Re-hypothecation: How it’s related to MF Global
By Paddy Hirsch
(h/tip Barry Ritholtz)
Re-hypothecation from Marketplace on Vimeo.
If ever there was a word that you’d expect to find in a Harry Potter novel, it’s re-hypothecation. This a classic example of financial people inventing impenetrable terminology to make their business look like a black art. “Oooh, re-hypothecation, it must be magic!”
Well it isn’t.
The term "re-hypothecation" came up a lot during the MF Global meltdown. It’s quite a common term in the securities market – but what does it mean?
To explain re-hypothecation, we have to explain hypothecation. And hypothecation is pretty simple. It’s when you lend someone money and let the borrower keep the collateral.
This is not an unusual thing. In fact, it’s entirely normal. If I borrow money from Billy the Banker to buy a car, the car is the collateral for the loan. I can use the vehicle, but if I fail to make the interest payments, Billy will come and my T-bird away. Same goes for my house, if I borrow money to buy that, too. I take out a loan, but instead of giving the collateral for that loan to the lender, or placing it in escrow, I, the borrower, hold on to it. Hypothecation.
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