UNREALIABLE: How Banks Will Create the Next Crash? In 2008, reckless credit default swaps nearly obliterated the global economy. Now comes the next crisis - rehypothecated assets.  It is a complicated, fancy term in the global banking complex. Yet it is one you need to know. And if you understand it, you will get the scope of the risks we currently face - and it's way bigger than just Greece.

So follow with me on this one. I guarantee that you'll be outraged and amazed - and better educated. You will also be in a better position to protect your assets at the end of this article, where I'll give you three important action steps to take. So follow along.....!

Their Profits on Your Money
Few people know this, but there's a process through which banks and trading houses are leveraging your money to increase their profits - just like they did in the run-up to the last financial crisis. Only this time, things may be worse, as hard as that is to imagine. Consider the fact that in 2007 the International Monetary Fund (IMF) estimated that this form of "leverage" accounted for more than half of the total activity in the "shadow" banking system , which equates to a potential problem that would put this insidious little practice on the order of $5 trillion to $10 trillion range.

And this is in addition to the bailouts and money printing that's happened so far. Wall Street would have you believe this figure has gone down in recent years as regulators and customers alike expressed outrage that their assets were being used in ways beyond regulation and completely off the balance sheet. But I have a hard time believing that.  Wall Street is addicted to leverage and, when given the opportunity to self-police, has rarely, if ever, taken actions that would threaten profits.

Further, what I am about to share with you is one of main the reasons why Europe is in such deep trouble and why our banking system will get hammered if the European Union (EU) goes down. And what makes this so disgusting - take a deep breath - is that it's our money that's at stake. Regulators like the Securities and Exchange Commission (SEC) and their overseas equivalents are not only letting big banks get away with what I am about to describe, but have made it an integral part of the present banking system. Worse, central bankers condone it.

As you might expect, the concept behind this malfeasance is complicated. But it's key to understanding the financial crisis and to avoiding a possible global recession in 2012 and beyond. What we're talking about is something called "rehypothecation." Most people have never heard the term, but trust me, you will shortly. Let me explain what this is, and why you need to know about it. Then, I'll offer three ideas to trade around it.
 
What Does Hypothecation Mean?
Hypothecation is what it is called when a borrower pledges collateral as a means of securing a debt. The borrower retains ownership of the collateral but it is hypothetically under the control of the creditor who can seize possession of the collateral if the borrower defaults. If you own a house and have a mortgage, you have hypothecated it to your mortgage company, for example.

This means that you still own it, but in the event of a default, your bank or your mortgage company (the creditor) can take ownership and do what it wishes. "Re hypothecation" varies slightly when it is applied in the financial markets. For example, if you put a buck in your checking account and the bank has to keep 10% of that in reserve, it can loan out $0.90. But then, if somebody else deposits $0.90, the bank can loan out $0.81 cents or 90% of the total assets on deposit. And so on, until literally all the money on deposit is effectively hypothecated to another entity.

This is why banks are constantly seeking new depositors - to feed the hypothecation machine and their profits. Obviously a buck is still a buck no matter which way you cut it, so cash does count for something. But at the end of the day, any banks can create a daisy chain of rehypothecated assets that result in as much as $10 in new checking accounts and rehypothecated assets against every $1 in actual deposits. Perhaps more.

If you are a brokerage house, the process is similar. Have equities, the collateral gets posted and used accordingly. Bonds, same thing. The brokers will reuse them by rehypothicating them at their discretion while making sure a fraction of the actual underlying value remains in reserve as collateral.

Typically, banks and investment houses have rehypothecated customer assets to back their own trades, their own borrowing, and their own operations. Just like your house, which can be seized if you do not pay up, assets on deposit with a broker may be sold by the broker (hypothecated) if investors fail to keep up with margin payments or if the securities drop in value and the investors in question fail to respond to requests to boost their collateral - all at the broker's discretion depending on their margin and clearing requirements. Now here's where it starts to get sticky.
Follow me here next Tuesday for continuation