If rehypothecation is in your vocabulary as a word you use on a regular basis then there is a high probability that you are in the brokerage, hedge fund, or other securities related business. Rehypothecation is one of those words that creeped into our vocabulary by accident as the economy has had its latest hiccups and analysts on television began to talk about areas of weakness in the economy.
Rehypothecation is a practice that we have problems with but also is a process that has been around for centuries. With this brief backdrop, what is rehypothecation?
Let us assume that you borrow $1,000 from a bank and as collateral you let them hold $1,000 in bonds (known as hypothecation) that you would prefer to get back rather than cash in for some reason. At this point you have a $1,000 loan to pay, and the bank has a loan to collect. Then the bank realizes that there is a high probability that you are capable of repaying the loan without the bonds as collateral. The bank approaches you with the deal that if they could use your bonds as collateral for one of their deals, they would be willing to pay you a small fee.
All goes well until whatever the bank used your bonds for has a hiccup and either they go down in value or some other catastrophe occurs. At this point the bank may not be able to repay your bonds and both you and the bank now have a problem.
This sounds crazy, but it is legal, and it contributed to the financial crisis back in 2007. Even if it is legal, from our perspective it is ill-advised. Now that you know the word and its meaning, run the other way when you hear it!
On a much easier path is the non-word “grammer.” We are not sure about the rest of the Country, but here in the South “Grammar” often comes out of our mouths as “Grammer.” We guess it is a southern thing, but it leads to a lot of misspellings of a very simple word.