MF Global: Where's the Cash -- Part II

rcwhalen's picture

This week in The Institutional Risk Analyst we published a comment on the ongoing financial genocide at MF Global, “MF Global: Where's the Cash?”

The comment correctly identifies the location of the “missing” $1.6 billion as JP Morgan Chase and other bank custodians of MF Global.  The trouble is that even though we now know where the missing customer money has gone, namely JPMorgan, there is little chance that the defrauded customers of Jon Corzine will ever recover a dime.

Here’s the link to a video by William Rochelle of Bloomberg News explaining how the safe harbor in Section 546(e) of the Bankruptcy Code likely will prevent MF Global customers from ever getting their $1.6 billion back -- even when it’s located, as it has been evidently.

When Bill recorded the video, the bankruptcy trustee hadn’t yet raised the loss estimate from $1.2 billion.  In case you’re wondering why Bill is so knowledgeable about bankruptcy law, he was head of bankruptcy litigation at Fulbright & Jaworski in New York before he decided to take up journalism. 

What people need to understand is that like the case of WorldCom, the MF Global bankruptcy illustrates the way in which the large Wall Street banks have used their Washington lobbyists to encroach upon the rights of investors.  Even if it were proved that John Corzine and his colleagues committed criminal violations of the Uniform Securities Act and state law, there is little chance that the investors in MF Global will ever receive equity and justice.  Again, read the WorldCom case.  

The problem here is that the existing laws against pillaging customer accounts and other acts of fraud are in conflict with the bankruptcy statute designed to make the world safe for large banks and over-the-counter derivatives.  Specifically, the post 2005 bankruptcy laws prohibit trustees from clawing back the $1.6 billion in stolen customer funds.  Indeed, the Bankruptcy Court and trustee are precluded from pursuing the banks just as the trustee in the Madoff fraud has likewise been stymied.   

In addition to the clients of MF Global who were apparently defrauded, the big losers in this mess are the smaller independent broker dealers who have acted as custodian of client funds.  Once institutional customers understand that they have no rights in the event that management of a small broker-dealer absconds with client funds to pay bank margin calls and a broker-dealer fails, the ability of independent dealers to hold customer funds is going to evaporate. 

Purely as a matter of due diligence, no fiduciary will ever again be able to use a US-based broker dealer as a custodian.  To do so would be reckless and would expose the fiduciary to claims of negligence in the event a loss similar to MF Global occurred. 

Until the Congress rectifies the current bankruptcy laws and allows trustees to claw back payments made to secured lenders and other counterparties, there is no reason for any rational personal to allow a broker dealer to hold securities in custody.  All of this business will go to the big banks, who will be just as happy to see the smaller dealers thrown into the meat grinder.

Now why, you may be wondering, did the lobbyists from the big banks push Congress to expand the safe harbor for secured parties in the bankruptcy code?  As one former Bush II Treasury official told me last night: “The canard the banks used to get 546 amended was that overriding the trustee's normal avoidance powers was said to be necessary to limit systemic risk and ensure access to credit.  God forbid the banks be required to do some due diligence.  As the bailouts showed, the systemic risk was in fact enhanced by the changes to the bankruptcy code and the illusion of superior claims to collateral, thus increasing leverage.”

The MF Global bankruptcy provides yet more evidence that the 2005 bankruptcy reform legislation passed by Congress is an abomination, but the cancer goes even deeper than the years of Bush II.  The big banks who earn the lion's share of their profits in the quantum world of derivatives are literally looting the real economy and real investors, all with the full approval and complicity of the Fed.

Fred Feldkamp, learned securities counsel and expert on RMBS, put the problem in perspective:
"Greenspan proved his total ignorance of the current state of the law when he stupidly eliminated regulatory restraints on fraud saying there was no need for regulation because "fraud is self-regulating."  The "Supremes" don't "get it" as of now and Congress precluded just about every other means for controlling fraud between the last 2 years of Clinton and the 8 years of Bush II.  It took a decade (1929-1938) before the Supreme Court woke up to the Great Depression's root cause (fraud of the 1910s to 1929).  Blaming Obama for this is understandable in one sense, but overly simplistic."

It may be overly simplistic to blame President Obama for the financial mess, but don't think that this president won't throw Jon Corzine to the wolves to make political points.  "Jon Corzine is not well-liked in Washington," one veteran republican operative told me over dinner tonight. "Don't be surprised if we see a  high profile prosecution of Corzine by the US Attorney to prove Obama is distancing himself from the big banks."

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q5251355's picture

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Eric L. Prentis's picture

“The problem here is that the existing laws against pillaging customer accounts and other acts of fraud are in conflict with the bankruptcy statute designed to make the world safe for large banks and over-the-counter derivatives. Specifically, the post 2005 bankruptcy laws prohibit trustees from clawing back the $1.6 billion in stolen customer funds. Indeed, the Bankruptcy Court and trustee are precluded from pursuing the banks just as the trustee in the Madoff fraud has likewise been stymied.”


$707 trillion dollars of OTC derivatives are outstanding, therefore, your money is not safe. Wall Street banksters created a deregulated, unstable financial system that is guaranteed to fail. Wall Street banksters threatened taxpayers to bail them out during the credit crisis. When that no longer works, Wall Street banksters will just steal customers’ money. If the government lets this stand, our politicians are all criminals.

Zero Govt's picture

it's nice to know the thieving Corzine is one of the most 'trusted' go-to economic advisors of both Joe Biden and President Backtrack Obumma

gives you the impression Washington is a den of crooks ...but that's just conspiracy stuff obviously

steve from virginia's picture

This will certainly bolster confidence in the finance markets.

Anyone in the finance markets? Hello???


Confidence lost in governments (check)

Confidence lost in markets (check)

Confidence lost in large market participants (check)

Confidence lost in smaller, previously well-regarded participants in markets (check)

Confidence lost in the regulators (check)

Confidence lost in the currencies (We're working hard on it boss, give us a few more weeks ... the Greek default should do the trick.)

Dermasolarapaterraphatrima's picture

Trust/ Fewer and fewer investors trust these funds anymore. If the industry were sound, other funds would come down on MFG hard so they would not look bad. Right now they all look bad due to MFG.

Problem Is's picture

MF Global: Where's the Cash?

Jamie's pocket...

Mr Lennon Hendrix's picture

The cash is at JPM's London House where they will use it to reserve and fractionalize, hypothecate and rehypothecate to make sure Europe is funded for the next round of bailouts.

kaiserhoff's picture

The money is gone.


Where is the special prosecutor???

Who is running the cover-up???

Who is guilty as sin???  May I suggest we follow the money?

Barrons, WSJ, The Washington Post, and the Old Grey Lady should be on this like stink on a monkey.  Aiding and abetting the crime of the century will hasten their well earned demise.

disabledvet's picture

Who needs those clowns when you have Zero Hedge?

kaiserhoff's picture

Good point.  I read ZH for many reasons, but I think the main strength is that free speech here is an order of magnitude better than anywhere else.  Party on First Amendment.

El Gordo's picture

We're a nation of laws, not of people and personalities.  It just costs a little money to get the law set up the way you want it.

Money 4 Nothing's picture

They said it Vaporised.. Aaaand it's gone! That's good enough for me.

centerline's picture

Same gremlin that will get the retirement funds at some point. The reality is that cash is (has been) already vaporized. What we are seeing is smoke and mirrors. Dead money walking per so... or more realistically, sloshing around chasing yield that is become more and more elusive and captured only by higher and higher risk taking. A new sport should be named "extreme investing" - LOL.

illyia's picture

I must admit that those bankruptcy laws are the gift to graft that just keeps giving. Anyone else remember thinking at the time....


Widowmaker's picture

"Justice" in the US -- What a fucking joke!!!


Gold Dog's picture

Two things;

- I marched and protested against the draft in the late 60's. I don't even know what to protest against anymore...there is so much to choose from.

- I will be in Barcelona on Sunday, they have called for their first "Greek" style protest.....think I'll carry a "Yankee Go Home" sign!


riphowardkatz's picture

Reminds me of the saying which is unfortunately too true "I would be more cynical but I can't keep up with all the bad news"

Catullus's picture

Purely as a matter of due diligence, no fiduciary will ever again be able to use a US-based broker dealer as a custodian.  To do so would be reckless and would expose the fiduciary to claims of negligence in the event a loss similar to MF Global occurred.

I suggested this to my father-in-law who manages trusts for his clients.  He said that this is spot on.  He'd rather even not manage the trusts at all or just tell them to stick money under the matresses 

dontgoforit's picture

Jon's mattress must be at least 6 feet thick!  Not exactly the princess & the pea!

Papasmurf's picture

Jon's assets need to be fully liquidated to satisfy customer's claims.  Move him to a smallish room that has a three inch mattress and the sink built into the top of his commode.  Leave his ass there forever  as example and deterent to the rest of the fuckers in the financial industry.

sun tzu's picture

A conrete slab is good enough for him

dontgoforit's picture

Then the prophet Jerimiah said, "seek the things that are lasting, for all else is temporary and not worthy of pursuit."  There's a long history of people fleecing others.  Nothing new there.  However, considering the amount in this case, it could end badly for the perps.  And that is their choice.  Too sad.  Bad choice.

Ruffcut's picture

My tradeking, TOS and PFG best accounts I believe are with penson financial. I have no idea who the fuck they are. Probably the next mother fucker global ready to disappear in the night.

WVO Biker's picture

PFG Best clears through Jefferies Group, Inc.

stant's picture

singapore here we come , let the corrupt bastards screw each other. time to take your ball and find a better field

Everybodys All American's picture

I'll believe that prosecution of Corzine by Eric 'Place' Holder when I see it. You're living in dream world if you think the Obama administration is going to prosecute anyone related with MFGlobal. You want evidence? How many prosecutions are there for the MBS sold fraudulently by the banks that has put the entire world economy into a tailspin or why is Countrywide's Mozilla free? Solyndra bankruptcy, Fast and Furious, and Arizona immigration proves this attorney general and administration is not up holding the rules of law or Constitutional law. I could go on. There is zero evidence that Holder will lift a finger.

Problem Is's picture

+1... 'Place' Holder...

I like that one...

sun tzu's picture

Dick Holder's DOJ is more interested in prosecuting Amish farmers for selling fresh produce and dairy

Problem Is's picture

Damn bearded domestic terrorist farmers transporting bio-weapons grade, unpasteurised, unsafe, non Monsanto rBST puss-o-milk, across state lines...

The FBI and DOJ will spare no expense of your tax dollars defending Amerika against this imminent threat...

Dan Conway's picture

Holder is only interested in going after whitey and conservatives.  Corzine will not stand trial under this administration and likely not the next.  Madoff was easy to prosecute and easy to hate.  Sar-Box is a joke and we were told it would stop bad behavior.  The bankruptcy laws are a joke and yet no mention of changing them so far in this election cycle.  Ugggghhhhhhh

Widowmaker's picture

Holder is just a puppet -- Nothing but a piece of incorporated lady-justice ass.

For a nickel he'll let you fuck her, too!

IAmNotMark's picture

No...Holder won't let you fuck Lady Justice for a nickel.

I think he's charging a megabuck per justice fuck.

disabledvet's picture

not a problem. the trading moves off the CME and "we'll starve 'em out." the fact of the matter is the Federal Government is so massive and the renewed engagement into the Middle East will be so big as to make the compensation for said corruption far from worth the effort. I mean "the Federal Government is borrowing 100 billion a week"--and you want to steal 1.6 billion? I had no idea JP Morgan was so broke...

LawsofPhysics's picture

... the fucking world is broke, so it is with moral hazard - "we'll prosecute the fraud really, but this is a clear case of stupidity, so there is nothing we can do" -  yeah, this will end well.

disabledvet's picture

This is not mere fraud! They're STEALING. Okay! No problem! The government will now print with impunity! "the banks won't last 5 seconds." I mean what is cash money itself other than a contract being upheld! Shall we talk the debt markets then???!!!!! "hey, phuckers...where's the earnings there????"!!!!!

apberusdisvet's picture

Doubtful that Corzine will escape retribution, whether in this world or the next.  I envision a really pissed off farmer with a shotgun going postal and achieving final justice.  If I were Corzine, I'd get my ass out of  NJ and move to the Eccles Building where master criminals achieve the ultimate sanctuary.

sun tzu's picture

If I was on the jury for the pissed ofrf farmer I would vote not guilty

WVO Biker's picture

Some funds of my account were transferred to RJ O'Brian. They had closed positions at MF and opened again at RJO, funds credited and funds debited thus making it complicated to figure out the claim. A guy from RJO told me about 2 weeks ago that 72% or 73% had been returned and that was about in line with what I came up with in my own calculations. The claims are processed by an Oregon company and I hope the SIPC will help me out with the missing funds. It is my understanding that all accounts may have been transferred to RJO so the link is to call them. Only a few MF employees have new jobs at RJ O'Brian, all the others were fired on 5 minutes notice. RJ O'Brian says they want to be like Lind-Waldock used to be in the old times (1990s) and I'd say they are an OK brokerage. Everybody hates the MF upstairs persons that brought such a desaster to their customers and their empleyees. It was a shock for everybody but from the viewpoint of a customer the treatment was fair, considering the circumstances. I did open a London account after MFs demise but my confidence in the US legal system was not shaken. Immorality and bitchness is an international phenomen of debt ridden times IMO and I want to be "partially offgrid" to decouple. Life is great. 


WVO Biker's picture

To date customers have been returned on average 73% of their net liq.

sun tzu's picture

The connected ones got back all their money. Others got back nothing

rehypothecator's picture

72% of their segregated funds, and 0% of "secured" 30.7 funds, foreign cash used to margin futures trading on foreign exchanges.  One client had an account that was 100% cash, in euros.  Zero returned so far.  

Dermasolarapaterraphatrima's picture

TBTJ......"Too Big To Jail"...said one journalist.

laosuwan's picture

"Don't be surprised if we see a  high profile prosecution of Corzine by the US Attorney to prove Obama is distancing himself from the big banks."


Not a chance. Although expect to see lots of prosecution for "insider traading" of little guys to create the appearance of tough action and to distract and placate the masses. Perhaps a few celebrety doctors or atheletes to round it out.

Lost Wages's picture

Yeah, I say "Dream on," to the prospect of Corzine getting burned at the stake. If that guy goes to jail, Obama would never get any campaign contributions again. What is the point of donating large sums to a Presidential campaign if you don't get to commit fraud and live in 7 houses?

Widowmaker's picture

Agreed, not one fucking chance does anyone committing crimes in pinestripes Inc. go to jail.

No one.

Papasmurf's picture

I think there may be some vigilante justice before this is all over.  

Christophe2's picture

It's already started (2004): American goes on suicidal rampage, causing millions of $ in damage to the (likely masonic) assholes who ruined his business:

=> I wish his joy ride could have lasted a little bit longer!

Shizzmoney's picture

No, he'll eventually have to face SOME heat for what he did.  Although the non-attention this has gotten in the media after the immediate fallout is troubling.

The heat he will face, will probably be a day late and a dollar short, however.  He should have all personal assets and cash stripped immediately (most are probably that has stopped the US before).  He will instead probably be put in a luxury federal max jail cell in Nevada witth a tennis court.

Plus, you also forget the "John Brown" scenario, where people take justice into their own hands.  Like in the Full Tilt Poker sitation (where Bitar/Lederer/Ferguson/Furst owe the poker community 300+ million), the longer this goes without being resolved, the more likely someone' ass is going to get shot. 

Especially if a MF Global-rollee finds out he/she has NO chance of getting their money back.