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Finance a la shmoop what is hypothecation? alright well here's apothecation

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and yes all legal drugs even the absinthe there but hypothecation is [Man discussing hypothecation appears]

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something totally different although it does involve some forms of alchemy at

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least a financial alchemy in fact hypothecation is basically the process

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or rules behind pledging collateral for a loan jimmy walnuts has gotten out of [Jimmy walking down the street]

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the Mafia game he wants to take all the dough he made shaking down kwik-e-mart [Jimmy running from police with cash]

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and invest it and he wants his investment account at his stock

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brokerage to be a margin account well he has a hundred grand in the account and

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with a 50% margin limit Jimmy can borrow or margin up to 50 grand worth of his

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stock to you know buy stuff like a new Beemer without all the bullet holes in [BMW car with bullet holes]

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it so he will hypothecate his 100 grand in stocks as that collateral borrowing

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forty seven thousand dollars to buy the car and all is good

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well eventually jimmy plans to pay down his margin account with both cash he [Jimmy carrying cash to woman]

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deposits in there and also through the dividends that the account generates on

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its own which usually exceeds the margin interest that the brokerage is charging

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him so where does hypothecation run into trouble well what if Jimmy wanted to buy

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10 cars like you know he just had a fetish for em and he pledged

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forty-seven thousand for this baby yeah the Beemer but then he also wanted that

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baby for 22 grand and while this one for 35 grand and that one for 70 well he

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can only pledge his collateral once for one setting or one purchase that is he

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can't go to one car seller and promise him the hundred thousand dollars that's

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in his brokerage account as collateral for this used Ferrari and then go to a

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different car seller and pledge him the same hundred thousand dollars that's in

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his brokerage account for that 1973 James Bond Aston Martin and then go to a

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third car seller and do the same thing basically he's promising collateral to a

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whole bunch of people well beyond what that collateral is actually worth and

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basically lying about you know what he's got in his pocket quickly he will have [Man discussing Jimmy's collateral]

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pledged a few hundred thousand dollars worth of collateral in a brokerage

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account that only had value of 100 grand so yeah unless you're

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you know connected we don't recommend going the Jimmy walnuts route [Jimmy appears tied up]

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