Western Banks Scramble As China’s “Rehypothecation Evaporation” Goes Global

Western Banks Scramble As China’s “Rehypothecation Evaporation” Goes Global
Tyler Durden’s picture
Submitted by Tyler Durden on 06/07/2014 18:38 -0400
Backwardation
China
While we have warned about the problem with near-infinitely rehypothecated physical/funding commodities/metals, be they gold or copper, many times in the past, and most recently here, it was only this week that China finally admitted it has a major problem involving not just the commodities participating in funding deals – in this case copper and aluminum – but specifically their infinite rehypothecation, which usually results in the actual underlying metal mysteriously “disappearing”, as in it never was there to begin with. It would appear our fears of global contagion (through various transmission channels) are now coming true as WSJ reports that as many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans. As we detailed previously, it appears the day when the Commodity Funding Deals finally end is fast approaching… and as we note below, why that will certainly be a watershed event.
As we warned would happen, The Wall Street Journal reports that as many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans, according to people with knowledge of the matter.
The banks, including Citigroup Inc. and Standard Chartered, provided loans to trading firms that were backed by metals such as copper and aluminum stored at one of China’s biggest ports, the people said. The trading firms hold the deed to the metal, which can be used to secure financing, but the metal stays in a warehouse. Banks fear a private Chinese company may have used the metal as collateral to get multiple loans, potentially defrauding the lenders and trading firms.
Two of the people with knowledge of the matter estimated the value of the loans and collateral at several hundred million dollars.
The banks are frustrated because they haven’t been able to get access to the collateral, the people said.
The metals are stored at Qingdao Port, which administers the warehouses.
An executive at one of the banks said the title documents from the warehouses may have been photocopied and used to secure the loans.
The vicious cycle has begun… LENGTHY BUT INFORMATIVE.. CONTINUED
http://www.zerohedge.com/news/2014-06-07/western-banks-scramble-chinas-rehypothecation-evaporation-goes-global

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