Traditional legal principles are seemingly pretty clear and straightforward on how a good faith acquisition of stolen goods is to be treated: the buyer, even though he is not criminally liable, can not acquire title to stolen property. The failed futures brokerage Sentinel Management Group lost the money of its clients in when it went into bankruptcy in 2007. According to the SEC, the firm misappropriated the funds belonging to its clients. Since then, creditors of the company have been fighting over who has title to certain assets. On the one side are the customers of Sentinel, whose funds and accounts were supposed to have been segregated from the company's assets. On the other side there is New York Mellon Bank, which lent Sentinel $312 million that were secured with collateral mainly consisting of said – allegedly 'segregated' – customer funds. The result: 'Banks that received what were essentially misappropriated goods as collateral do not have to return them to their original owners as long as they are deemed to have acted in good faith'. Legal questions aside, one thing is already certain: customers of futures brokerages can no longer have faith that their assets are in any way segregated or protected. This is yet another chink in the 'confidence armor' that has propped up the financial system to date.
We have said it over and over, we'll say it again. For all those who for one reason or another would like to boycott the broken markets, yet trade gold in paper form, please understand that all the invested capital is at risk of total loss and can and will be lost, commingled and rehypothecated, not necessarily in that order, with little to zero recourse and the residual claim on liquidating assets pushed to the very end of the queue. Because if Lehman, MF Global, Peregrine, and countless other examples were not enough, here comes Amber Gold: a gold-based investment ponzi scheme out of Poland, in which it is likely needless to say that the gullible investors never had actual possession of the gold. And when they tried, it was gone. All gone.
It only took 20 years, a trail of counterfeit documents, superficial and failed audits, dubious tax returns and one unsuccessful suicide attempt, but in the end they got him: the CEO of failed commodity brokerage Peregrine aka PFG, Russell Wasendorf has been indicted on 31 charges of lying to government regulators regarding the failed brokerage's operations. He faces a maximum sentence of 155 years' imprisonment on the charges and fines of about $7.75 million, according to a statement from the U.S. Attorney's Office for the Northern District of Iowa. There is also that whole $215 million in commingled and subsequently stolen client money but that's another matter. In other words, just like Bernie Madoff, Wasendorf is going away for a long, long time for doing precisely what everyone else does: the first one for engaging in a ponzi even as now everyone acknowledges the entire system is one big ponzi - does that make it better and legitimate: apparently so; the second one for commingling client cash for personal benefit. As a reminder, this is what JPM did with $350 billion in excess deposit cash as part of its London whale trading fiasco, and broadly what every bank in the post Glass-Steagall world does with the roughly $8 trillion in total US bank deposits.
The "Honorable" Jon Corzine may have prudently disappeared form the face of the earth, but that doesn't mean he is not accessible. In fact, in the parlance of our Bloomberg times, he is "Green" and anyone out there with a terminal can have a live Q&A with the former head of MF Global and Goldman Sachs.
Last week we wrote that we were not surprised to learn that the first party of interest in the PFG bankruptcy was "none other than JPMorgan, which together with various other banks, will be the target of a subpoena by the PFG trustee." We added "How shocking will it be to find that Dimon's company is once again implicated in this particular episode of monetary vaporization." It appears that we were not the only ones shocked to learn that Jamie Dimon's firm could make a repeat appearance again when it comes to missing client money: JPM itself seems to not have expected this development. The result, as just reported by Reuters: "JPMorgan Chase & Co on Monday sought to limit the power the bankruptcy trustee for Peregrine Financial Group has to subpoena information from financial institutions that did business with the failed brokerage." Why, whatever may JPMorgan be hiding, and whyever is it taking preemptive steps from preventing such information from leaking into the public domain: because it is too "burdensome" - it is only logical that Jamie can not dedicate one person of his 261,453 employees to this modest matter. No fear though: even if it is found that just like in the MF Global bankruptcy JPM may have overreached just a tad when it comes to money that doesn't belong to it, the CFTC can just say that as a result of an extensive 4 year investigation, JPM was found to have done nothing wrong, and if the public can please already disperse.
In what may be the most amusing news of the day, according to the FT the CFTC will shortly drop its 4 year old investigation into silver manipulation, "after US regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation." How about evidence to support an "illegal" case? Of course, that this is happening after the recent discovery that the world's most pervasive fixed income benchmark was manipulated for years, if not decades, can only be reason for laughter and wonder if the CFTC used the same assiduous diligence methods in pursuing the alleged perpetrators of precious metal manipulation as it did in letting the fraud at PFG slip through its fingers for two decades. We will probably never know, or at least not until an email mentioning bottles of Bollinger and silver price "fixing", (or "banging the close" for that matter) in the same sentence inexplicably turns up and makes a complete mockery of the CFTC yet again.
Update via CNBC:
- CITADEL, KRR SAID NO LONGER TO BE LOOKING AT KNIGHT
- KNIGHT CAPITAL CLOSE TO FUNDING DEAL, CNBC'S KATE KELLY SAYS
- KNIGHT MAY GENERATE ABOUT $400 MLN FROM INVESTORS, KELLY SAYS
- GETCO, TD AMERITRADE LIKELY PART OF INVESTMENT GROUP: KELLY
Knight Capital is scrambling: it has a few hours to convince any potential suitors that it is worth some $300 million more alive than having its carcass picked off at a cost of $0.01 over its debt (which itself will likely be materially impaired) in a Chapter 11 Stalking Horse sale. If the Sunday before the Lehman, and MF Global, bankruptcy filings is any indication, the third time will not be the charm for the company whose 1400 employees may have no place to call work at 9am tomorrow. Sadly, in a world in which entire countries and continents have taken on the patina of Schrödingerian felinism, constantly shifting between alive and dead states depending on who is looking, we would take the under on the probability that the firm's lawyers will not be visiting 1 Bowling Green at some point in the next 16 hours.
When we started reading the LA Times article reporting that "the federal government has quietly been completing an audit of U.S. gold stored at the New York Fed" we couldn't help but wonder when the gotcha moment would appear. It was about 15 paragraphs in that we stumbled upon what we were waiting for: "The process involved about half a dozen employees of the Mint, the Treasury inspector general's office and the New York Fed. It was monitored by employees of the Government Accountability Office, Congress' investigative arm." In other words the Fed's gold is being audited... by the Treasury. Now our history may be a little rusty, but as far as we can remember, the last time the Fed was actually independent of the Treasury then-president Harry Truman fired not one but two Fed Chairmen including both Thomas McCabe as well as the man after whom the Fed's current residence is named: Marriner Eccles, culminating with the Fed-Treasury "Accord" of March 3, 1951 which effectively fused the two entities into one - a quasi independent branch of the US government, which would do the bidding of its "political", who in turn has always been merely a proxy for wherever the money came from (historically, and primarily, from Wall Street), which can pretend it is a "private bank" yet which is entirely subjugated to the crony interests funding US politicians (more on that below). But in a nutshell, the irony of the Treasury auditing the fed is like asking Libor Trade A to confirm that Libor Trader B was not only "fixing" the Libor rate correctly and accurately, but that there is no champagne involved for anyone who could misrepresent it the best within the cabal of manipulation in which the Nash Equilibrium was for everyone to commit fraud.
Update 2: and spreads some more: Sterne Agee Not Routing Trades to Knight Capital
Update: it spreads: Fidelity Investments Not Routing Orders Through Knight: Reuters
Earlier, when interviewed by Bloomberg TV, Knight Capital CEO refused to say, prudently under advice of counsel, if any counterparties have cut off their lines to the fallen Knight. Well now we can confirm with 100% certainty that at least one Prime Broker has terminated all funding to and fro the firm which may not have much time left. We are certain it is not the only one. And now the scramble for a deal is on. If Lehman and MF Global are any indication, the odds are good to quite good. Inversely of course, just like Knight's berserk algo yesterday.
- What's wrong with this headline: Obama authorizes secret support for Syrian rebels (Reuters)
- Hilsenrath promptly dusts off ashes of sheer propaganda failure, tries again: Fed Gives Stronger Signals of Action (WSJ)
- Fed Hints at Fresh Action on Economy (FT)
- Fed Poised to Step Up Stimulus Unless Economy Strengthens (Bloomberg)
- IMF Chief Lagarde Praises Greece, Spain for Efforts (Bloomberg) - efforts to beg as loud as possible?
- US sanctions against bank 'target' China (China Daily)
- Trimming China's Financial Hedges (WSJ)
- ganda central bank cuts key lending rate to 17 pct (Reuters)
- Greece Agrees €11.5bn Spending Cuts (FT) - Agrees? Or does what a good debt slave is told to do
- Germany Retains Stable AAA Outlook at S&P After Moody’s Cut (Bloomberg)
- Spain’s Bond Auction Beats Target as Borrowing Costs Rise (Bloomberg)
- Bundesbank’s Weidmann Says ECB Shouldn’t Overstep Mandate (Bloomberg)
- Hollande and Monti Vow to Protect Euro (FT) - be begging Germany to death
- Monti Calls French, Finns to Action as Italy Yields Rises (Bloomberg)
- not working though: Banking license for bailout fund is wrong: German Economy Minister (Reuters)
- Switzerland is ‘New China’ in Currencies (FT)
- Regulator Says no to Obama Mortgage Write-Down Plan (Reuters) - tough: there will be socialism
- Gauging the Triggers to Fed Action (WSJ)
- When domestic monetization is not enough: Azumi Spurns Calls for Bank of Japan to Buy Foreign Bonds to Curb Yen (NYT)
- Indonesia’s July Inflation Accelerates on Higher Food Prices (Bloomberg) - remember: the Deep Fried black swan
- China Manufacturing Teeters Close to Contraction (Bloomberg)
- Spain Introduces Regional Debt Ceilings to Achieve Budget Goals (Bloomberg) - yes, they said "budget goals"
The blunt trauma that JPMorgan was implicated in the missing millions from segregated accounts in Jon Corzine's bankrupt MF Global may have passed but the memory lingers, especially for all those whose cash is still locked up somewhere in vapor space. Yet one event that may tear the scab that patiently was healing, courtesy of a Copperfield market full of distractions such as JPM's CIO fiasco, Lieborgate, oh and, Europe, right off is the recent bankruptcy of Peregrine Financial, aka PFG, whose story we first broke, and which just as we suspected, has promptly become the second coming of MF Global, as at least $200 million has "evaporated." It is thus with little surprise that we find that the first party of interest is none other than JPMorgan, which together with various other banks, will be the target of a subpoena by the PFG trustee. How shocking will it be to find that Dimon's company is once again implicated in this particular episode of monetary vaporization.
Gary Gensler Explains How CFTC Allowed PFG To Steal $200 MM In Client Funds 8 Months After MF GlobalSubmitted by Tyler Durden on 07/25/2012 10:13 -0400
Former Goldman appartchik Gary Gensler is about to take the stage (again) and explain why the CFTC should exist at all after allowing not only MF Global but a few weeks ago, Peregrine Financial, to steal hundreds of millions in client money without any regulatory supervision at all. All we can say here is: Free Corzine!
According to the IMF’s “official” analysis, EU banks as a whole are leveraged at 26 to 1. I would argue that in reality many of them are well north of 30 to 1 and possibly even up to 50 or 100 to 1. The reason I can claim this with relative certainty is because the EU housing bubbles dwarfed that of the US. In the chart below the US housing bubble is the lowest line. After it comes Britain (blue) and Italy (orange) then Ireland (green) and finally Spain (dark blue).
We’ve recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.