Rehypothecation
Categories: Credit
See: Hypothecation.
It sounds like an obscure math term, maybe something to do with a hypotenuse. Or perhaps some esoteric alternative medicine that involves flooding the rectal area with a high-powered water injection. (Why did our minds go there? Probably time to switch therapists.)
Anyway, the actual term "rehypothecation" has to do with a particular lending policy. It basically means pledging something as collateral. You get a mortgage. If you default on the mortgage, the bank takes your house. That's hypothecation: offering your house as collateral for the loan.
Okay, so rehypothecation does that process...again. You pledge your house as collateral for a loan. The lender then turns around and pledges your house as collateral for its own loan. It's now double collateral (well, not really...it's just collateral for someone else).
It comes up most often in the case of securities: stock or bonds used as collateral for loans. The process isn't allowed in all cases. The Federal Reserve lays out rules and regulations about how the process has to proceed.
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Finance: What is Hypothecation?7 Views
Finance a la shmoop what is hypothecation? alright well here's apothecation
and yes all legal drugs even the absinthe there but hypothecation is [Man discussing hypothecation appears]
something totally different although it does involve some forms of alchemy at
least a financial alchemy in fact hypothecation is basically the process
or rules behind pledging collateral for a loan jimmy walnuts has gotten out of [Jimmy walking down the street]
the Mafia game he wants to take all the dough he made shaking down kwik-e-mart [Jimmy running from police with cash]
and invest it and he wants his investment account at his stock
brokerage to be a margin account well he has a hundred grand in the account and
with a 50% margin limit Jimmy can borrow or margin up to 50 grand worth of his
stock to you know buy stuff like a new Beemer without all the bullet holes in [BMW car with bullet holes]
it so he will hypothecate his 100 grand in stocks as that collateral borrowing
forty seven thousand dollars to buy the car and all is good
well eventually jimmy plans to pay down his margin account with both cash he [Jimmy carrying cash to woman]
deposits in there and also through the dividends that the account generates on
its own which usually exceeds the margin interest that the brokerage is charging
him so where does hypothecation run into trouble well what if Jimmy wanted to buy
10 cars like you know he just had a fetish for em and he pledged
forty-seven thousand for this baby yeah the Beemer but then he also wanted that
baby for 22 grand and while this one for 35 grand and that one for 70 well he
can only pledge his collateral once for one setting or one purchase that is he
can't go to one car seller and promise him the hundred thousand dollars that's
in his brokerage account as collateral for this used Ferrari and then go to a
different car seller and pledge him the same hundred thousand dollars that's in
his brokerage account for that 1973 James Bond Aston Martin and then go to a
third car seller and do the same thing basically he's promising collateral to a
whole bunch of people well beyond what that collateral is actually worth and
basically lying about you know what he's got in his pocket quickly he will have [Man discussing Jimmy's collateral]
pledged a few hundred thousand dollars worth of collateral in a brokerage
account that only had value of 100 grand so yeah unless you're
you know connected we don't recommend going the Jimmy walnuts route [Jimmy appears tied up]