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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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Thu, 01/12/2012 - 22:40 | 2060471 RobotTrader
RobotTrader's picture

Can't blame Sprott for being angry.


1) He missed the greatest retail and tech stock rally in recent history, with the XRT and QQQ closing in on 10-year highs

2) The gold stocks have been utterly horrid performers, many juniors gold down 70%, some like General Jim's TRX were "Bre-X'd" this year

3) Nobody wants "Things", because everyone is clamoring for "Paper"

He's probably kicking himself because he's not a "Consumer Discretionary" fund manager.

Thu, 01/12/2012 - 22:52 | 2060488 akak
akak's picture

Have to blame RobotShitforbrains for being a gullible, conformist, shortsighted loser.


1) He missed the greatest rally in the last decade, with gold and silver totally BLOWTORCHING stocks and bonds

2) Stocks have been utterly horrid performers over that same decade,  with the DOW down in REAL terms over 30% since 2001, and the NASDOG falling over 50% in real terms over the same timeframe

3) Only the sheep and brainwashed idiots want "Paper", because everyone with any sense is clamoring for physical precious metals before this whole corrupt, house-of-cards financial and monetary system finally collapse

He's probably kicking himself because he simply can't pull his thick head out of Bernanke's ass.

Fri, 01/13/2012 - 08:58 | 2061025 Temporalist
Temporalist's picture

Based on RetardTraitor's opinions of Sprott and PMs he will die believing that it must suck to be a billionaire.

Thu, 01/12/2012 - 23:03 | 2060506 akak
akak's picture

Hey RobotLemming,

If the day ever comes when you grow a spine and a pair and actually chose to engage in an honest exchange of ideas or debate over your hero Bernanke's destructive monetary and fiscal policies (instead of invariably just dropping your flyby, trollish one-liner shitbombs here), just bring it on --- I'll be ready and waiting right here.  Let's just say, though, that I won't exactly be holding my breath for that to happen.

Fri, 01/13/2012 - 00:38 | 2060672 The Old Man
The Old Man's picture

"Air" and people holding on to there jobs. I can have accountants make me look good too. LOL!

Fri, 01/13/2012 - 05:24 | 2060895 Snidley Whipsnae
Snidley Whipsnae's picture

Robotrader... PMs have kicked the shit out of stocks for the last 11 years.

Wanna talk about it?

Fri, 01/13/2012 - 09:13 | 2061055 El Hosel
El Hosel's picture

 Dick Robostein

Fri, 01/13/2012 - 00:13 | 2060628 Atomizer
Atomizer's picture


The Tooth fairy, Easter bunny and Santa Claus union is going to remind the public that the financial system is safe & sound. 

Fri, 01/13/2012 - 00:18 | 2060637 plata pura
plata pura's picture

This sprott bloke owes me money.

Fri, 01/13/2012 - 01:23 | 2060741 Peter Pan
Peter Pan's picture

Maybe that's true but it certainly won't be as much as Uncle Sam and the banks will owe you by the time you retire.

Fri, 01/13/2012 - 00:42 | 2060665 The Old Man
The Old Man's picture

I don't really know fellas. This whole gold silver thing looks definate to manipulation that's losing ground. The silver price is fluctuating as I speak. Something is going on. I've seen a +5% (+ or -) in the last few days. Reminds me of a panic buy sell situation that's looks like sell before anything happens to affect oil. I'm holding for a lower price until the shock of the regulations pass the lawsuits which I surmise will be tossed or adjusted as the article suggests. The dollar is the mean to the end here. If the FED fucks this prodiction up, (and yes, it's prodiction) buy as much as you can, before the dollar falls endlessly. It will be all you can hope for after the change. GLTA!

Fri, 01/13/2012 - 00:44 | 2060678 cranky-old-geezer
cranky-old-geezer's picture



Why all the bitching about how corrupt the financial system is?

Don't participate in it.  

Don't put your money & assets where criminals can get their hands on it.

...which is any type of account at any large financial firm.

...and smaller firms too, as they get bought up by larger firms ...without any notice to you.

Why do you sign a brokerage account agreement saying your assets can be hypothecated and re-hypothecated many times over

...then bitch and whine when those assets disappear?

Say what?  You didn't read the fine print?

Why do you insist on doing business with criminals?

...which is pretty much everyone in the financial system these days.


Fri, 01/13/2012 - 00:46 | 2060686 The Old Man
The Old Man's picture

Hey Cranky, you're talking to people who want to know. So thanks. We are all grumpy here.

And ditto to your comments.

Fri, 01/13/2012 - 01:20 | 2060724 cranky-old-geezer
cranky-old-geezer's picture



I'm not grumpy, because I don't do business with financial system white-collar criminals. 

MFG didn't rip off any of my money, and no other brokerage firm will be able to rip off any of my money, because I don't have an account with any of them.

No, I don't do business with criminals hoping I'll make a profit and not get screwed. 

I don't care how they screw other people.  Nor do I care how those people try to get their money back.

It didn't take MFG bankruptcy to convince me brokerage firms are crooks.

I saw that way back in '08 when Bear Stearns went down.  And I didn't lose any money then either.

I won't play in the corrupt manipulated paper markets ...which is all of them in my opinion, stocks, bonds, forex, you name it, because (a) you have to have an account at a corrupt brokerage firm, and (b) markets are manipulated by large players anyway.

I've been tempted at times.  But I won't do it. 

I enjoy sleeping peacefully at night.

They keep gold and silver prices suppressed? 

Fine, no problem.  More opportunities to buy it cheap ...physical obviously ...certainly not paper.

Paper markets are ponzi markets in my opinion.  All of them.


Fri, 01/13/2012 - 03:58 | 2060867 Gromit
Gromit's picture

And this is why, I think, real estate gets a bid here.

Fri, 01/13/2012 - 05:33 | 2060898 Snidley Whipsnae
Snidley Whipsnae's picture

"real estate gets a bid here."


Without a driver for real jobs with real wages real estate will languish for years if not decades.

The only bid real estate might get is if the Fed uses the next QE to purchase huge blocks of MBS and turns it over to the TBTF banking crooks for pennies on the dollar.

I predicted that this would be the 'final solution' to the housing backlog back in 2008 and nothing that has happened since has changed my mind.

Create a crisis and do not let it go to waste. Steal, steal, and steal some more... That is what TBTF means, that is their goal, and that will be the 'final solution' to real estate.

Fri, 01/13/2012 - 11:09 | 2061377 cranky-old-geezer
cranky-old-geezer's picture



The only bid real estate might get is if the Fed uses the next QE to purchase huge blocks of MBS and turns it over to the TBTF banking crooks for pennies on the dollar.


It seems Fed's #1 job is keeping paper asset prices inflated, because that's what banks have on their balance sheets.

Fed prints currency and pays TBTF banks top dollar for nearly worthless paper like MBS.

Fed's balance sheet is the most toxic of any bank anywhere.  Fed is the true "bad bank" where TBTF banks dump all their toxic paper for top dollar.

THAT is why banks want QE3. So they can dump more toxic paper on the Fed and get full price for it commission.

Of course there's one paper asset Fed is destroying the value of: Our ponzi paper US dollar currency.

QE doesn't help the economy one bit.  It hurts the economy by stealing more wealth from the American people via currency debasement, and giving it to huge zombie banks.

Fri, 01/13/2012 - 01:21 | 2060734 Peter Pan
Peter Pan's picture

The system once ran on confidence in its institutions, its leaders and its values. It now survives a while longer due to the ignorance of the masses and the machinations of its robber barons.

We are all frustrated Sprotts.......not because the lies are extending the pretending but because they simply increase the size of the final explosion on the younger generation whose aspirations will be destroyed by the thieves who are gaming the system.

Fri, 01/13/2012 - 02:27 | 2060814 Ira Gold
Ira Gold's picture

It is a farce. with our communication these days, the wool can't be pulled over our heads anymore. Now watching the political strategies is like watching a movie, or a comedy rather.

Fri, 01/13/2012 - 10:37 | 2061257 miker
miker's picture

Here's what I believe:

1)  Sprott is a good guy.  His closed end metal funds provide a secure way for investors to hedge risk (versus ETFs).  The fact that they are priced at a premium shows that people are willing to pay for that hedge.  d

2)  It seems more and more likely that the MF Global fiasco was "engineered" by our government to strongly dissuade small-to-medium players from helping ramp commodity prices.  Why?  Because the Fed wants to be able to QE AND control prices more slowly.  Nothing hurts their plan more than for prices to get ramped up too quickly.  So they needed to quash a major segment of the commodity market that could hurt their plan.  By the way, the big guys are in their pocket and have to do what they direct or get shut down.  And the major commodity-related industries, well they are in line too. 

Keep a close eye on Mr. Corzine.  He is a bigtime political and finance insider.  I think they asked him to "serve his country" by staging this fiasco.  Think I'm crazy?  What is crazier than allowing creditors to step ahead of clients that were robbed?

3) Position limits will not be enacted for some time as this would reduce the ability of the big players to manipulate PMs (and other commodities) as the Fed needs.  See if Sprott's prediction of a further delay this year of the rulemaking isn't born out.  Everyone knows that position limits are needed for a healthy functioning of the commodities markets BUT everyone doesn't know how much they are needed to control prices by the Fed through their member banks. 


Fri, 01/13/2012 - 16:26 | 2062940 AgShaman
AgShaman's picture

No. I don't think you're crazy.

A careful look into how long the "investigation" has carried on in the silver manipulation gives creedence to your theories.

People should not forget about the "Ides of March"...or the "Sell in May" phenomena

They can keep extending position limits exemptions for the bullion bank "hedgers". May 31st should remain in the back of your mind. It could become the "shift" point for the "Shorts" to remove themselves outta their positions and get on the long-side and let this mutha run. I don't believe they will get crushed and go down without bashing the precious and gaining advantage with an entry on the "long" side for when the mania starts. They understand that J6P does not have deep enough pockets with their 401k's in lockdown. There's enough capital out there in the accounts of the unwashed masses, but they are too asleep to divest themselves from their bagholder status in the equities markets and right their ship with exposure to physical PM's.

I think people should remember to keep a cash missile at the ready for this reason. Entry at these levels is even good lower prices do bring a flood and cause a sourcing problem for the smallish players. There's places to get it...but you may have to wait months for your product.

So yeah...I agree. It will be stall tactics to allow time for the short sellers to remove more or most of their positions. The CFTC is a castrated government agency with no authority or teeth. Their job is to enable the crooks and buy as much time using the stall tactic mantra of "we are doing something....we are getting closer" 

Nothing will get done....until JPM is ready to go "long" in gold and silver

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