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Rehypothecation has vital role to play
14 June 2012
The mainstream media’s discovery of rehypothecation has
provoked a similar reaction to that against short selling.
The industry must answer the critics, says Simon Murray
Speaking at an ECB press conference on June 6 2012, ECB President Mario Draghi admitted that “it took us a while to understand how the financial crisis was propagating the main causes and how to manage a failure as big as Lehmans.” One crucial area of analysis involved Lehman Brothers’ repo and rehypothecation activities. These activities, taking place largely under regulators’ radar screens, created enormous risk exposures.
In September 2010, JPMorgan Chase’s chief risk officer Barry Zubrow provided a fascinating insight into the risks facing repo agents, in his written submission to the Financial Crisis Inquiry Commission. Even when JPMorgan increased margin requirements shortly after the near-collapse of Bear Stearns, this “did not protect JPMorgan fully from the risks it faced in extending tens of billions of dollars of credit to broker-dealers each morning as part of the unwind.”
Draghi may be correct in claiming that the situation today...
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