The financial embarrassment of MF Global Holdings has been reported by Reuters as due in part to a reluctance of that firm’s bankers, JP Morgan, alleged reluctance to provide more funds. Significant in MF Global’s embarrassment appears to have been its involvement in Re-Hypothecation transactions. These complex transactions involve customers of MF Global making deposits with them in segregated accounts, which were then used as collateral to obtain leverage for investments in order to make a high return on its dealings before repaying the loan from the bank and returning the funds to the customer’s segregated accounts.

It is reported that MF Global had trouble, after investing in European Government Bonds, in selling these investments which resulted in calls being made in respect of the loans. A significant feature of re-hypothecations is that the borrower (MF Global) used customers’ monies to secure a debt. Although MF Global retained ownership of that collateral, it was “hypothetically” controlled by the creditors: i.e., the banks etc., who had a right to receive possession if there was any default.

This is another instance of leverage causing a failure.