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On MF
The MF Global story gets more bizarre by the minute. At this point one has to ask if it could become a systemic problem. At first, I did not think so. I’m rethinking that. There is no definitive information as of yet. The CFTC is suggesting that the missing client money is $633mm. It might be larger than that (Zero Hedge Link).
Some thoughts:
I was one of many who tried to stave off the bankruptcy of Drexel Burnham Lambert in 1989. Skadden Arps, (the same law firm who is advising MF today) was involved in the last month as the chess game played out. They were advisers. Their clear advice was to NOT commingle custody accounts. To commingle funds is potential jail time for any involved. Drexel went down. But client money/assets were returned.
Of course Corzine and all the other seniors at MF knew this. Skadden was giving them the same advice as they gave to DBL 20 years ago. So how can it be that three days after a chapter filing there appears to be a very big hole?
This happened with another big future’s house back in 2005. That was Refco. In that case there were significant client account losses. Of historical interest:
-Phil Bennet, the boss at Refco, went to jail for 12 years.
-Man Group bought what was left of Refco (they were good futures brokers).
-Man became MF Global. Rinse and repeat.
The history is relevant as it is more evidence that Corzine and MF management HAD to know that commingling was the ultimate no-no. It was part of their history.
My guess is that the missing customer cash was grabbed by one (or more) of the big players in the global bond market. MF did not sign off on the cash grab. The banks moved on them and their customer accounts. MF had no say in the matter.
Given Corzine’s relationship with Goldman, I put them high on the list of probable plug pulling bankers. Nomura was a place to go to finance AAA sovereign positions. One of the French or German banks could have been the warehouse for MF’s sovereign exposure. It wouldn’t surprise me if any one of them pulled the plug on the leveraged bets.
It should be noted that all of the big players talk when they are moving on collateral and closing relationships with financial firms.When the SHTF, they act as one.
MF has said that the funding for the sovereign exposure was “locked up” to maturity. That’s complete bullshit. I can tell you from first hand knowledge. When Wall Street is financing positions they always have a MAC (Material Adverse Change) provision that allows them to call the financing. If the debt is not immediately repaid it produces an event of default. That creates a cross default to all other asset positions. When they smell trouble they move first and ask questions later. They always lock up cash.
If you think this sounds far fetched consider what happened at Refco:
Refco’s forex brokerage arm, Refco FX, LLC, was holding over 17,000 retail customer brokerage accounts at the time that Refco declared bankruptcy shortly thereafter. In the bankruptcy proceedings, Bank of America and other large creditors managed to convince the bankruptcy court that Refco’s customers were actually unsecured creditors because of Refco’s failure to segregate its customer accounts from their own general funds, despite telling customers that it had done so.
Most of the broker’s 17,000 customers eventually received little or no compensation.
This is not supposed to happen. FINRA is the watchdog for this. Their words on how “safe” customer accounts are with registered brokers.
In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Even if a firm fails, its customers' assets will be safe.
So much for FINRA.
Where could this go?
I think some drop in confidence by market investors in secondary firms has to happen. Money has to leave those players. With that, will go the flow trading that comes with the accounts. Liquidity across all markets (especially futures) will be affected.
If we go down this road (we will if MF/the Banks actually used/seized clients money) the short-term consequence will be another big ramp up in volatility. Most assets classes will suffer in that environment.
Leveraging of "liquid" assets is a critical component of the global system. The repo markets are already under serious attack. The MF story could take us to a new level.
The absolute craziest outcome would be that we learn that it was Goldman who closed the books and seized the cash last Friday (someone did). It would be even crazier if this leads to a problem that gets out of hand. There’s a decent chance that it plays out along these lines.
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Very interesting observation or conjecture. Any thoughts as to whether something similar could be happening in reverse between the EU and US currently, as a prelude to additional major bank failures in the Eurozone?
P.S. And regarding your "Anomie Watch" (if you are the same LB that I have had bookmarked for over a year - it was good to see the hiatus come to an end), I was wondering if Slovakia, with Sulik leading the charge, would have a looong memory, and perhaps return the favor of the Munich Accord. However, they pssed the EFSF as predicted.
why would institutional UK investors want to opt out of segregation requirements? What is the potential benfit in doing that? THere only seems to be downside.
And we all know there's only this one roach.
Banks all move at once, collusion of the highest magnitude, but no one sees it coming.
Fucking rats.
Awesome job and an easy read for me (a dullard). Great job, thanks!
This is the meat and potatoes I came here for. ZH Rocks!
So Bruce, with my limited experience with BK's, isn't the BK Judge duty bound to order any assets moved within a certain time period of the BK filing, frozen and/or returned to the account holders/accounts they were moved from?
I have seen this happen in several BK's I have been involved with, more specifically, I have seen assets and sales and/or confiscation of assets unwound by the BK judge and sanctions slapped on those who did the moving. Is this possible in a case as big as MFing Global?
DaddyO
So you would think. But the Refco story says no.
More about Refco in here.
Dark Side of the Looking Glass: Part 1 - YouTube
The implication being that all the books are cooked and it's only visible when the entity fails. That's why we have so many entities pending failure, but so few that have busted as of yet. The rot, as it becomes visible, destroys belief.
That's interesting.
Kind of like quantum theory, but for fraud.
"I think some drop in confidence by market investors in secondary firms has to happen."
It seems to be the goal.
Bruce...rumor is Goldman was actually on the MF desks last week and transacting... A la LTCM
These guys play all day in Chicago, fuck Corzine, Fuck Europe with a capital F.
Here's how it goes...
http://www.youtube.com/watch?v=0c3bhh8fqYs
Fuck you...pay me!
This leaves me wondering how do I make sure that BullionVault REALLY segregates customer funds from general funds, DESPITE them telling me in their prospectus and website that they really do that.
Any suggestions anyone?
take delivery of physical
I do agree with keeping some physical metal in one's possession, but how useful, is it, really? It's only use is as a hedge against complete system breakdown, and even then, water, food, guns, etc., make just as good of a hedge. And when the time comes, what will you trade your metal for? Will you demand nothing less than to be a prince, or will people laugh at you while you are trying to sell metal and they are busy growing a garden or starting a small, local business?
This is where ideas like bullionvault and goldmoney come in. You own the physical metal but pay for storage and management expense. There is little risk of theft. And you can sell quickly in a straightforward manner.
I think there's a place for innovation in this area. God help you if you think the solution to all of the world's, or life's, problems, is to hoard metal at home.
Have you ever seen your gold in those places, or are you shown the same pictures as everyone else?
"God help you if you think the solution to all of the world's, or life's, problems, is to hoard metal at home."
Yet, that is precisely the world we now live in. If you think for one second that you'll get your money or metal 'quickly in a straightforward manner' in the event of a collapse/crisis/theft, then I've got some prime waterfront property in the Mojave for sale. Comes with little risk, too!
If you don't physically have it in your possesion, you own nothing but a promise. The idea behind using metal as a form of exchange for goods 'when the time comes', is that while Person X may not need your metal, he can choose to exchange goods for it so that he in turn can use that same metal to get something from Person Y. There are no guarantees of course, which is why preparing for the inevitable means gathering more than just metal.
Except that, the "paper gold" owners (the 99%) are going to clamor loudly about their "gold" when (it's certain) a new currency is created. They will demand parity, and since they are running things now (and presumably into the future), if their own "gold" is good, then so will be your's. I'm in both possession and in accounts, and I've got my tools, my land, and my guns. Overall, I'm confident that I will survive just fine.
same thing goes for GoldMoney, if anyone 'holds physical' with them,
I've just gone through the BullionVault Safety FAQ, again. It has considerably expanded since the early days, and is a very interesting read.
In particular, it has detailed descriptions of trust and bailment agreements setup between parties, and descriptions of what would happen in case of BV bankruptcy and creditors trying to recover their dues court.
BV makes it clear there is a risk that money held in custody at Lloyds could vanish if the system collapses...or that it could take a while to get custody of physical held at ViaMat.
Take delivery anyway.
You're onto this, the traders are great at their jobs, get the story UNDER the story. Great work, Bruce.
Bruce .. ...
how would goldman grab the client money ? How is that possible it would need MFGs assistance right?
Is this the end of retail brokerages outside of the TBTF , whos next?
Goldman is the govt. "F you - pay me." They can do what they want as long as Obama gets healthy campaign contributions. There are no laws for these people.
When you are in real trouble every account with a positive balance is fair game. I hope you never have to learn this the hard way.
Correct. When in doubt grab the money. One can fight about it in court later. Grab first.
"Posession is 9/10ths of the law"
My only question is how one would grab the money. I've been in the securities business my entire professional life, and I can honestly say that I couldn't "grab" a clients money or commingle accounts even if I wanted to. Even with full discretion, someone in another department would have to be in on the game, and there would still be a paper trail with screaming red flags. I don't even see how someone at the CEO level could intimidate the mid-level flunkies to put their professional careers on the line for something that is so blatantly illegal.
And yet, it happened. I'm very curious to watch both the economic repercussions and the legal wrangling.
I agree. I have never seen this happen except REFCO. This is always - go to jail do not pass go. But post 2008, America is Chicago/Kenya/Zimbabwe. People vote for this.
Well, it's all better now. Corzine has resigned and turned down his departure bonus. Justice has been served.
equity_momo wrote:
Bruce .. ...
how would goldman grab the client money ? How is that possible it would need MFGs assistance right?
Is this the end of retail brokerages outside of the TBTF , whos next?
This article was posted yesterday at tfmetalsreport.com and highlights exactly the point you made above.
Ann Barnhardt wrote this piece and lays it out pretty well
http://www.tfmetalsreport.com/blog/2840/mfing-global
DaddyO
Thx
What this all means is our taxes will be going up exponentially just to buy more golf carts for Club Fed.
It would suck to be an MF Global client after reading that.
They're probably all on their way down to Zucotti park.
I heard they(OWS) raised over $500k so far and wondered where that came from. $5 a crack from 100K 99%'ers, or $100K from 5 1%'rs. Maybe the latter one is more like it - hoping they will help expose the kleptocracy to the sheeple. Who know.
You don't have to be an insider to know that the roots of this problem go deeper than MF Global. A firm like that can't dig itself into this deep a hole without help from the outside.
You're exactly right. There is more to this and they are doing everything to make this simple. I asked a few days ago, will these customers be made whole soon or maybe not.
Corzine was the CEO of Goldman Sachs, maybe he was put at MF Global so they could grab the money. Goldman is untouchable, since all the government officials are ex Goldman. They will all get by with it. That is probably why the Judge gave them money to keep in business for 2 weeks to cover up everything and to cover up any Goldman Sachs involvement. We have no justice and we have no representation, only banks and corporations have that.
+1
Corzine was a trojan horse. I am sure the money will be used for GS end of the year bonuses. GS is the govt.
Fraud is as fraud does.
If the system in general is fraudulent in nature then MF is most likely not the only one out there with this going on. They just haven't been caught yet. So now you the investor must determine if your funds are wrapped up with another MF in the making. How do you find out? Well, apparently the only way you find out is through a bankruptcy. One obviously can't rely upon regulators/overseers to let you know ahead of time. Thus your funds are uncertain.
It's like having your cash held in someone's safe but the people responsible for ensuring that the cash is indeed there were never there to begin with. You just assumed they were because they said they were. All you had to go by was assumption, but it was at least supposed to be an assumption backed by enforcing the law through oversight.
Tell me then, so if the stock market in general hates uncertainty what is more uncertain than not knowing or having confidence in the integrity of the institution itself and their overseers all of which are essential to a market functioning? It doesn't get any more uncertain than this, does it?
And this is why I'm staying out of the market. Everything now is uncertain.
"If the system in general is fraudulent in nature then MF is most likely not the only one out there with this going on. They just haven't been caught yet."
Look at what the TBTF banks did with the mortgage market from predatory loans to fucked up documents sold as institutional grade securities...no one yet prosecuted. With this kind of enforement do you think anyone on Wall Street is worried about getting caught cheating? Unfortunately I think this kind of behavior is more the rule than the exception. Besides, it's an election year and both sides need lots of $$.
At some point people won't want promises anymore, they will want real things. At that moment, when the confidence in the system is gone, everything will fall apart.
Bruce, I REALLY enjoy your articles.
Bruce, you're the best poster here
Didn't JPM have all of their cash accounts, and not a clue that funds were being mingled?
so declare bankruptcy and stay out of jail... raiding customer accounts to stave off insolvency seems pretty stupid unless they were expecting an immediate lifeline from someone...
you only steal that massive sum of money to "plug a huge hole in your own pocket." As crazy as it sounds i think it's all about Greece and the demise of the EU. Everyone knows if Greece goes bye-bye there goes Euro-denominated debt. Basically it's "grab bag time" because New York City itself would be in deep doo-doo! Well...if you've got the "Refco billions" then it really doesn't matter. So far only you are the only one making any sense...and needless to say the MSM is terrified of this story because it goes literally to CNBC HQ! Once the "betting parlors" get outed...well, let's just say they haven't been able to close the door on those closets for years!
As crazy as it sounds i think it's all about Greece and the demise of the EU. Everyone knows if Greece goes bye-bye there goes Euro-denominated debt.
Not at all crazy Vet. But, it would not just be euro denominated debt but euro denominated assets as well. The only practical way to handle it would very literally be to reset both assets and liabilities to zero, void any value of the euro in your nation, as if it were confederate money the day after the Civil War ended, and then your Finance Ministry would issue the new or former currency at what is a made up value that suits the immediate needs of the nation for liquidity reasons, after that you can print or destroy, adjust the M1, M2, as needed.
I have heard others who say they would simply temporarily set aside their debts and issue currency pegged at some fraction to the euro and go from there till they got stability and an equilibrium of sorts, then adjust euro debt by that difference but still honor those debts. That will never fly.
I will say that there are more and more corners in this town with OWS protesters holding signs. They were just at the main square downtown but they have taken a decentralized approach, they now have just a few people on about 20 major intersections doing a lively jig and waving, being nice to people. And people are responding with horn honking and waving back. The vast majority are beaters with passengers in dire need of dental care but you would be surprised how many well off looking people are responding.
Hey all, why would MFG think there were going to be consequences to using other people's money illegally and unethically when the Fed and the PPT do it every day? They might even be able to avoid any major poverty or discomfort because they know where the bodies are buried, they can just publish their poison pill letters of who what where when and how the government is manipulating us all and they will claim it was a condition of doing business as a market making primary dealer that they did what they were ordered to. Nope, no jail time. And eventually the government will make the public who were robbed whole because they do not want the truth to come out even more than Corzine does.