant contagion risk and likely so opaque and derivative based, we can't prepare for it...I guess we can foam the runway so to speak but it comes down to just letting the pieces fall where they may and seeing what's left. Going back to that US Treasury example...it's explicitly backed so the value is at least in theory there to cover each of the 7 transactions but what if they're levered transactions based on the same collateral.

Anyway, I put it in the OP, rabbit hole.

It's what may be colloquioually referred to as a "house of cards" and its a non-stop can kicking, bag holder shuffling scape goat merry go round that can only go on for so long.



But it's also the product of a world economy based on debt/credit as the motor for growth. The chickens always come home to roost at some point.

My view on this is that we are paying for this one way or another.

Leverage reduces costs. Without leverage we must wait, there are opportunity costs that would be accepted.

With leverage, opportunity costs are reduced, and the risks of leverage are of course accepted.

With rehypothication, the cost of the leverage is theoretically reduced as it defrays the opportunity cost of the capital to the instituton. But, there is a heightened leverage risk that comes with it.

Rehypothication improves velocity of money, which is a major factor in money supply. Many view this element as the house of cards, but it is also a positive side of higher leverage.

There is no escaping risk, and any risk will rear its head on occasion. Are the good attributes of a particular risk worth the downside of that risk is the question I typically ponder.