Global Economic Intersection Article of the Week
Monday marked two weeks since the news broke that MF Global “removed” unencumbered segregated funds from customers’ accounts. Segregation simply means that customer deposits can’t be mixed with the firm’s own money or used to cover firm expenses. They must always be available for customers to trade with or withdraw at a moment’s notice. During that time MF Global customers have found themselves locked out of reduced equity in their accounts. Worst of all, even MF Global customers who held no open futures positions and only cash and unencumbered assets, have found those assets under the control of the bankruptcy trustee.
The trustee is struggling to find the money, calling the record keeping “sloppy” There are stories that JP Morgan and others “might be” involved in the ratlines.
The litmus test will be how much equity shows up in the accounts of actual customers. And more importantly, can those customers access that money or transfer to other firms. Anything else is a charade.
To any thinking person, this has all the hallmarks of a systemic-loss-of-confidence event. This is well put in a letter sent to bankruptcy judge Martin Glenn, who is handling the MF Global bankruptcy. There has been little good coverage on this in the Lame Stream Media. Forbes, and especially Robert Lenzner, has stayed on this story. Lenzner writes convincingly that the CFTC has a loophole that actually permits firms to gamble clients’ segregated accounts. Most of the real coverage is, as usual, in the blogosphere. From Lenzner:
In Re: MF Global, Inc. Case No. 11-02790 (MG) (SIPA)
Re: The reputation of the United States
Dear Judge Glenn:
Our firm is a registered introducing broker with the CFTC. I have written to you previously on behalf of our customers. Here is a comment this morning from one of our former customers in Europe: “I will never do business in the United States of America again.”
The system to protect futures accounts is broken. And the whole world knows it. What started as a failure of one FCM that quickly gave a black eye to the CFTC and especially the CME has now made our United States of America a very bad joke to commodity futures traders all over the world.
The problem this morning is not just excess margin equity. The problem this morning is the reputation of the United States of America.
Thank you very much for your time and for listening.
Very Truly Yours,
HL Camp, Proprietor, HL Camp Futures
The CME Group has first line regulatory responsibility for insuring basic fundamental protections for customers. To say that they failed is putting it lightly. Now after fiddling while Rome burns and no doubt witnessing the beginning of a run on other firms, the CME has decided to respond with a financial guarantee of sorts to see if they can unplug the log jam. Assuming that the vast majority of people still expect rule of law and decent conduct, this is put up or shut up time.
…thinking this is an outlier rogue firm and is not a widespread issue would be highly wishful thinking on anybody’s part.
The litmus test will be how much equity shows up in the accounts of actual customers. And more importantly, can those customers access that money or transfer to other firms. Anything else is a charade. One might speculate that these clowns would have the outcome calibrated and that this is more than a PR gimmick. Gimmicks now will have deep and long lasting blowback effects. You should note that so far governmental strategy has been to try and let this one quietly die. No doubt that’s because MF Global’s chief mucky muck Jon Corzine was often mentioned just three months ago as Presidente Hopium’s replacement at Secretary of Treasury for Timmy ” Turbo Tax” Geithner. The “regulator” at CFTC is another corruptos, Gary Gensler, a Goldman Sachs crony and associate of Jon Corzine.
I had a residual account at MF Global. I was originally referred to Lind Waldock by Charles Schwab (who apparently failed their due diligence on MF Global). I had used Lind Waldock for years. Then suddenly it became Refco, then recently MF Global. Many MF Global accounts were Schwab referrals. I noticed the commissions were too high, and was gravitating to OptionsExpress which is a Schwab company with cheaper commissions for futures trading. I had some positions left at MF Global and rather than go offline for a week transferring the account I was letting the positions run off.