FINRA

Missing customer funds might be those of MF Global itself.  Also, JPM gets to keep any and all collateral and cash it seized in return for $8 million?

The banks did MF in.

The temptation to compare any financial institution’s failure to those that preceded the 2008 crisis and panic are reasonable. It is easy to classify MF Global as 2011’s “Lehman” event, just as it was to use the same term to describe Dexia a few weeks ago. The use of the term “this year’s Lehman” is somewhat misplaced simply because its users are looking for an event that kicks off another crisis or panic. Instead of using “Lehman” to describe a potential inflection point that propels the crisis into panic, it might be better to see MF Global as AIG. The comparison to AIG is not to say that MF Global was as interconnected, that its failure will be as devastating, or that it is the straw that breaks the European camel’s back. The urge to see the past in the present is historically valid, but it will never be exactly alike (Mark Twain had this right). Rather I think the comparison is useful in that AIG taught the wider world what was really rotten at the core of modern finance, namely hidden risks that were shockingly existential. MF Global’s failure importantly shows that none of the lessons have been heeded in the days since, providing a somewhat unique window into the real dangers that still lurk hidden in the shadows. More than that, though, MF Global demonstrates an obvious shortcoming of the financial system as it relates to the real economy.

Now that the affdavit of MF Global COO Bradley Abelow has been filed, we finally get the (partial and quite watered down) inside scoop of just what the events were that brought the company to its knees, and what specifically were the precipitating catalysts that ultimately led to the Halloween massacre. The relevant part begins with section E, paragraph 33, on page 13. "As a global financial services firm, MF Global is materially affected by conditions in the global financial markets and worldwide economic conditions. On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1. MFGI increased its required net capital to comply with FINRA’s requirement...." Read on.

• Sarkozy Sees More Budget Cuts to Save France’s AAA Rating as Growth Slows (Bloomberg)
• EU Crisis Deal Buys Time for Greece: Papandreou (Bloomberg)
• California Proposes to Curtail Workers’ Benefits (WSJ)
• FINRA brokerage oversight group misled regulators, SEC charges (WaPo)
• Greece Will Leave Euro Even With Pact: Rogoff (Bloomberg)
• Italian banks cool to demand for more capital (FT)
• EU Crisis Resolution Critical to Obama 2012 Bid (Bloomberg)

The WSJ has published the list of 18 trades that Finra is currently investigating (or, rather, isn't) Steve Cohen's hedge fund for illegal practices ("expert networks" and what not), using the same methodology as that applied by Zero Hedge a year ago, before anyone had the faintest clue that SAC would be the target of an extensive theatrical campaign by regulators and populist politicians. The following statement by Finra is priceless: "In the 18 referrals made by Finra and the NASD between 2002 and 2011 that were reviewed by the Journal, investigators said they were vexed by SAC's repeated appearance in routine screens of suspicious trading near mergers and acquisitions, earnings announcements and other market-moving news." Needless to say, if any readers has wittingly or otherwise traded alongside SAC in any of these transactions, it may be time to shred any evidence. After all, the "I don't recall nothing" testiony worked miracles for Rupert Murdoch.

From my recent conversations with emerging market portfolio managers, it is becoming quite clear that the enthusiasm investors had placed in Brazil as a domestic growth story earlier in the year is running thin. Buy why is the bloom coming off the rose? Some of the things portfolio managers are saying range from an experienced small-cap Latam buyer who said, “Inflation, Mantega going Don Quixote fighting wars that nobody creates other than themselves with high inflation. There is just no visibility,” to a large global fund manager who said, “I am in Brazil this week, it’s slowing down here for sure...” Banco Fator head of equity research Lika Takahashi made some very insightful comments this morning on this topic. In her view, there are couple of factors. First off, valuations in Brazil remain high. Especially considering that it’s likely the global slowdown coupled with high inflation domestically will crimp margins going forward, something she believes is not fully priced in yet.

What eventually became the Arab Spring is spreading and quickly becoming a Western Winter. Protests in Europe and America are growing in size and intensity. Awareness of the unfair and crony-capitalistic nature of our current political/financial system is spreading. Americans of all economic, geographic, philosophic and political stripes are questioning the very foundations upon which our “prosperity” has been based for decades. Slowly they are realizing that they were always playing a rigged game that they were never designed to win. As you’d imagine, this is not sitting so well with them and some are starting to stand up and make their voice heard. Don’t think for one second that this is going to stop. Americans by the millions are losing their homes, their jobs, their savings and their futures.

Given the complete and utter disaster that awaits us once the curtain is finally drawn back in Europe, it’s important to consider whether or not the crisis we currently face is nothing but another downturn or is it in fact another game-changing, punctuated equilibrium moment? I firmly believe it is the latter. I’ll spare the audience the laundry list of challenges we face as a global economy - unsustainable debt loads, ghost cities, peak oil, climate change, over $700tr in notional derivative exposure, etc. - it’s a long list. In the final analysis, it’s hard to conclude anything other than the system we’ve known since 1971 is about to implode. The powers that be know this and they are very afraid. Every piece of chewing gum they’ve tried to use to glue their global economic model back together again has failed. Humpty Dumpty has had a great fall but the cracking-up isn’t over yet. Indeed, we have arrived again at one of the great turning points in economic history. However, the current destination is the one that the 1% hate so much. This is the moment where some of the 1% lose their grasp on power and money and witness first-hand Schumpeter’s creative destruction. Historically, these are the times when pitchforks are carried and torches lit. Think about how wealthy, powerful Brits felt when news of the original Tea Party made its way to London. Think about how a rich plantation owner in the South felt when news of Lee’s defeat at Gettysburg filtered down. Think about how a New York investment banker felt in 1933 when Glass-Steagall was passed. They were very likely afraid, very afraid. The edifice of their power and wealth was crumbling down around them.

The big news this morning, aside from the relatively strong economic data out of the US (of course, we’ll have to wait for the downward revision on jobs to see the real number, which is an ongoing statistical aberration for the record books but anyway) is the news that the German parliament overwhelmingly passed the measure to support the EFSF.  In reality, this wasn’t really that newsworthy as passing this particular legislation had been expected since Germany originally agreed to the deal in principal earlier this summer.  This was not the leveraged, CDO^2 like structure that failed NY Federal Reserve President cum Treasury Secretary Tim Geithner had been pitching recently in Europe.  No, that idea has been dismissed out of hand and Mr. Geithner properly ridiculed for recommending that the already over-taxed European people be further Major Kong-style strapped to the ticking atom bomb that is the European banks’ leveraged balance sheets.

In case you haven’t noticed lately, the market doesn’t move on good or bad earnings or economic data, it moves on political rumors and innuendo about government’s willingness to continue the TARP/cheap money/QE lifeline to the terribly over-leveraged banking sector.  It’s especially troubling when you consider the faith most members of Congress place in Ben Bernanke and the other Oracles of Delphi at the Fed.  One area that’s going to come home to roost very soon is the zero interest rate policy (ZIRP) that has been in place since late ‘08/early ’09.

Blow up the debt, you blow up the banks. Blow up the banks, you blow up the $700tr derivatives market. Blow up the $700tr derivatives market and the world we’ve known since Bretton Woods changes forever. It’s the same thing that had Hank Paulson corralling senior members of Congress into a wood-paneled room telling them that if he doesn’t get TARP the world will end. He was wrong then and the fear-mongers in Europe are wrong now. Let the banks blow up, let the equity holders get wiped out and the debt holders take haircuts. Guess what? The sun will continue to rise. Sensible, solvent players will move in to pick up the pieces and the real business of healing a horribly broken economy can finally begin but not one second before we force real capitalism down the throats of the current crop of pseudo-capitalists running the world. We’ve had a nice run as the world’s super power. Almost 66 years at the top of the world isn’t too shabby. And no matter what happens during the next few years that would see the US knocked off its perch as sole super power, we will still be an economically important, vital member of the global community. The sooner we acknowledge that the current economic system, that we in the US sit firmly on top of, is broken and needs massive, perhaps even painful fixing, the sooner we can get back to being a great country. In the meantime, the Bernank will tell you how he plans on extending the bad system at 2:15pm. Enjoy.

Looks like the Silvercorp story is not going away any time soon. Just released by Rui Feng, SVM's CEO and Chairman, is the latest hastily written (with some glaring typos) refutation of today's allegations by Alfred Little (and the "short industry" in general apparently) that the Chinese company is merely another fraud. This is hardly the last word in this ongoing fiasco, and we fully expect Muddy Waters to get involved as well.

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

In my opinion, the Swiss and Brazilian moves signaled the true beginning of the global currency wars. The depreciation race to the bottom has begun. Trade wars will be next. This is just getting started. Once FX interventions fail, governments suffering from falling exports will attempt to protect local champions via protective taxes, tariffs and the limiting of certain imports. Affected governments and industries will retaliate for their own loss of exports and so on and so forth. Welcome to the currency wars....Bottom line: now is a great time to get out of govt paper and many miles away from the large US and European banks. I am a broken record on this but you should own gold and silver miners, fertilizer companies, oil companies and water companies. Some technology stocks could make sense and reasonable exposure to Asia and Latam. Corporate bonds of companies providing any of the products listed above (gold/silver, fertilizers, oil and water) makes a ton of sense. I would avoid the large multi-nationals here as I think trade wars are coming and their cash flows from foreign operations are about to come under fire.

All you need to read.