MF Global

Session has resumed

And now the one we've all been waiting for...

Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.

In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things,  and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.

It's official - the man who has been more invisible in the past month than Slimer the friendly ghost, aka former Goldman and MF Global (and let's not forget New Jersey) CEO Jon Corzine, is now officially on the Thursday, December 8 docket, of witnesses to tesitfy at the House Agirculture Committee hearing examining the MF Global bankruptcy. In what could be the most popular televized hearing out of Congress since Carl "Shitty Deal" Levin went to town on Lloyd and Vini, the entire world will be watching with baited breath first whether Corzine will even appear, at which point things get tricky of the Obama administration, best known recently for using Corzine as a distinguished financial advisor, and secondly, his explanation of just how it is that buying Italian bonds in zany off-balance sheet schemes while commingling billions of client funds to mask capital deficiency is legal.

Why did the CFTC abdicate its congressional mandate, pushing a futures broker into the jaws of SIPC where a trustee with no futures experience could rack up exorbitant fees?

You better curb that risk Boss, sir, or else... Please!

While the US Attorney General's office, presided by a very much embroiled in the Fast and Furious scandal Eric Holder, who at last check was spending 90% of his time frozen in carbonite, may believe that Jon Corzine is the homo sapiens equivalent of holy water, others appear to not share the sentiment. And as of today, two former employees have proceeded to sue Jon Corzine as fins.com reports. "Two former employees of MF Global have filed a class-action lawsuit against the firm's former Chief Executive Jon Corzine, other senior executives and board directors on behalf of themselves and current and former employees who acquired stock in the company while Corzine led the firm. The lawsuit, filed in the United States District Court for the Southern District of New York, alleges that the defendants provided false information regarding the company's financial condition and made statements that artificially inflated the stock price." Jon Corzine and the board breached their fiduciary duty to their employees and destroyed their careers and retirement savings," Jacob Zamansky, lead counsel for the plaintiffs, said in an email. The plaintiffs are Monica Rodriguez, the New York-based head of credit for the Americas, and Cyrille Guillaume, the London-based managing director of the commodities and stock division....If employees had known MF Global's true financial state, Zamansky said, "they could have refused to buy in or insisted on compensation arrangements that were all cash." And here is why Corzine's life is about to get very difficult now that the precedent has been set: "The employees did not file suit against MF Global, the company itself, because it is currently undergoing bankruptcy proceedings." One wonders how much more various Attorneys General need to see to perhaps consider to at least question the former CEO of Goldman Sachs, pardon, MF Global.

About a year ago, we discussed the very troubling moves by insolvent countries such as Ireland and Hungary to "raid" their pensions funds for various fungible purposes, a move which in virtually every way a was a progenitor to the MF Global capital commingling, if not outright bankruptcy, and was explained as reflecting "a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions  Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system." While it was unclear precisely what the use of funds was, back then FN speculated that it pension funds were being tapped to boost sovereign debt bids. Which if true means that Europe's peripheral pensioners have seen about a 20% drop in the NPV of their retirement assets. Today we add Portugal to the list of countries committing an MF Global type crime on a global scale: the Telegraph writes: "Portugal has raided €5.6bn (£4.8bn) of pension fund assets in a controversial scramble to meet its deficit targets." And since the money is once again implicitly and explicitly used to patch broken fiscal models, it is as good as gone. Which in a paradoxical way is almost welcome, as the true Arab Spring will not come to Europe (and America) until the citizens don't read, in clear writing, that their welfare state entitlement benefits are gone.... They are all gone. And at that point there will be truly nothing left to lose.

The failure of MF Global has wide ranging consequences for the American economy. Its bankruptcy is being handled in a manner that is making these consequences many magnitudes worse than necessary...

Couldn't happen to a nicer advisor to Joe Biden

• JOHN CORZINE SUBPOENAED BY HOUSE COMMITTEE
• HOUSE AGRICULTURE VOTES TO ISSUE SUBPOENA IN WASHINGTON TODAY

Don't forget to get your popcorn out for next Thursday:

• HOUSE AGRICULTURE COMMITTEE SETS DEC. 8 HEARING ON MF GLOBAL

Nothing like watching one Goldmanite explaining why he failed to prevent another Goldmanite from (allegedly) stealing hundreds of millions in customer accounts. Linked below is the live hearing by the "Continuing Oversight of the Wall Street Reform and Consumer Protection Act" in which Schapiro and Gensler are held to account for their epic failure with MF Global oversight.

The judge in the MF Global disaster just got real. The assignment of Louis Joseph Freeh, former Director of the the FBI no less, somewhat assures that Corzine and crew will get their day in court - or at least be vilified enough that someone pays the real price for the wrongdoings. He is the perfect man for the job having investigated, among others, mob connections to Italian pizza joints.

Within days of the  of the MF Global bankruptcy, the court approved a motion granting what is essentially authorization to continue commingle and use customer funds held at the broker unit.

Jon Corzine's last great act might have been the institutionalization of customer account pilfering.  Indictments anyone?

If anyone is wondering why the collapse of MF Global after the discovery of its commingling and theft of client funds was the single worst thing that could happen to market confidence, then look no further than the small Baltic country of Latvia where precisely what Jon Corzine's firm did to its clients, has happened at the bank level. Businessweek reports: "Lithuanian prosecutors issued an arrest warrant for Vladimir Antonov and Raimondas Baranauskas who are former shareholders of Bankas Snoras AB. Both men are suspected of embezzlement and document forgery, the Prosecutor General said in a statement on its website today. Baranauskas is also suspected of accounting fraud and abuse of authority, it said." Kinda like Jon Corzine, if not by the actual authorities, then by everybody else. And just like in the US where the lack of confidence in the system following the MF filing, so in Latvia the people have decided to hit the ATMs first and ask questions later. "“This money was the bank’s clients’ money,” said Irena Krumane, head of Latvia’s bank regulator, on Latvian Television last night. Krajbanka will most likely be liquidated because the bank doesn’t have the resources to meet depositor and creditor demands unless the Lithuanian government decides to recapitalize the lender, said Janis Brazovskis, the lender’s administrator, in an interview with Latvian Independent Television program 900 Seconds today...Depositors can withdraw 50 lati a day beginning today for the rest of the week, said Krumane at a press conference." At today's rate this is about $95. Which is why what happened next, as shown in the pictures below, was to be completely expected, and is a perfect indicator of the collapse in liquidity and credibility of our own system where commingling, unlike in Latvia, goes unpunished.

ALSO: Trustee Giddens Did Not Say a 1.2 Billion Shortfall. But Media Goes Hysterical!