The admission is here:
- MF Global Admits Using Client Money, AP Says
- MF exec. made the admission in phone call with regulators Monday morning
It's time to get some expert on the ex-MF Global head's mental state and to blame temporary insanity, otherwise, someone is going to be bunking with Bubba very shortly.
In one of the more quirky results of the rush for short-term protection and macro overlays this morning, the price of index protection was bid so far above the 'fair-value' based on the volatility of the underlying S&P 500 index components that the implied correlation (a modeled measure of the relationship between index and single-name implied vol demand - often reflective of 'crash risk' sentiment) for Jan 2011 exploded above 100%. Yes, we know that is 'impossible', but the point being that last week's smash higher in equity (and credit), as we noted at the time, had the feel of hedgers capitulating which leaves today's growing tensions (European and domestic) enough to push nervous traders massively into liquid hedges (macro protection). The bottom-line is that demand for liquid 'crash hedges' moved from 'economically sensible' to 'at any price' this morning.
How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A WhimperSubmitted by Tyler Durden on 11/01/2011 - 13:49
A little over a month ago, Zero Hedge started an avalanche in the financial sector, and an unprecedented defense thereof by the "independent" financial media and conflicted sell side, by being simply the messenger in pointing out that the gross exposure of one Morgan Stanley to the French banking sector is $39 billion. The firestorm of protests, which naturally focused on the messenger, and not the message, attempted to refute the claims that Morgan Stanley (and many others) are overexposed to Europe (both banks and countries) by stating that gross is not net, and that when one nets out "hedges" the real exposure is far, far lower. The logic is that bilateral netting, as the principle behind this argument is called, should always work - no matter the market, and that counterparty risk, especially when it comes to hedges, should always be ignored because banks will always honor their own derivative exposure. Obviously that this failed massively when AIG had to be bailed out, to preserve precisely the tortured and failed logic of bilateral netting was completely ignored, after all things will never get that bad again, right? Well, wrong. Because the argument here is precisely what the exposure is when the chain of netting breaks, when one or more counterparties go under (such as MF Global for example, which filed bankruptcy precisely due to its hedged (?) European exposure - luckily MF was not in the business of writing CDS on European banks or else all hell would be breaking loose right now). So little by little the story was forgotten: after all when everyone says gross is not net, contrary to what history shows us all too often, everyone must be right. Today it is time to refresh this story, as none other than Bloomberg pulls the scab right off and while confirming our observations, also goes further: yes, banks are not only massively exposed to Europe, but they are in essence misrepresenting this exposure to the public by a factor of well over ten!
This is getting ridiculous. Citing a Socialist Party Official Dow Jones is reporting that "The Greek PM's Referendum Call is 'Basically Dead'"! Instant knee-jerk reaction is a 1% rally in ES and 75pip rally in EURUSD. Evidently the people will not get their say in how much suffering they will face - which perhaps makes the military brass changes even more relevant?
While the calls for G-Pap's resignation grow louder and Merkozy's blood pressure rises, we couldn't help but notice a potentially significant action among the top military leaders in Greece. Athens News reports that the Minister of Defense is proposing a complete (and surprise!) replacement of the country's 'top brass'. What better way to consolidate power than to bring in 'your guys' as the country lurches closer to all out chaos?
A question has been raised as to if the clients of MF Global are insured on their losses as a client of a bank or securities firm would be under FDIC or SIPC? The answer is maybe. While there is no regulatory insurance agency to cover the losses of MF Global clients, the CME itself has a guarantee fund for losses. This fund is financed by the other Primary Clearing members. So all FCMs bear some burden of MF Global’s indiscretions. We believe it amounts to a $4BB Clearing Member “error Account” The answer depends on legal questions and accounting details: For example, are the segregated funds of a Clearing member’s clients guaranteed if those funds were lost due to fraudulent actions by that clearing member? In other words, do the other Clearing Members at CME have to pony up the lost money if MF Global lost it fraudulently as opposed to though market events and poor in-house risk management. If MF Global is found to be in violation of some CME rules, fraud, delinquency or otherwise, we believe CME’s other Clearing Members will put their collective political collateral into finding a way to not pay the money lost.
As we detailed 11 months ago, LCH.Clearnet now stands at the fulcrum of today's price action in Europe as the critical 450bps spread to Bunds on European sovereign debt - which will trigger considerable rises in margin requirements - is being aggressively defended thanks to the ECB's SMP. What is evident (and troublesome) is the confluence of the rally in Bunds (as Greece implodes) and unhedgeable risks in ITA bonds which means relatively aggressive buying in ITA bonds is doing little to improve spreads. With all eyes now on the spread (which stood at a measly +150bps when the LCH.Clearnet margin rules were set) as opposed to price, buying Bunds is perhaps the easiest and most liquid way to put pressure on the Italian bond market.
Looks like that 50% haircut may be insufficient. Who was the guy on CNBC was was buying Greek bonds a few days back on the "bailout"? And now, back to your regularly scheduled fiat ponzi system collapse.
As expected, following the complete failure of banks to institute an extortion cartel on debit account fees after two already defected, it was only a matter of time before Bank of America withdrew as well. Sure enough:
- BofA Drops Plan for $5 Debit Fee, Spokesman Says
Now, while this is great news for whatever deposits BAC has left (substantially lower than what it had at September 30, that's for sure), it doesn't answer the question - just how will the bank make money?
When sharing our perspective last night on why the alleged MF Global crime of commingling client capital with the firm's deficiency capital we asked, "What happens next? Why customers at all other brokerages, all other exchanges, afraid that their money will suffer the same fate as MF, even if they transact with perfect solvent clearers and agents, will proceed to pull their money, as they know they have nobody to trust but their own prudent and forward looking actions. Which in turn will start the kind of liquidity drain that killed not only Lehman, but froze money markets, and with that brought the complete capital markets to a standstill, only to be thawed after the Fed pledged multiples of the US GDP to rescue Wall Street in October of 2008." Sure enough, here it comes. "Reports of short falls of client money ... if true would be a disaster for all the smaller brokers and banks as nobody will trust them anymore," one London trader said. Reuters continues "MF Global filed for bankruptcy protection on Monday, putting a sudden end to Corzine's drive to transform the more than 200-year old MF Global into a mini Goldman by taking on more risky bets on euro zone sovereign debt. In Australia, trading in grain futures and options was suspended by bourse operator ASX Ltd , prompting concerns about the integrity of the country's agricultural futures market. "We're sitting out here with risk that we can't cover," said Jonathan Barratt, head of Sydney-based Commodity Broking Services. MF Global was one of the largest participants in the country's agricultural futures market. And it is all only going to get worse as the liquidity outflow avalanche is realized, following the market's most recent distraction with Europe.
Just two for now, but something tells us this is quite representative of the overall industry:
- Third Point Offshore Fund, Ltd.: October Net Return +0.8%
- Absolute Return Capital (ARC) – Bain Capital, LLC : October Net Return +0.7%
More as soon as we get the Month End HSBC report.
Market observers have long noted that increasing volatility presages market crashes. If you glance at a chart of September-October 1929, just before the crash that started the Great Depression, you will note the same sort of manic swings of euphoria and fear that have characterized the U.S. stock market over the past few months. Not only are the swings increasing in amplitude, the time between each move up or down is decreasing. Think of a series of wind storms that grow increasingly more violent even as the time between storms diminishes.
Yu Yongding: "Europe’s courtship of Beijing is moving to a more intense level. Klaus Regling, the chief of the eurozone bail-out fund, is in Beijing discussing possible support. Just a few days ago French President Nicolas Sarkozy conferred with Hu Jintao, his Chinese counterpart, to win Beijing’s support. They should not hold out their hopes too high. The two will have had a courteous hearing: China is willing and able to help. Since the beginning of Europe’s sovereign debt crisis, Beijing has repeatedly expressed its wish to offer “a helping hand” to Europe. Eurozone countries, however, have to understand that they will have to save themselves. Expectations of a “red knight” riding to the rescue are sorely misplaced."