Comments on: Hedge Funds Questioning the Soundness of Investment Banks http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-soundness-of.html Sun, 22 Nov 2009 11:45:14 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Yves Smith http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-soundness-of.html#comment-4039 Yves Smith Fri, 15 Feb 2008 14:22:00 +0000 http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-the-soundness-of-investment-banks/#comment-4039 lune,<br/><br/>I wish I had a good answer to your question. The only reason I can surmise anyone accepting that arrangement is that it has to do with the extension of margin loans and/or repos. Although a broker would inevitably have the right to sell collateral if a borrower failed to meet a margin call, perhaps the banks want extra protection for some reason<br/><br/>anon,<br/><br/>You aren't the first person who has raised worries about brokerage accounts, but Refco was a special situation. The CEO was embezzling to a massive degree.<br/><br/>If you are with a well established brokerage firm, I don't think you should have any cause for worry. Ditto if it isn't so large but has stable management and is well run and has been around a long time. Refco was a firm focused on professional traders, so it was for the sophisticated and risk oriented, not your average retail customer. lune,

I wish I had a good answer to your question. The only reason I can surmise anyone accepting that arrangement is that it has to do with the extension of margin loans and/or repos. Although a broker would inevitably have the right to sell collateral if a borrower failed to meet a margin call, perhaps the banks want extra protection for some reason

anon,

You aren’t the first person who has raised worries about brokerage accounts, but Refco was a special situation. The CEO was embezzling to a massive degree.

If you are with a well established brokerage firm, I don’t think you should have any cause for worry. Ditto if it isn’t so large but has stable management and is well run and has been around a long time. Refco was a firm focused on professional traders, so it was for the sophisticated and risk oriented, not your average retail customer.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-soundness-of.html#comment-4037 Anonymous Fri, 15 Feb 2008 13:30:00 +0000 http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-the-soundness-of-investment-banks/#comment-4037 I agree, some background detail would have been welcome. Presumably this "rehypothecation" is only an issue for hedge funds, and not something that retail brokers or wealth managers would ever do with their clients' investments? Retail forex traders got burned when Refco went bust because their funds weren't properly segregated... do ordinary investors need to start worry about their broker? We live in paranoid times... I agree, some background detail would have been welcome. Presumably this “rehypothecation” is only an issue for hedge funds, and not something that retail brokers or wealth managers would ever do with their clients’ investments? Retail forex traders got burned when Refco went bust because their funds weren’t properly segregated… do ordinary investors need to start worry about their broker? We live in paranoid times…

]]> By: Lune http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-soundness-of.html#comment-4034 Lune Fri, 15 Feb 2008 09:42:00 +0000 http://www.nakedcapitalism.com/2008/02/hedge-funds-questioning-the-soundness-of-investment-banks/#comment-4034 This may be an overly simplistic question, but why would banks offer a discount in exchange for switching assets to the banks' name? I imagine that except in times like these when the solvency of banks becomes a real question, there should be no difference between segregating assets and assigning them to the bank. After all, in either case, the accounting of assets and the custodial services are the same. It's only during a time of impending bankruptcy that your assets are at risk.<br/><br/>If that's the case, then perversely, offering discounts is an admission of your banks' insolvency risk, and the higher the discount, the bigger the presumed risk of bankruptcy. Do the banks really want to be admitting this? This may be an overly simplistic question, but why would banks offer a discount in exchange for switching assets to the banks’ name? I imagine that except in times like these when the solvency of banks becomes a real question, there should be no difference between segregating assets and assigning them to the bank. After all, in either case, the accounting of assets and the custodial services are the same. It’s only during a time of impending bankruptcy that your assets are at risk.

If that’s the case, then perversely, offering discounts is an admission of your banks’ insolvency risk, and the higher the discount, the bigger the presumed risk of bankruptcy. Do the banks really want to be admitting this?

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