MF Global and the great Wall St re-hypothecation scandal

"By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults."

OK, sounds logical

"In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default."

Right, I'm with you...

"In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital)."

analogy is holding, makes perfect sense...

"Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds."

WTF. So you can use MY collateral, something I own, as collateral for YOUR leveraged borrowing to make YOUR trade. AND this happens over and over again, building up a tower of debt teetering on a scrap of actual assets underpinning them? And if someone in that chain of leverage above me loses, my money is just gone? And this is the part of Wall St. that is legal?

It makes me sad that we are so afraid of this complex finance bomb strapped to our head that we choose to stand paralyzed in fear and wait, for years, for it to finally and conclusively explode on its own rather than at least attempting to disarm it.