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The debt bomb just got bigger

The amount of debt worldwide is more than all of the bank accounts in the world, and the current financial situation in Cyprus is the inevitable next phase: Confiscation.

All pretense is now gone that central or global bankers can ‘securitize’ growth by packaging and repackaging debt; by hypothicating and rehypothicating debt; by regulating and rergulating debt. Since the bond market rally began in the early 1980s (yes, it’s that old) each crisis has been met by central and global bankers – the IMF, EU and ECB, to name a few – and their Wall St. and City of London brethren with an increase in debt, and an extension of the debt’s maturity.

The result has been – as of 2007 – the biggest mountain of on-balance sheet and off-balance sheet debt in history: A staggering $220 trillion in debt in America’s $14-trillion economy alone (when you include all public, private and contingent liabilities of unfunded entitlement programs). Deals in the global debt derivatives market now stand in excess of $1 quadrillion, riding above a global GDP of approximately $60 trillion.

But starting in 2007, and then becoming spectacularly apparent in 2008 with the Lehman collapse, the ability of the world’s taxpayers to pay either the interest or principal on this debt has hit a brick wall. And for several years now, governments around the world have tried the same old tricks of ‘extend and pretend.’ Repackage and extend the maturity, and pray that tax receipts start picking up enough to pay some of the debt off. It didn’t work. The debt bomb just got bigger. Now in Cyprus we see the inevitable next phase: Confiscation.

To pay off the debts that were incurred to finance the biggest wealth grab in history, we see in Cyprus, as well as central and global banking institutions around the world, a trend to just reach in and grab people’s money from their ‘insured’ bank accounts. We should have figured out this was coming when JP Morgan (read: Jamie Dimon) reached in and illegally stepped ahead of customers at MF Global and grabbed over $1 billion, with the help of his crony pal Jon Corzine.

Have we learned our lesson yet? They have more debts to pay than there is money in all the bank accounts in the world. This means that chances are, you – whoever you are, and whatever country you live in – will have a sizable percent of your savings stolen by banksters.

Since the crisis hit (and for several years leading up to it) we’ve been recommending on ‘Keiser Report’ to put as much money as you can in gold and silver. Our advice then and now is: The only money you should keep in a bank is money you’re willing to lose.

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JP Morgan Managed to Get Its MF Global Money Before Bankruptcy

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Dino Grandoni

Those farmers, traders, and other assorted customers of busted trading firm MF Global probably won’t like hearing the news that JP Morgan got money it was owed, on the day before it filed for bankruptcy, The New York Times reports. And even worse in the hunt for the missing $1 billion in customer funds after the collapse of former New Jersey governor and Goldman Sachs CEO Jon Corzine‘s trading firm, The Times reports that the  “roughly $200 million that JPMorgan Chase received is said to be entirely customer money.” There were other transfers to other, unspecified trading partners on October 28, the day before MF Global filed its bankruptcy papers, as well, the paper reports. Meanwhile, customers have only gotten back a third of their money and are short roughly $1.2 billion. For its part, JP Morgan apparently questioned the source of the money itself, asking for assurances that it wasn’t coming from customers (which it didn’t get).

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MF Global Looted Customer Accounts

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By Stephen Lendman

Heads should roll. Don’t bet on it.

Wall Street’s business model is grand theft. Jon Corzine was MF Global‘s CEO. Earlier he headed Goldman Sachs, America’s premiere racketeering organization.

He also was one of legions of corrupt politicians as US senator and New Jersey governor. His extreme, longstanding criminality warrants putting him in prison for life. No restitution can reverse his harm. It’s true also for many others like him.

Before its collapse, MF Global (MFG) faced a run on its holdings. On October 31, it filed for Chapter 11 bankruptcy protection.

On November 19, Reuters said the firm “moved hundreds of millions of dollars in customer money from its US brokerage unit to Bank of New York Mellon Corp. in August, just months before filing for bankruptcy….”

In other words, MFG lawlessly looted customer accounts. It used client money for its own purposes to speculate, as well as cover debt obligations and losses. At issue is grand theft.

In fact, it’s one of the most brazen acts in memory in a business notorious for outrageous criminality. What ever’s gotten away with incentivizes Wall Street crooks to steal more. Why not! At most, they’re slap on the wrist punishments mock rule of law justice.

On November 19 on the Kaiser Report, Barry Ritholtz commented on the big lie, hyper-leveraged banks, the MFG scandal, and congressional political whores, saying:

People responsible for creating these problems shift blame to others. Facts say otherwise. Wall Street speculators take big risks. They use hyper-leverage that’s only effective when it works.

“Their models were wildly optimistic. Banking is supposed to be very boring.” Decisions are supposed to be made about who’s credit worthy and who isn’t. Instead, reckless speculation replaced investing and sound lending policies.

Wall Street’s ideology is bankrupt, “and it’s causing global damage to the economy. For investment banks, the five biggest houses got waivers on leverage rules.”

SEC collaborators rigged the system for them. These banks also “happen to be the five biggest donors to Congress,” or among the largest. Over time, successful lobbying removed everything affecting profits, no matter the risk. The SEC, Fed, FDIC and CME rigged the system for them.

Brazen fraud became standard practice. Criminals deserving prison keep stealing. The dirty game involves grabbing “whatever the hell you want and run for the hills. No one will prosecute you.”

“MF Global is another order of magnitude. If anyone is going to jail over this whole period, it has to be” their top officials. Don’t bet on it, especially a power broker like Corzine.

He’s directly responsible for stealing $1.2 billion in client funds. He looted them brazenly. According to Bloomberg:

“Examiners from CME Group Inc., the world’s largest futures exchange, found unexplained wire transfers” and $1.2 billion “during the weekend the failing broker was talking with possible buyers, a person briefed on the matter said.”

Multiple investigations began, including by Justice Department lawyers. The Commodity Futures Trading Commission (CFTC) and Chicago Mercantile Exchange (CME) were responsible for overseeing MFG. They knew what went on but did nothing.

Huffington Post writer Daniel Dicker said the Koch Brothers were tipped off in time to get out safely. Others weren’t as lucky.

MFG is America’s eighth largest bankruptcy, the first major one the Eurozone crisis caused. Expect more ahead.

Practices cratering economies in 2008 continue. Nations teeter on bankruptcy. Corzine bet heavily that Spanish and Italian debt wouldn’t collapse.

Using 40 to 1 leverage, he bet massively the wrong way. His second quarter $190 million loss drove investors away. Those remaining lost everything. Corzine and top executives pocketed millions.

In 1999, he was worth an estimated $400 million when he left Goldman Sachs. Perhaps its double that now, including funds looted from MFG. We may know more later on.

From 1994 – 1994, Corzine headed Goldman Sachs during the time banking became deregulated. Carter began it late in his tenure. Reagan did much more. Clinton completed unfinished business. James Petras calls the 1990s “the golden age of pillage,” the decade of anything goes.

It persists in the new millennium because political Washington and regulators look the other way, profiting handsomely by doing it. Everyone feathers nests belonging to others. Self-sustaining corruption continues. Only little people and unknowing investors get scammed. Power brokers make out like bandits.

After losing his 2009 gubernatorial reelection bid, government regulators welcomed Corzine back on Wall Street. New York Fed president William Dudley (a fellow Goldman alumnus) made MFG a “primary dealer.” Despite its size and a former trading scandal $10 million fine, it became one of a handful of firms marketing US Treasuries.

At the behest of Corzine and other power brokers, CFTC head Gary Gensler suspended implementation of new rules imposing limits on broker-dealer use of client funds, especially for foreign sovereign debt. In other words, they were freed to commit grand theft. MFG took full advantage.

Wall Street Journal Money & Investing editor Francesco Guerrera wrote about “Three Lessons From the Collapse.” He quoted University of San Diego Professor Frank Partnoy, saying:

MFG’s “failure illustrates how much financial markets are about trust and confidence. Once you lose those, you are done.”

Guerrera’s three lessons include:

  • closing accounting loopholes and strengthening oversight;
  • establishing lead regulators for nonbank financial firms; and
  • writing new rules for “nonsystemic” firms as well as “too big to fail” ones.

Dodd-Frank financial reform left a broken system in place. The entire law needs rewriting. Better still, scrap it and start over. Stiff regulations with teeth are needed, including mandatory prosecution of crooks, especially those highest up to let others know invulnerability days are over.

When culpable CEO heads roll, it’ll be a good start. However, game-changer differences won’t happen until all high level Wall Street swindlers wear numbered striped suits.

Trends forecaster Gerald Celente lost $100,000 in an MF Global gold futures account. He told Russia Today:

“I really got burned. I got a call,” saying “I needed to have a margin call. (W)hat are you talking about,” he asked? “I’ve got a ton of money in my account. They responded, oh no you don’t. That money’s with a trustee now.”

His advice for everyone holding gold ETFs is cash out because “they are going to steal all our money.” Angry about MF Global’s theft, he called Corzine a “cheap SOB.” He’s that and much more.

“How come he’s not in Jail,” railed Celente. It’s “because he’s one of the white shoe boys from the Goldman Sachs crowd.” He added that “the merger of state and corporate power” brought “fascism” to America.

The entire system’s too corrupted to fix. Only tearing it down and starting over can work. It’s high time the process started. Hopefully, OWS protests began it.

Rumor has it that JPMorgan Chase and perhaps other Wall Street banks are involved. Judge Martin Glenn is handling MFG’s bankruptcy. HL Camp, Proprietor of HL Camp Futures , wrote him as follows:

“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,” saying:

“I will never do business in the United States of America again.”

According to Camp, “(t)he system is to protect futures accounts is broken. And the whole world knows it.”

“What started as a failure of one FCM (Futures Commission Merchant) 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.”

Forbes staff writer Robert Lenzner said traders and clients didn’t know about MFG’s unscrupulousness. He said a CFTC loophole lets firms speculate with segregated client accounts. Few know it without carefully reading contract fine print or getting sound legal advice.

Lenzner’s lesson one is CFTC Rule 1.29 must be scraped. It lets futures commission merchants gamble with client funds.

Lesson two is knowing personal funds aren’t safe in futures metals, energy, precious metals, or agricultural

futures accounts.

Lesson three is resolving which regulator oversees firms like MFG – the CFTC or CME. One should have primary responsibility and be held accountable for fraud.

Lenzner added that Justice Department attorneys are determining whether federal crimes occurred. He expects a lengthy process because MFG’s books “are in a state of chaos,” deliberately no doubt.

Whether anyone ends up indicted isn’t sure. At most perhaps, expect lower level patsies hung out to dry to let crime bosses like Corzine stay free to steal more. It’s how it always works.

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MF Global Revelations Keep Getting Worse

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Janet Tavakoli, Tavakoli Structured Finance

  • Shortfall estimated at $1.2 billion or more (up from $600 million)
  • “Repo-to-Maturity” is a “Total Return Swap-to-Maturity,” a Type of Credit Derivative
  • Probable Shortfalls Throughout 2011
  • Jon Corzine to Credit Derivatives Head: Next Time “Double Up”
    JT Note: Subsequent to this report Jim Parascandola told me that he was never
    told to increase the size of any position, albeit his trades were profitable.
  • Regulators Waive Required Tests for Jon Corzine
  • Questions About How MF Global Became a Primary Dealer
  • MF Global Wrote Rubber Checks for some Electronic Checks for Others
  • Tip-Offs for Some Customers?
  • CFTC’s Gary Gensler Didn’t Act
  • MF Global Debacle Damages a Key Global Market

When MF Global collapsed on October 21, it was the biggest financial firm to collapse since Lehman in September 2008. Then Chairman and CEO Jon Corzine is connected to the head of one of his key regulators, the Commodity Futures Trading Commission (CFTC), through his former protégé at Goldman Sachs, Gary Gensler. He also knows the Fed’s William Dudley, a key member of the Fed’s Open Market Committee, from their days at Goldman Sachs. The Fed approved MF Global’s status as a primary dealer, a participant in the Fed’s Open Market Operations, just before Jon Corzine took its helm and beached it on a reef called leveraged credit risk.

MF Global’s officers admitted to federal regulators that before the collapse, the firm diverted cash from customers’ accounts that were supposed to be segregated:

MF Global Holdings LTD. “violated requirements that it keep clients’ collateral separate from its own accounts…Craig Donohue, CME Group‘s chief executive officer, said on a conference call with analysts today that MF Global isn’t in compliance with the rules of the exchange and the Commodity Futures Trading Commission.”

MF Global Probe May Involve Hundreds of Millions in Funds,” Bloomberg News – November 1, 2001 by Silia Brush and Matthew Leising

Cash in customers’ accounts may be invested in allowable transactions, and MF was allowed to make extra revenue from the income. But what isn’t allowed, and what MF Global apparently admitted to doing, is to commingle customers’ money with its own and take money from customers’ accounts to meet margin calls on MF Global’s own allowable transactions. Even if all of the money is eventually clawed back and recovered, this remains an impermissible act. Moreover, full recovery–even if it is possible–is not the same as restitution. People have been denied access to their money, and businesses and reputations have been tarnished.

In layman’s terms, you may buy a Rolls Royce with customers’ excess cash, sell it at a profit, and pocket part of the profits. You may buy a Rolls Royce and try to resell it at a profit with your firm’s cash. But you aren’t allowed to take customers’ money to make the car payments on your firm’s Rolls Royce. If one engages in this impermissible activity, it becomes almost impossible to cover up if you have an accident driving your Rolls Royce.

Implausible Denial and an Ugly Surprise

On November 1, Kenneth Ziman, a lawyer for MF Global, relayed information from MF Global to U.S. Bankruptcy judge Martin Glenn in Manhattan: “To the best knowledge of management, there is no shortfall.” If that sounded like a cover-up, it was, unless of course you prefer to believe that the “best knowledge” of management is actually no knowledge at all.

How long does it take to find more than $600 million to $1.2 billion of customers’ money? MF Global’s books seem so messed up that one person couldn’t have created this chaos alone. A lot of people had to agree to throw away controls, standards, and procedures. I doubt this happened just in the final week or two before MF Global blew itself up.

“According to a U.S. official, MF Global admitted to federal regulators early Monday [October 31, 2011] that money was missing from customer accounts. MF Global acknowledged a shortfall in a phone call amid mounting questions from regulators as they went through the firm’s books.”

MF Global’s Collapse Draws FBI Interest,” by Devlin Barrett, Scott Patterson, and Mike Spector, WSJ, November 2, 2011

The initial bankruptcy estimate was a shortfall of around $600 million. As of Monday November 21, MF Global’s liquidating trustee believes the shortfall may be as much as $1.2 billion and possibly even more

“Repo-to-Maturity” is a “Total Return Swap-to-Maturity,” A Type of Credit Derivative

If you call a total return swap-to-maturity a “repo-to-maturity,” you are much less likely to freak out regulators. Many regulators still remember that Long Term Capital Management (LTCM) used total return swaps (among other things). Jon Corzine should remember, too, since he was closely involved with LTCM when he headed Goldman Sachs. In September of 2011, FINRA seemed to catch on that MF Global’s transactions were riskier than it previously thought and asked for more capital against these trades.

Part of AIG’s acute distress in 2008 was due to credit default swaps, another type of credit derivative, linked to the risk of shady overrated collateralized debt obligations. The basic problem was risk on fixed income assets that could only go down in value combined with lots of leverage.

I’d like to interject a side note. I understand that some pundits tried to say that the New York Times’s Gretchen Morgenson was incorrect when she wrote MF Global was felled by derivative bets. She is correct. The pundits leaped to the conclusion that when she referred to credit derivatives and “swaps” that she meant credit default swaps, but she was referring to total return swaps, a type of credit derivative. (Later in the article she discussed a different topic, lack of transparency in credit default swaps, another type of credit derivative.)

MF Global’s problematic trades were different from AIG’s, but they were also derivatives, in fact, they were a form of credit derivative. The “repo-to-maturity” transaction was just a form over substance gimmick to disguise this fact. Specifically the transactions are total return swaps, a type of credit derivative, and the chief purpose of these transactions is leverage.

A total return swap-to-maturity includes a type of credit derivative. It allows you to sell a bond you own and get off-balance sheet financing in the form of a total return swap. Alternatively, you can get off-balance sheet financing on a bond with risk you want (but do not currently own so there is no need to sell anything) and take the risk of the default and price risk. (Price risk can be due both to credit risk and/or interest rate risk.) This is an off-balance sheet transaction in which the total return receiver (MF Global) has both the price risk and the default risk of the reference bonds. In this case, MF Global had the price risk and the default risk of $6.3 billion of the sovereign debt of Belgium, Italy, Spain, Portugal, and Ireland. As it happened, the price fluctuations of this debt in 2011 weren’t due to a general rise in interest rates, they were due to a general increase in the perceived credit risk of this debt.

Repo transactions are on balance sheet transactions, but they don’t draw as much scrutiny from regulators. There was just one little problem. MF Global wanted the off-balance sheet treatment of a derivative, a total return swap, but it didn’t want to call it a total return swap, so it used smoke and mirrors. Even if MF Global engaged in a wash trade at the end (if there is no default in the meantime) to buy back the bonds, MF Global would receive par on the bonds from the maturing bonds. The repurchase trade at maturity is a formality with no real (or material) economic consequence.

In other words, the “repo-to-maturity” exploits a form-over-substance trick to avoid calling this transaction a total return swap. Accountants paid by the form-over-substance seekers and asleep-at-the-switch regulators will sometimes, at least temporarily, go along with this sort of relabeling.

The fact that MF Global was exposed in a leveraged way to default risk and liquidity risk because of these transactions and that the risk was- linked to European sovereign debt was disclosed in MF Global’s 10K for the year ending March 31, 2011, a required financial statement filed with the SEC. The CFTC and other regulators had the information right under their noses, but it appears they didn’t understand that they were looking at a leveraged credit derivative transaction that could lead to margin calls that MF Global would be unable to meet.

See Also: “Credit Derivatives and Leverage Sank Jon Corzine’s MF Global,” by Janet Tavkaoli, Huffington Post, November 4, 2011,

The result is that yet another large financial institution has been felled when it couldn’t meet margin calls due to the credit risk of fixed income assets combined with high leverage in an off-balance sheet transaction. The ugliest part of this story, however, isn’t that MF Global got in over its head, it’s that the bankruptcy trustee estimates customers’ money to the tune of $1.2 billion or more is still missing.

Probable Shortfalls Throughout 2011

MF Global reportedly employed 35:1 leverage–some reports are 40:1–against a portfolio comprised around 20% of European Sovereign risks including Belgium, Italy, Spain, Portugal, and Ireland. MF Global would have had several trading days in 2011 with moves of 5% to 10% on this sovereign risk. MF Global was so thinly capitalized that this trade alone could eat up half of its capital. Any of MF Global’s other asset positions moving the same way in 2011’s highly correlated markets would have put MF Global in a position of negative equity. From a risk management point of view, examiners have to consider the very strong possibility that MF Global had several negative equity days throughout 2011.

How did MF Global meet margin calls throughout 2011? It seems an investigation into money flows throughout 2011 is in order.

By the end of October, the combination of a $90 million August legal settlement against MF Global coming due, increased capital calls by FINRA, and margin hikes from counterparties worried about MF Global’s credit made it impossible for MF Global to cover up its shortfall.

Regulators Waive Required Tests for Jon Corzine

Jon Corzine resigned as Chairman and CEO of MF Global on November 4, just days after the October 31 bankruptcy announcement. As a matter of corporate governance, holding the position of Chairman and CEO meant that Corzine had a lot of concentrated power with little oversight. Many question the wisdom of a corporate structure that allows officers to hold this dual position. (Ken Lewis, the former Chairman and CEO that merged Bank of America into the poorhouse held this dual role, too. Lewis defended this practice at the Federal Reserve Bank of Chicago’s Bank Structure Conference in 2003.) Corzine was the former governor of New Jersey and had been out of the active markets for twelve years. Prior to that, until 1999 he had been the CEO of Goldman Sachs.

The Financial Industry Regulatory Authority Inc. (FINRA) gave Jon Corzine a waiver from his Series 7 and Series 24 exams when he took the helm of MF Global in March 2010. The former is required for anyone involved in the investment banking or securities business including supervision, solicitation, or training of persons associated with MF Global, and that included Corzine. As an officer of MF Global the latter was required for Corzine, since he had been out of the business for around 12 years or more than six times the 2 year expiration date for reactivating these qualifications.

Jon Corzine to Credit Derivatives Head: Next Time “Double Up” (See note below)

The test waiver by regulators seems to be blatant cronyism, because Corzine not only hadn’t been involved in the day-to-day markets for more than a decade, his responsibilities at MF Global included active decision making. The waiver wasn’t justified. Corzine reportedly authored the strategy for the MF Global killing trades, and he also had authority on the trading floor.

Jon Corzine pushed traders to increase their risk. According to an MF Global employee, Corzine knelt down beside Jim Parascandola, head of credit derivatives trading, and told him that next time he should “double up” on his winning protection bets on brokerages. Traders loved Corzine, because he pushed them to increase risk. Now the traders aren’t lifting offers, they’re pounding the pavement.

Update: Subsequent to this report Jim Parascandola told me that he was never told to increase the size of any position, albeit his trades were profitable.

MF Global Becomes a Primary Dealer Unregulated by the Fed: How Did That Happen?

MF Global’s financials were shaky ever since Man Group spun it off in 2005 and saddled it with a lot of debt. Yet MF Global was added to the Fed’s list of 22 primary dealers in February 2011, just before former Goldman CEO Jon Corzine officially came on board. Primary dealers buy and sell U.S. treasuries at auction and are a counterparty to the Fed’s Open Market operations.

William C. Dudley is the president and chief executive officer of the FRBNY. He is also vice chairman of the Federal Open Market Committee (FOMC) and VP of the Markets Group, which oversees open market and foreign exchange trading operations and provisions of account services to foreign central banks and manages the System Open Market Account. Dudley is a former partner at Goldman Sachs (1986-2007), and he was Goldman’s chief economist.

David Kotok of Cumberland Advisors has raised important questions about the fact that the Fed has dropped its role of surveillance of primary dealers, and his commentaries are available here.

Besides trading treasuries, the big benefit to primary dealers is the perception that the Fed will provide funding to primary dealers during a systemic liquidity crunch. Just before Bear Stearns imploded, the Fed changed the rules so that non-U.S. banks, along with brokers that were primary dealers (as MF Global later became), were allowed to borrow through a program called a Term Securities Lending Facility (TSLF) to finance mortgage backed securities, asset backed securities, and more. TSLF’s start date was too late to help Bear Stearns, and the program has now been discontinued, but the perception of a Fed safety net has precedence.

Why did the Fed award prestigious primary dealer status to a shaky operation like MF Global, an entity it does not regulate?

MF Global Stalled and Wrote Rubber Checks: Did Some Customers Get Better Treatment?

The week before the bankruptcy, when customers asked for excess cash from their accounts, MF Global stalled. According to a commodity fund manager I spoke with, MF Global’s first stall tactic was to claim it lost wire transfer instructions. Instead of issuing an electronic check or sending an overnight check, MF Global sent paper checks via snail mail, including checks for hundreds of thousands of dollars. The checks bounced. After the checks bounced, the amounts were still debited from customer accounts, and no one at MF Global could or would reverse the check entries. The manager has had to intervene to get MF Global to correct this, and still hasn’t gotten the entries corrected. Reuters’s Matthew Goldstein reported more in “MF Global and the Rubber Check.

I thought that was bad enough, but on November 10 I was a guest on Stocks & Jocks, a Chicago radio show, when Jon Najarian said that a large broker he knows got a $400,000 electronic check from MF Global the Friday before that bankruptcy, and the check cleared. If that’s accurate, MF Global treated some customers differently than others.

Tip-Offs for Some Customers?

In August, customers started pulling billions of dollars out of their segregated accounts with MF Global. It was the biggest outflow of funds since January 2009. The bankruptcy trustee may clawback transfers of funds from MF Global as it was teetering, because it is likely that employees within MF Global were well aware of the problems and tipped off key customers.

Yet Gary Gensler, head of the CFTC, did not investigate or begin transferring accounts out of MF Global before the bankruptcy, and that is unprecedented for the CFTC. Given that Gary Gensler was a protégé of Jon Corzine at Goldman Sachs, one should question why Gary Gensler didn’t act and why he should be allowed to remain head of the CFTC.

CFTC’s Gary Gensler Didn’t Act

Gary Gensler, Jon Corzine’s former Goldman Sachs colleague and current head of the Commodities Futures Trading Commission (CFTC), had reason to be concerned about MF Global’s risk management. In early 2008, a rogue trader racked up $141.5 million in losses in unauthorized trades that exceeded his trading limits. It seems he accomplished this in under seven hours. In August of this year, MF Global and the underwriters of its 2007 initial public stock offering (IPO) agreed to pay around $90 million to settle claims by investors that they were misled about MF Global’s risk management prior to the rogue trader’s actions. Since 2008, MF Global’s financial condition has been nothing to brag about. Now the settlement is in jeopardy due to the bankruptcy. [Michael Stockman, the chief risk officer of MF Global as of January 2011 (after the previous mentioned incident) was in my Liar’s Poker training class lampooned by another classmate, Michael Lewis.]

In the past, the exchanges and CFTC “always” moved customer positions before a Futures Commission Merchant (FCM) declared bankruptcy. The CFTC had ample reason to have contingency plans for MF Global based on publicly available information. Yet the Gensler-led CFTC hasn’t followed this historical precedent when an FCM led by his former Goldman colleague teetered on the edge of bankruptcy. Gensler has recused himself from the CFTC’s probe of MF Global.

The exchange-traded futures markets have been shaken to the core. The Bankruptcy Code apparently conflicts with the Commodity Exchange Act, so customers of MF Global have less protection than one might expect. The Securities Investor Protection Corporation (SIPC) is not the FDIC. Account holders have no idea how long it will take to get back all of their money, if it is there to be recovered, and right now, it appears a lot of it cannot be found. This is why many traders sweep all of the excess cash out of their accounts each day, and only put in cash when required.

MF Global Debacle Damages a Key Global Market

The “risk wizards” of Goldman Sachs once again look like market wrecking balls. The futures market is a globally connected market and it is a key mechanism for farmers, metals miners, and metals fabricators (among others) to hedge their risk. Confidence in the futures market has been shaken. No one knows if their money is safe, but what is more disturbing is the appearance of crony capitalism once again giving favored treatment, lax regulation, and absent oversight to a crony capitalist that abused all of these perks to blow up a large financial firm and damage a key global market.

This commentary is available in pdf form by clicking this link.

Read more posts on Tavakoli Structured Finance »

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MF Global trustee doubles estimates of shortfall

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By Nick Brown and David Sheppard

(Reuters) – The shortfall of commodity customer funds at MF Global Holdings Ltd (MFGLQ.PK) may be around $1.2 billion, about double initial estimates from regulators, the trustee liquidating the company said on Monday.

The news was a blow to customers still hoping to get more of their cash out of frozen broker accounts and raised new questions about why the authorities managed to locate only about 60 percent of the segregated customer funds three weeks after the parent firm’s October 31 bankruptcy.

“I’m flabbergasted,” said Tom Ward, a retired Chicago Board of Trade member whose two sons cleared their futures trades through MF Global and have been blocked from accessing their money. “The bottom line is, there’s going to be a haircut involved. It’s devastating, what this has done to the industry.”

Monday’s announcement was trustee James Giddens’ first public statement on the size of the shortfall, which regulators initially said was about $600 million.

Regulators are investigating what happened to the money and whether MF Global may have improperly mixed customer money with its own — a major violation of industry rules. No charges have been filed.

Hours after the statement, the bankrupt MF Global parent filed court papers along with JPMorgan Chase & Co (JPM.N), one of its key lenders, seeking the rare appointment of a separate trustee to take over the company’s assets in bankruptcy.

Such appointments are reserved for cases in which a company’s executives are accused of wrongdoing or when it may otherwise be in the estate’s best interest. JPMorgan, which pledged $8 million of its collateral to keep MF Global afloat during bankruptcy, agreed to increase that pledge to $26 million if a trustee were appointed, according to the filing.

The request is on the agenda for a hearing tomorrow afternoon in U.S. Bankruptcy Court in Manhattan.

An MFGlobal spokeswomen declined to comment on the case.

QUESTIONS RAISED

In Monday’s statement, Giddens said he currently controls about $1.6 billion of the brokerage’s funds that he can use to pay back customers. His plans to pay back 60 percent of customer funds by early December would nearly exhaust that amount.

The sharply higher estimate of the shortfall raises questions about the investigation, said Tim Butler, an attorney for a group of customers demanding a fuller payback.

“What did the CFTC know three weeks ago and what do they know now?” Butler said. “If the amount has changed that much over three weeks, where did the money go? What were (regulators) looking at before?”

Leaders on Capitol Hill have entered the fray with calls for hearings and accountability.

Sen. Chuck Grassley, R-Iowa, said the CFTC should “do everything possible” to get more information to customers on the status of their funds. The call comes as angry farmers and ranchers across the country begin to reconsider a livelihood in the market and how they hedge future crops and livestocks.

“Unlike the big banks, the average farmer who lost money in this fiasco can’t afford to hire an attorney and attend proceedings in a Manhattan courtroom,” Grassley said in a statement.

MF Global was run by former Goldman Sachs & Co Inc (GS.N) chief and New Jersey governor Jon Corzine before its bankruptcy. The Chapter 11 filing came after the New York-based company revealed it made a $6.3 billion bet on European sovereign debt. Corzine resigned on November 4.

On Sunday, Reuters reported that, based on initial reports of what was supposed to be segregated for customers, the trustee appeared to be keeping about $3 billion on hand to cover the shortfall.

Customers had been clamoring for more specifics, saying that was too large of a cushion — a notion Giddens rejected.

“Restoring 60 percent of what is in segregated customer accounts … would require approximately $1.3 to $1.6 billion to implement,” or nearly all the money at the trustee’s disposal, he said.

Giddens previously transferred more than $2 billion to other brokers, giving most customers access to a portion of their funds.

Sen. Pat Roberts, R-Kan., said legislators should call on Corzine to testify about his former company’s actions. Roberts said in a statement on Monday that the Senate Committee on Agriculture, Nutrition and Forestry should hold a special hearing on the matter.

If the trustee does exhaust the funds he now controls, his focus would shift to going after monies that may belong to the brokerage, but may be tied up in foreign depositories, or may be part of the shortfall, Giddens spokesman Kent Jarrell said.

“We can’t distribute money we don’t have, but we do have legal means for going after other assets,” Jarrell said.

INVESTIGATION CONTINUES

The Commodity Futures Trading Commission and other regulators are investigating MF Global.

CFTC Commissioner Jill Sommers refused to speculate on how the $1.2 billion figure might compare with earlier estimates.

“From the very beginning we have tried as much as possible to never use a figure, out of fear that it’s not right,” said Sommers, who has been leading the agency’s investigation into MF Global after Chairman Gary Gensler recused himself from the probe because of his ties to Corzine.

“Until the final reconciliation (of accounts) is done, you don’t know what the shortfall is.”

CME Group Inc (CME.O), operator of the clearinghouse for most of MF Global’s customers, declined to comment.

Commodity customers say they have more questions than answers about MF Global’s collapse and the safety of their money.

Sean McGillivray, vice president of Great Pacific Wealth Management, still has about $5 million tied up in MF Global for his customers. He was aware of the latest estimates of the shortfall, but wants exact figures.

“It would be in the best interest of all clients, brokers and anyone else caught in this mess to know just how much has been transferred … and how much is supposed to be there,” he said. “You could do this with an abacus and it would take less (time).”

A spokesman for the Commodity Customer Coalition in Chicago, which represents more than 7,000 former MF Global customers, said it was unclear how much of the trustee’s estimate related to possible co-mingling of customer money.

Some of the missing money could be tied up overseas, said spokesman John L. Roe.

“We’re hopeful given what was accounted for initially that more of the money will be found and that the trustee will work with us on an expedited claims process for customers,” he said.

INVESTORS REACT

In a sign that even distressed investors are losing faith in a decent return, MF Global’s bonds fell to an all-time low below 30 cents on the dollar, according to Tradeweb, down more than 5 cents on the day. The $325 million in 6.25 percent notes were issued at par in August.

Some investors have targeted other financial institutions. Two pension funds have sued seven banks, including Bank of America Corp (BAC.N), JPMorgan and Goldman Sachs, over prospectuses that allegedly concealed the problems that led to MF’s collapse.

The trustee’s case is In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790.

The MF Global bankruptcy is In Re MF Global Holdings Ltd, in the same court, No. 11-15059.

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