Eric Sprott: "The Financial System Is A Farce"

Tyler Durden's picture

From Eric Sprott and David Baker

The Financial System is a Farce: Part Three

2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore.

Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.

Let’s start with MF Global. With more than two months passed since the scandal broke, federal officials are still unable to find the estimated US$1.2 billion of missing customer funds.1 The whole episode has been a disaster for the CME, the self-regulatory body in charge of making sure the futures brokers play by the rules. Normally in instances of broker bankruptcy, the CME is supposed to backstop client accounts and keep them liquid – i.e., allow them to continue trading while the bankruptcy gets settled. It never happened in this case. Client accounts were frozen for weeks. Funds have remained missing for months – an eternity for clients who were caught short. The great shock was watching how inept and incapable the CME was in 1) preventing the fraud in the first place and 2) recovering client assets during the aftermath. The CME essentially copped out of their responsibility, offering little more than some perfunctory press releases along the way. They were also surprisingly quick to offer excuses for their non-action. According to CME, it really wasn’t their fault, since CME had “no control over the disposition of customer segregated funds that are held by MF Global and not by CME Clearing”.2 Their on-site review of MF Global’s operations the week before its bankruptcy suggested that the brokerage firm was in full compliance of all the rules, so it wasn’t really the CME’s problem. But of course it was their problem. That’s what the CME is there for – to protect clients in cases of fraud or bankruptcy. To protect the “integrity of the exchange”.

In the weeks that have passed, a curious web of transactions have surfaced between MF Global, JP Morgan and Goldman Sachs. Before its bankruptcy, MF Global had been drawing down a $1.2 billion revolving line of credit with JP Morgan. In bankruptcy court, JP Morgan was able to negotiate a lien on some of MF Global’s assets in exchange for paying $8 million towards bankruptcy costs. According to Reuters, “The lien puts JPMorgan’s interests ahead of MF Global customers who have not yet received an estimated $900 million worth of money from their accounts, which remain frozen as regulators search for missing funds.”3 It is also alleged that JP Morgan accepted a roughly $200 million transfer from MF Global the day before its bankruptcy to cover an overdraft in MF Global’s trading account held with them (it still isn’t clear if JP Morgan has the cash).4 MF Global also appears to have sold hundreds of millions worth of securities to Goldman Sachs in the days leading up to its collapse, but did not immediately receive payment for them from the MF Global’s clearing firm, none other than JP Morgan.

To be fair, on November 22nd, the CME did offer to pledge $550 million as a guarantee to the SIPC Trustee in the event that they did not recover all of the missing client funds, but we cynically wonder if that pledge was made after they finally figured out where all the money had gone. The CME seems to have had a good idea by early December, based on comments made by Commodity Futures Trading Commission (CFTC) member, Jill Sommers.5 The bottom line is that MF Global’s client interests and security appear to have been side-stepped to buy time for bigger, more important players to cover their losses (asses), and that is not the way the regulatory system is supposed to function.

We’re not naïve – we know the government will always protect the interests of the big banks over paltry retail investors, but do they have to be so brazen about it? The MF Global episode is basically shameless. Then there’s Dodd-Frank. Remember Dodd-Frank? It’s the massive financial regulatory reform act that was signed into law by President Obama back in 2010. We are certainly not fans of cumbersome overregulation, but in its essence, Dodd-Frank was supposed to provide a new framework to address the potential failure of a too-big-to-fail bank. There’s nothing wrong with that. Given the sheer size of the off-balance sheet derivatives market, we don’t see a problem with at least attempting to prepare for another large scale banking failure in the US. But almost two years later, we have to laugh at how little of the Dodd-Frank framework has actually been implemented. According to law firm Davis Polk, a mere 21% of the act’s 400 rulemaking requirements have become finalized since the law passed in July 2010. Of the 200 Dodd-Frank rulemaking requirement deadlines that have already passed, 74.5% of them have been missed to date.6 The lawyers must be having a field day with all the paperwork.

One part of the Dodd-Frank story that interests us is the CFTC positions limits rule set to go into effect on January 17, 2012. The new position limits are aimed at preventing excessive speculation in the commodity markets which are believed by many, including ourselves, to have driven wild fluctuations in the gold and silver spot price over the past decade. Position limits are an obvious threat to large futures speculators like the big banks, so it was no surprise when two Wall Street lobby groups, the Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association (ISDA) launched a lawsuit against the CFTC demanding that the new rules on commodity trading be thrown out, or at the very least, delayed. The CFTC voted on the request to delay implementation and officially rebuffed it on January 4th, which is a heartening development in an otherwise cynical saga.7 Back in December, however, the CFTC had already quietly waived the position limit filing requirements on all CME participants until May 31, 2012.8 So even if the new rules go into effect this month, banks won’t have to report their position levels until May 31st either way. Given the lobby groups’ outstanding lawsuit against the new rules, combined with the CFTC’s apparent tendency to grant temporary reprieves, we don’t expect the new position limit rules to be enforced any time soon. Once summer approaches, there will probably be more delays and more deferrals, granting the big players plenty of time to protect themselves. Extend and pretend. Delay and defer. That’s the song we sing on the merry-go-round.

Then there’s Europe and the European Central Bank (ECB). Back in December, the mighty ECB had to step in with yet another massive liquidity injection to avert a total meltdown in the EU banking system. On December 21st, they flooded 523 separate EU banks with a “Long Term Refinancing Operation” (LTRO) program totaling €489.1 billion ($626 billion).9 The program consists of loans that are due in three years and will charge an accommodating 1% interest rate. The liquidity injection will allow the EU banks to participate in a delightfully convenient carry-trade whereby they can take the borrowed money at 1% interest and invest it in various sovereign debt auctions that will likely pay them 3% or higher. The banks will keep the difference in profit, and the EU PIIGS countries get to breathe easier knowing they’ll be able to sell their garbage paper to the EU banks at suppressed rates as long as the LTRO loan money lasts. And the best part? It doesn’t involve any money printing, so there’s really no risk of inflation, you see? So just so we’re on the same page, if everything goes according to plan this year, European sovereign governments will fund their debt auctions with borrowed money lent to them by over 500 European banks who have themselves borrowed hundreds of billions of euros from the European Central Bank,… who as far as we can tell, borrowed those euros from the various EU sovereign states (or simply printed them). Do you get it? Do you see the circularity? Do you see the can being kicked down the road? And guess what? Since €489.1 billion is clearly not enough to avert disaster this year (most EU banks are so undercapitalized they’ve simply parked the borrowed LTRO money back with the ECB at 0.25% interest), the ECB has promised to launch another LTRO injection this coming February!10 No wonder gold was down in December. They completely solved the European debt crisis!

Last but not least, we must mention an alarming component of this year’s National Defense Authorization Act (NDAA) that was quietly signed into law by President Obama on December 31st, 2011. This year’s defense bill, officially known as Senate Bill 1867, includes a specific provision that seems to grant the US government the power to detain accused terrorists, including US citizens, indefinitely, without trial.11,12 There has been much uproar and confusion over the language used in the sections of the Bill related to the subject, and it’s still not clear how the Bill will change  the existing laws related to terrorism detention in the US, but it doesn’t bode well for constitutional freedom within the country. There’s obviously no direct market impact to the legislation, but we mention it only to remind investors how quickly the rules can change when governments feel vulnerable. ‘Political risk’ should no longer only be applied to mining investments in third world countries. In 2012, it may apply to us all.

It’s very difficult to predict what lies in store for the stock market this year. Anything could happen. Government intervention in the financial system has never been more extreme. We hope the examples above have shed some light on that. As we enter 2012, there are significant debt-related financial risks festering within the three great economic theatres of the world: the US, Europe and China. The market may rally, it could crash, it could tread water, we just don’t know. A lot will depend on how the central banks react. But we are eager to maintain the positioning that we held in 2011. We will maintain our exposure to precious metals equities and bullion. We will maintain our large gross short weightings in our hedge funds. We are confident that they will protect us on this farcical merry-go-round that seems to spin faster and faster with every passing day.


1. Associated Press (January 11, 2011) “MF Global trustee will meet with customers”. The Wall Street Journal. Retrieved January 11, 2012 from:
2. CME Group (November 6, 2011) “CME Group Statement Regarding MF Global”. CME Group. Retrieved January 5, 2012 from:
3. LaCapra, Lauren Tara and Goldstein, Matthew (January 3, 2012) “MF Global sold assets to Goldman before collapse: sources”. Reuters. Retrieved January 5, 2012 from:
4. Patterson, Scott and Lucchetti, Aaron (December 21, 2011) “MG Global Transfer Draws Scrutiny”. The Wall Street Journal. Retrieved January 5, 2012 from:
5. Roeder, David (December 15, 2011) “Regulator: We know where MF Global cash went”. Chicago Sun-Times. Retrieved January 5, 2012 from:
6. (January 3, 2012) “Dodd-Frank Progress Report”. Davis Polk. Retrieved January 5, 2012 from:
7. Protess, Ben (January 4, 2012) “New Limits on Commodity Trades Are Approved”. DealBook. Retrieved January 6, 2012 from:
8. CME Group Market Regulation Department (December 20, 2011) “Temporary Waiver of Annual Update for Position Limit Exemptions”. CME Group. Retrieved January 5, 2012 from:
9 Jones, Marc (December 21, 2011) “Banks gorge on ECB loans, market cheer short-lived”. Reuters. Retrieved January 11, 2012 from:
10 Cottle, David (December 21, 2011) “ECB’s Massive LTRO Gives Risk Assets Wings”. The Wall Street Journal. Retrieved January 5, 2012 from:
11 Miles, Donna (January 6, 2012) “Obama signs Defense Spending Bill despite having reservations”. American Forces Press Service. Retrieved January 5, 2012 from:
12 US Library of Congress (December 1, 2011) “112th Congress, 1st Session, S. 1867”. (See Sections 1031-1032) Retrieved January 11, 2012 from:

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ACP's picture

Really, bitchez?

Ahmeexnal's picture

No shit, Einstein.
Time to take the law into your own hands.

Mr Lennon Hendrix's picture

He should close his ETFs and send the metal to the shareholders.  Then no one could short all of that metal.

ACP's picture

I'd like to see a grassroots movement called "Gold Delivery Day."

redpill's picture

Everything is fine as long as we pretend it is.


Baritt Obamney 2012

ACP's picture

I think the American people need some lessons on how to react to politicians and the world of finance:

trav7777's picture

nothing is a bigger farce than Sprott's own funds selling gullible silverbugz PSLV at a 30% premium to NAV so he can 2ndary offer the rug from under their cost basis

EasterBunny's picture

He doesn't set the NAV, it's available for any investor to see. I agree, it doesn't make that much sense to buy his fund at 30% premium to NAV, but others think it's worth it and feel safer doing so than buying SLV etc. There is no secrecy and deception to anyone willing to look up the NAV; easy.

Road Hazard's picture

I know, lets elect Mitt "Flip Flippity Flopping" Romney and a repug congress and raise the national debt to 99 bernankillion dollars and live like there's no tomorrow, or party hard until the earth explodes in December of this year. Those repugs sure do talk a big game about getting government spending under control but LOVE putting the printing presses into hyperdrive!

Ron Paul 2012 or bust!

JPM Hater001's picture

They tried to do that with silver last year.  Buy an oz and bankrupt JP Morgan.  I think it was a Max Keiser idea.

Let me know if you need any other background filled in.

Oh, and I wouldnt wait for delivery.   You might want to go get it yourself.

Mr Lennon Hendrix's picture

I think the idea you write of, "Buy Silver" to crash JPM, was first made here, on Zero Hedge.

trav7777's picture

and here we are...and so is JPM.


JPM Hater001's picture

I wanted to be on the record as one of the few +1...

ACP's picture

If you actually showed up, you'd have a hood over your head and a one way ticket to GITMO under our new "legal system."

Anyway, going after CME would be one step towards "cutting the head off the snake."

seek's picture

It already happened, and that delivery day was in December, 2011. They killed MF Global to stop it.

Hate to say it, but for a small guy, you need a trusted, powerful intermediary to take delivery for you, then turn around and deliver the gold to you.

That trusted intermediary (for now) is the US Mint, and the deliverable is eagles. Fuck COMEX, don't play in their court.

SilverDOG's picture



Thank you for posting the keystone info. MFGlobals ceremonial sacrifice to its Gods. Dead-on.

Most say "huh?"

Snidley Whipsnae's picture

Right on Seek... Anyone that still has faith in their broker account and is playing the paper game after MF Global fiasco is a moron.

US Mint had another record sale of Silver Eagles. Some are catching on.

Rahm's picture

+++  Hold physical metals only way to go in the days ahead.

WhiteNight123129's picture

If you are DRS holder (registered holder of the stock in your own name, noone can short it).


IBelieveInMagic's picture

What is DRS and how do you go about getting it?

Snidley Whipsnae's picture

"If you are DRS holder (registered holder of the stock in your own name, noone can short it)."


Yeah, and if MF Global held your PMs in a warehouse and you had a warehouse receipt for your PMs there was no way you could lose your PMs... Untill MF went belly up and the warehouse receipts turned out to be more pieces of worthless paper.

If you continue to believe that bankers are going to play by the rules and that regulators will protect you then you are simply naieve.

Snidley Whipsnae's picture

"If you are DRS holder (registered holder of the stock in your own name, noone can short it)."


Yeah, and if MF Global held your PMs in a warehouse and you had a warehouse receipt for your PMs there was no way you could lose your PMs... Untill MF went belly up and the warehouse receipts turned out to be more pieces of worthless paper.

If you continue to believe that bankers are going to play by the rules and that regulators will protect you then you are simply naieve.

GOSPLAN HERO's picture

Reminder ... Zero Hedge is monitored by the U.S. Government.



TheFourthStooge-ing's picture

An urgent alert from GOSPLAN HERO was heard throughout the (home)land:

Reminder ... Zero Hedge is monitored by the U.S. Government.

Isn't everything?


Snidley Whipsnae's picture

"Reminder ... Zero Hedge is monitored by the U.S. Government."


So what? The gov is monitoring everything and what has come of it? A fucking giant hairball. If you are scared, find a MSM site and post Bloomblab bull shit.

This site is not for the faint of heart!

Got gold?

DaveyJones's picture

well said, that game was up a long time ago. Monitoring everything is one thing, keeping up is another.

Golden monkey's picture

I see... That's why (your?) secret service came in Canada to get me last year.

Sorry for everything, including that part of their "mission" report :


See you soon, asso.

Snidley Whipsnae's picture

Golden Monkey... It would help if you began your posts with an indication of who you are responding to.

I don't have a secret service... in case you were responding to my comment.

Also, I don't believe that blood in the streets is necessary.

Passive resistance, ie; close bank accounts, refuse to use credit cards, buy PMs, use local credit unions, etc, will be more effective than violent resistance. Violence will give the goons an excuse to turn the dogs of war loose on civilian populations. The best course, imo, is to get out of debt and stay out of debt... that will slay the dragons of Wall St and their lap dog pols.

Silver Bug's picture

Spot on Eric, the whole system is a sham!

stopcpdotcom's picture

Seems more like a tragedy to me.

DaveyJones's picture

certainly not a "light comedy" except if you're oh... a central banker's wife

rocker's picture

The problem is you can't short a financial ponzi fraud. And you surely can't go long a fraud.

Ruffcut's picture

Yes, you can short up the money you have left over to buy food and long the black guy who's doin yo wife.

That's the long and short of it.

Tijuana Donkey Show's picture

As long as he takes the nagging to, I'm fine with that. 

lotsoffun's picture

one could go long, but i can't bring myself to do that.  and as a good indicator - the vix as low as it is evidence people know that shorts of any kind will be crushed.


Snidley Whipsnae's picture

Rocker... all PM purchases are shorts on the dollar.

Got PMs?

Mr Lennon Hendrix's picture

It would be cool if he closed his ETFs and sent all the shareholders physical; otherwise he is allowing TPTB the ability to short more PM.

I appluad the article though.  I hope more influencial managers openly discussed the farce that is finance and economics.

Rakshas's picture

Lennon you've said that a couple of times over the past couple of days, how much of an issue do you see shorting a silver a closed end trust unit like PSLV is, particularly with such a premium attached?

Not trying to be a douche I'm just wondering whether this product is something that would be wise to short, personally I expect the shorts to get whats due them in the coming months as the not STUPID folks take out all the available physical. 

On shorting in general, some of the folks round here have started taking delivery of thier actual shares and storing them in their own safe as they believe that is the only way you truly own anything..... even paper..

Mr Lennon Hendrix's picture

I am going to give you the shorthand here, so please excuse me if I am not clear. 

The ones providing the major short positions are those running the power structure (JPM etc).  They do this at the bequest of the Fed.  They scratch each others backs in many ways: PDs buy USTs and the ed services the debt, the PDs short silver/gold, etc.  This needs to be done so that the Fiat Ponzi is still upright.  The Fiat Ponzi relies on the dollar.  The dollar trades inversely oil.  Oil trades 1:1 the PM complex.  So this is why the ponzi must short silver.

They don't care if they lose money.  It is not about the money, it is about control.  They have done all of this manipulation to establish the Police State.  They had to make money along the way to keep the power, so they front ran the shit.  The allowed the dot com/housing/UST bubbles for that purpose (killing two birds with one stone by destroying the middle class).

That is why they can lose some cash on their shorts.  They do want to get as much out of the ponzi while they can, but there are greeater needs than pennies.

TheAkashicRecord's picture

"The Financial System Is A Farce"

Yes we know this, how about some more focus on "now what" pieces?

Oh regional Indian's picture

Now this.......but most people Can't handle the truth. Only partial truths work. The FED is a scam. The Donkey/Elephant show is a scam. 

But don't tell me my language is perverted. Don't touch the Queen. CIA-Drug Traders? Tin foil loony.

Does not work like that. A dive is a dive, and you take all the revelations for what they are.

Every "thing" is a scam right now. Illusion built upon delusion.




Prairie Fire's picture

Using the PgUp key is a much more efficient way of scrolling up.

gwar5's picture

We know the markets are a farce, Sprott knows it, everybody knows it. There is a quiet run on the banks and quiet run on the markets with the little people pulling out. MF Global helped wake people up. Was glad to see 38K farmers file suit against Corzine personally, and others that were complicit.


Mr Lennon Hendrix's picture

They may be, but it is a slow wake up, the kind where you realize you are not sleeping but you can't stand out of bed.  The one where you don't have your motor functions and lie in a daze. 

People have pulled out of what they call "the market" (stocks) but they stay in cash, maybe they own MUNIs.  Still, they are in the system.  That is the thing:  barely anyone understands the main points of the Fiat Ponzi.

akak's picture

People have pulled out of what they call "the market" (stocks) but they stay in cash, maybe they own MUNIs.  Still, they are in the system.

I agree --- most refuse to recognize that "the system" does NOT consist solely of the stock market or the bond market, or having accounts with the TBTF banks and major, interconnected big brokerages.

That is why I put all of my savings into the only honest asset, precious metals --- in the form of GLD and SLV.

JohnG's picture




So you mean that you actually own GLD and SLV?  This is jot a jab at all.....or do you hold the metals in a safe.


Me, I have the physical metals, but about as much as I'm comfortable storing on my premises.


I also own PHYS, and PSLV.  PSLV I am considering selling because of the GIGANTIC premium to NAV, which I have never seen a good explanation as to why.  There are some "speculations," yet no real solid facts that can be backed up.  I've asked Eric King if he can get Sprott or Embry to adress this....afraid they will just talk thier book though.


Comments please?

(And do hold up on the "of you don't hold it, you don't own it"....I understand.)


akak's picture


Sorry, perhaps my sarcasm there was a bit too subtle.

No, I most definitely do NOT own any GLD or SLV. Although I was once naive enough to have done so, I have long since divested myself of those sham ponzi shells of supposedly metal-backed ETFs.  The only money that I would ever even hypothetically consider investing in relation to them now would be to short them in view of their eventual and inevitable collapse.

JohnG's picture

Understood.  When it comes to money I don't get sarcasm very well.