U.S. Regulators' Epic Fail

Most readers of The Motley Fool don't have a futures trading account for dealing in contracts for commodities like wheat, butter, and cattle. So perhaps it's easy for many investors to gloss over what's going on at MF Global (OTC: MFGLQ) right now.

I'm not referring to the fact that MF Global went bankrupt, nor am I thinking about the missing $600 million. What's got me worked up right now is the fact that billions of dollars of customer money at MF Global has been frozen, and those customers have been left grasping at straws, begging the company's bankruptcy trustee to release those funds.

Imagine this
You wake up Monday morning to find that your stock broker has gone belly up. Your life savings is with that broker -- your funds for retirement, college savings for your kids, perhaps a down-payment for a house. You try calling a telephone number posted on the broker's website and are told simply that the bankruptcy trustee is working through the books and that it's unclear when you'll have access to your money.

Or, worse, imagine you find out your bank has gone under. Again, your funds are frozen and nobody's able to tell you when you might see them. Meanwhile, bills are due, your mortgage payment is coming up, and, oh yeah, you'd like some groceries this week.

Fortunately, equity investors and bank depositors don't have to worry about these scenarios. The Securities Investor Protection Corp., or SIPC, guarantees up to $500,000 for securities, while the Federal Deposit Insurance Corp., or FDIC, steps in with up to $250,000 per account to protect depositors at failed banks.

As a result, when my online broker, E*TRADE (Nasdaq: ETFC  ) was teetering due to a terrible foray into the housing market, I didn't feel any need to flee to another broker. Likewise, when Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) were on the brink, depositors didn't have to panic.

Not so for futures traders
There is no guardian angel for futures traders that's ready to step in and backstop the customer accounts of a failed futures broker. There's no insurance fund sitting around waiting to make right the wrongs of that failed broker.

But customers didn't feel they had to worry about that. The funds of customers at a futures broker are kept in segregated accounts. Some of the money in those accounts can be used to earn interest for the broker, but the funds are under no circumstances supposed to be commingled with the company's money or used to provide funding to the broker.

The word seen most often to describe these segregated funds is "sacrosanct" -- defined by Merriam-Webster as "most sacred or holy."

Blasphemy!
The initial outrage over the MF Global bankruptcy was that these supposedly sacrosanct funds were apparently violated by MF Global. A cool $600 million went missing from the customer accounts and it's yet to be determined what was done or where that money went. But there is speculation that MF Global used customer money as last-ditch financing in its final throes before succumbing to bankruptcy.

At this point, though, thousands of MF Global brokerage customers care far less about the missing money -- which represents roughly 11% of total segregated accounts funds -- and far more about the fact that they've been locked out from what is still in the accounts. This has been particularly infuriating for customers who were the most conservative, since open securities positions have been transferred, but those with hefty amounts of cash in their accounts had been stiff-armed by bankruptcy trustee James Giddens until very recently.

Not academic
This is affecting a huge cross-section of people and having major real-world consequences.

In a letter to the bankruptcy judge, trader "C. Howard" writes: "I had a futures account with MF Global. Trading is my job and I can't work while all excess margin equity remains frozen."

Walter Augustine has a similar tale, writing: "As a small trader I rely on my daily activities for a living. Without the funds from my MF Global account I am dead in the water."

Howard Feldman wrote to the judge on behalf of his 85-year-old mother, whose funds have been locked up by the MF Global mess:

As the segregated accounts remain frozen as of this writing, my business and personal life have been tremendously affected in that these are my elderly mother's assets. In this day and economy where jobs and income are essentially impossible to find, I respectfully plead with the compassion of the court to allow for immediate access to our funds to allow our businesses and lives to continue.

But it's about even more than small traders that have been put out of work and people whose life savings have been tied up (as if that's not enough). As trader Edward Heming wrote to the judge, liquidity in the futures markets has the potential to impact all of us:

[It] is of the utmost importance that this release is acted upon in a timely manner to ensure that customers conduct business and provide liquidity to the futures markets. Although the effect of reduced futures liquidity may not be readily visible, ultimately what we pay in the grocery store and at the gas pump is largely influenced by the liquidity of the markets.

The Progressive Farmer interviewed Marty Klinker, a small Montana farmer who's been squeezed by not having access to the excess margin funds he had in his MF Global account. He's worried that his problems are likely echoed all over the country:

This is me, a small farmer from Montana. Contemplate the situation of a large elevator in Montana that backs all of their hedged-to-arrive contracts (HTAs) with futures. Someone with 10 million bushels on HTA back on the Kansas City or Minneapolis exchanges and no margin money could be in deficit by $5 or $6 million. How many elevators or commodity merchants are in similar situations across the heartland?

In other words, there may be many commodities producers gritting their teeth and dealing with the lack of access to their funds at MF Global, but if the issue persists and margin deficits mount, there could be market dislocations as they scramble to address the shortfall.

But that's not all. Major futures exchanges like the CME Group (NYSE: CME  ) and IntercontinentalExchange (NYSE: ICE  ) rely on transaction fees. A big drop in volume due to futures traders' money being locked up could be bad news for their businesses. And when you consider that futures contracts -- like equity options -- are inherently leveraged, the money locked up at MF Global has the potential to drive a truly massive amount of trading volume. In that light, it's no wonder that CME Group has offered to put up as much as $300 million to help expedite the return of funds to MF Global clients.

Help on the way?
Today, the bankruptcy judge approved a motion to release $520 million to thousands of MF Global customers that had cash-only accounts. This would represent 60% of the value of those accounts and is expected to happen "within a matter of days" (according to The New York Times). This is absolutely a step in the right direction and adds to the initial $1.5 billion that was transferred shortly after the bankruptcy.

However, this still leaves substantial question marks for customers whose accounts weren't all cash, but had substantial amounts of excess margin. It also leaves a very significant amount of the all-cash customers' assets tied up -- and, again, around 89% of the customer segregated accounts appear to be accounted for.

Further, there are considerable concerns surrounding how the rest of the claims process will unfold. Time is of the essence for many of those affected, and customers are worried that "nimble" and "quick" aren't adjectives to describe Giddens, who has spent more than three years unraveling Lehman Brothers. There are also concerns mounting for many customers that their supposedly sacrosanct accounts could end up getting converted to unsecured claims and they will have to fight tooth-and-nail with other creditors like JPMorgan Chase (NYSE: JPM  ) and Bank of America.

The significance of this is huge for the U.S. futures trading industry. If customers of brokerage firms suddenly feel that they can't trust the safety of the funds they have with their brokers, then they'll start pulling their accounts, potentially hampering liquidity in the futures markets. This would have a direct effect on financial markets, but through the widespread use of futures by companies throughout the economy to hedge certain exposures, this could produce a chill for the broader economy as well.

Rules are supposedly on the books to prevent a mess like this from happening. As of right now, it would appear that those rules failed miserably. It's time for a change.

If you have any information to share about the MF Global situation, the team at The Motley Fool is all ears. You can email tips@fool.com or call 703-254-1546.

The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (38) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 17, 2011, at 6:18 PM, terracomm wrote:

    this is easy.

    we know there will be no regulation, so there must be insurance similar to FDIC.

    and an instant claims process.

  • Report this Comment On November 17, 2011, at 6:23 PM, xetn wrote:

    In fact, there is really no protection due to regulations or regulators, because they always act after the fact. Any fool that relies on regulators to protect their investments is a "greater fool".

    The problem is that regulations and regulators give a false sense of security. You should only rely on your own due diligence. If you are not comfortable with that, then you should not be in the markets. Ultimately, it is completely your responsibility and your money.

  • Report this Comment On November 17, 2011, at 7:14 PM, brokeassbroad wrote:

    That is akin to saying that if you get hit by a car and the ambulance takes your hat but leaves you lying in the road, it's your own fault. It's your body, so it's your responsibility to get it to the hospital.

    It's pretty atrocious that we've all come to expect, and learned to accept shoddy protections from the powers that be.

    Blaming the victims? Jeez, I thought we resolved that 30 years ago...

  • Report this Comment On November 17, 2011, at 7:19 PM, whereaminow wrote:

    Is this actually a problem of regulation or a problem in the court system? It must be terrible to have your funds locked up while this works through the courts, but I don't see what you think regulation could do here. In the case of FDIC, the bank no longer has the actual funds to repay depositors. The FDIC "replaces" those missing funds. In this case, the funds in question aren't missing, they are frozen while the courts work it out. That's a completely different situation.

    In regards to the FDIC, it actually has no impact on the monetary loss from a bank failure. It just spreads out the loss over a wider group of people (everyone who uses dollars). It's not exactly insurance either, since the pool of people pay for the losses (through monetary inflation, the ultimate source of the money to repay depositors) must do so without ever having signed any contract or reading the fine print (in fact, they don't even put in the fine print that the losses are recouped through monetary inflation.) It's more like extortion to prop up a flawed system.

    The FDIC is a political solution, not an monetary solution. The same amount gets lost. It just doesn't take down the politicians and the inept CEOs with it.

    David

  • Report this Comment On November 17, 2011, at 7:25 PM, CaptainWidget wrote:

    Insuring account ensures customers don't give a damn whether their bank is solvent or not. Kopp said himself, when E-Trade was in trouble, he felt no urgency to withdraw his funds. The insurance kept him in a bad business deal, letting bad business proliferate.

    Bad businesses need to die, they don't need to be insured.

  • Report this Comment On November 17, 2011, at 7:34 PM, TMFKopp wrote:

    @CaptainWidget

    The problem is that if everyone simply gets spooked and flees based on rumor or unfounded fears, then it can be a self-fulfilling prophecy. And with, say, a retail bank, I don't think it's anywhere near reasonable to expect Ma and Pa Average Joe to be able to do the diligence necessary to figure out whether it's a safe bank.

    Matt

  • Report this Comment On November 17, 2011, at 7:36 PM, CaptainWidget wrote:

    <<The problem is that if everyone simply gets spooked and flees based on rumor or unfounded fears, then it can be a self-fulfilling prophecy. And with, say, a retail bank, I don't think it's anywhere near reasonable to expect Ma and Pa Average Joe to be able to do the diligence necessary to figure out whether it's a safe bank.>>

    Why not? Your average american consumer knows more about their baby stroller than they do their bank. The only reason why is their forced to initial their own due dilligence. People are a lot smarter than they're given credit for, and in the presence of the correct incentives, we'd have a country full of financial experts.

  • Report this Comment On November 17, 2011, at 7:43 PM, TMFKopp wrote:

    @whereaminow

    "In this case, the funds in question aren't missing, they are frozen while the courts work it out. That's a completely different situation."

    Well, not entirely true. There is around $600 million missing and the cause is yet unknown. The trustee has frozen the rest of the funds to avoid potentially distributing money that isn't actually there. If there were an insurance fund, that fund could be stepping in right now to guarantee the missing funds so that all of the client funds could be distributed ASAP.

    That CME has stepped up with a $300m guarantee shows how important it is for the industry at large to get those funds back into the hands of futures traders. It also suggests the willingness of futures-market participants to embrace an insurance fund.

    Matt

  • Report this Comment On November 17, 2011, at 7:47 PM, TMFKopp wrote:

    @CaptainWidget

    "Your average american consumer knows more about their baby stroller than they do their bank."

    Your average american consumer is also overweight and has precious little saved for retirement.

    Matt

  • Report this Comment On November 17, 2011, at 7:55 PM, CaptainWidget wrote:

    So what? You think fat people aren't capable of figuring out their finances? I don't get the implication....

    People don't know anything about their finances because they're incentivized not to. The FDIC says "Don't worry about reading your banks balance sheets, trust us" so Americans do. They have nothing saved for retirement because they're incentivized not to. The federal government says "Don't worry about saving for retirement, trust us", so Americans do.

    The incentives are perverse. I think the correct term is "moral hazard". But when incentivized to look after themselves, do research, and work hard, Americans will do that. I don't think as lowly of Americans as you do apparently....

  • Report this Comment On November 17, 2011, at 8:03 PM, TMFKopp wrote:

    @CaptainWidget

    "They have nothing saved for retirement because they're incentivized not to. The federal government says "Don't worry about saving for retirement, trust us", so Americans do."

    Umm... not so much... a big part of it is that for so long private industry took care of employees through pensions. I don't know of anyone that says, "Oh, I'm not saving b/c I'm going to get Social Security."

    "I don't think as lowly of Americans as you do apparently...."

    Interesting place to take that.

    Bottom line is that financial analysts that devote their life to working with this kind of stuff get it very wrong. That you're assuming that the average consumer can do a stand-up job b/c they can manage to buy a stroller is beyond ridiculous.

    Matt

  • Report this Comment On November 17, 2011, at 8:29 PM, Mega wrote:

    "Likewise, when Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) were on the brink, depositors didn't have to panic."

    I don't advocate panic, but the FDIC doesn't appear to be capable of handling the collapse of a bank that big - at least not "smoothly".

  • Report this Comment On November 17, 2011, at 8:34 PM, TMFKopp wrote:

    @MegaShort

    "I don't advocate panic, but the FDIC doesn't appear to be capable of handling the collapse of a bank that big - at least not "smoothly"."

    Yeah, great thought. I was actually thinking the same thing as I wrote that and it's very likely true. But the fact is that there wasn't mass panic and the *whoosh!* of deposits out of those two. Which would have been a pretty scary scenario.

    Perhaps in that case it was just the illusion of security, but at least there was insurance that was supposed to be there.

    Matt

  • Report this Comment On November 17, 2011, at 8:59 PM, lowmaple wrote:

    When I read that someone had their 85 yr old mother's savings in a futures account I wonder if we have to tell people not to lie down on the freeway.

  • Report this Comment On November 17, 2011, at 9:47 PM, TomBooker wrote:

    So does this clean-up complete the ICE account transfers?

    This is ICE's letter filed. They had to borrow a boatload of money to get these moved to other Clearers with margin

    https://www.theice.com/publicdocs/futures_us/exchange_notice...

  • Report this Comment On November 17, 2011, at 11:22 PM, CaptainWidget wrote:

    <<"Oh, I'm not saving b/c I'm going to get Social Security.>>Get out of your bubble......there's millions of Americans for whom this is exactly the case.

    <<Bottom line is that financial analysts that devote their life to working with this kind of stuff get it very wrong. That you're assuming that the average consumer can do a stand-up job b/c they can manage to buy a stroller is beyond ridiculous.>>

    Right, so a well informed American what, needs to simply read the reports to be exactly as well informed as the financial analyst. There's many professions in this country that revolve solely around distilling complex information and explaining it in lay terms to the consumer.

    Financial Analysis, in the utopia of personal responsibilty, would be no different. People sorting through expert advice, filtering out the noise, and making good choices for themselves (rather than handing over their money to a stranger and hoping for the best). Right now, there's no reason to find a good bank because, if you make the wrong choice, there's no repercussions. This gives bad banks liquidity, propping up whatever sorts of shenanigans they can get away.....moral hazard......maybe you've heard of it.

    You seem to think people aren't capable of making their own choices and doing their own due dilligence, I disagree.

  • Report this Comment On November 18, 2011, at 12:16 AM, TMFKopp wrote:

    @CaptainWidget

    I can only say that I sure hope you don't get your way. I wouldn't look forward to having to hold many different banking and brokerage accounts to hedge against any one of them going under and costing me my deposits / life savings. I also wouldn't be particularly fond of the increased propensity for liquidity crises at banks and brokers as skittish depositors would be ready to rush to the vaults to pull their money at the least whiff of trouble -- rumor or not.

    The insurance is a cost to the entire system, but in exchange there is much increased stability and security for customers.

    Matt

  • Report this Comment On November 18, 2011, at 1:13 AM, Merton123 wrote:

    I had never even heard of MF Global until this scandal occurred. I heard of Charles Schwab, Vanguard, Fidelity, and Merryil Lynch. None of these firms encourage future trading, trading on margin, and so-forth. The people who flocked to MF Global must have been the real risk takers (i.e., the son who invested his elderly Mom's money in a brokerage account). When investing crosses the line into gambling then don't be surprised that the brokerage house starts acting like a casino. I personally have a brokerage account with Vanguard and can tell you that they don't encourage in any way the type of trading (i.e., gambling) that occurred at MF Global. Mert

  • Report this Comment On November 18, 2011, at 1:20 AM, TMFKopp wrote:

    @TomBooker

    "So does this clean-up complete the ICE account transfers?"

    I think the short answer to this is "no."

    Today's action by Judge Glenn was a step in the right direction. 60% of the cash in *cash only* accounts was released. That amounts to $520 million. Now there's some fog of war around some of the numbers involved here, but couple that with the $1.5 billion or so that was previously released and I think there's still potentially $3+ billion of *customer money* still locked up at MF Global.

    Now I'm not sure what of that relates specifically to ICE positions, but, as to my knowledge here are a few instances of what's still locked up:

    1) For open positions, 60% of margin collateral was xferred, so 40% of that remains behind.

    2) For cash-only accounts, 60% will be xferred, leaving 40% behind.

    3) Excess margin remains behind. I.e., if you had only a couple of positions, but a ton of cash in your account, 60% of the collateral associated with those positions has been xferred, but 100% of the cash over and above the collateral for those positions remains behind.

    Matt

  • Report this Comment On November 18, 2011, at 1:28 AM, TMFKopp wrote:

    @Merton123

    It's very tempting to think about it that way. And as a conservative, dividend-loving investor myself, I can definitely see where you're coming from. And, to be sure, I'm sure there was a good amount of gambling that went on with customers at MF Global.

    On the other hand, like equity options, bonds, real estate, and so on, futures can be a legitimate way for people to diversify their savings.

    Further, just as there are professional traders and market-makers that help the stock market click along, there are the same in the futures market. Many of these folks operate independently and, if they worked through MF Global, are getting walloped.

    Finally, most importantly, you don't have to look far at all to see how widely used futures are to manage risk at a whole range of companies -- think Kraft, Southwest Airlines, or Kellogg.

    From Kellogg's 10-K:

    "Our Company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. Primary exposures include corn, wheat, soybean oil, sugar, cocoa, paperboard, natural gas, and diesel fuel. We have historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months."

    In a similar way, much smaller producers -- like the farmer mentioned in the article -- do the same thing.

    This is a world that straight equity investors (like myself) think about rarely, but it's a *very* important arm of the financial markets.

    Matt

  • Report this Comment On November 18, 2011, at 1:31 AM, TMFKopp wrote:

    Oh, and to add ^

    "The people who flocked to MF Global must have been the real risk takers"

    The real issue here is that even if they were, there are regulations on the books that absolutely prohibit the broker from using client funds to fund itself. Though the investigation still churns on, it appears that this may have been exactly what happened.

    While you or I may not agree that trading futures is the best way to invest, the bottom line is that their money should be protected per the existing regulations.

    Matt

  • Report this Comment On November 18, 2011, at 3:59 AM, Stonewashed wrote:

    Imagine this

    You wake up Monday morning to find that the bank that ordered work from you after having been bailed out decides it is in their investors best interest not to pay you hundred of thousands of dollars. A large part of your cash flow is tied up on that bank's job -- your union employees wages, benefits and dues college savings for your kids, and money for the vendor supplies. You try calling a telephone number of the GC, the owner of the building and their lawyers told simply that their on vacation in Europe or simply don't return the call. When they finally do return the call they want to renegotiate the price of the contract. In the mean time they want you to use your line of credit to pay costs associated with this job. The union wants all benefits for their employees deposited anyway, but in no way, will help pressure those involved to get you paid, while at the same time running jobs with illegal immigrants with a few card carrying members out of suitcases full of cash. The shareholders think this is just good business and get to reveal in those institutions reporting stellar earnings during the same time period.

    While you may or may not agree that a company should have trusted the largest financial institutions in the world to pay their bills, the bottom line is this is the status quo these days. How does it feel to investors when the shoe is on the other foot?

  • Report this Comment On November 18, 2011, at 5:42 AM, CaptainWidget wrote:

    <<I can only say that I sure hope you don't get your way. I wouldn't look forward to having to hold many different banking and brokerage accounts to hedge against any one of them going under and costing me my deposits / life savings. I also wouldn't be particularly fond of the increased propensity for liquidity crises at banks and brokers as skittish depositors would be ready to rush to the vaults to pull their money at the least whiff of trouble -- rumor or not.>>

    It's not as if this problem was never thought of until 1913, there used to be private clearing houses that functioned in the exact same manner as the FDIC, providing liquidity to banks who's depositors drew past the banks fractional holdings. And since the liquidity channels were private (and thus culpable for bad debt, forcing them to watch price signals and avoid excessive risk) there's no moral hazard. Bad businesses die, good businesses thrive, bank runs don't kill banks, and depositors become more well informed about where their money is sitting. Sounds like a win/win

    If your best argument for upholding a tremendous moral hazard is that's it's less convenient for you...well...I have no retort. It probably is less convenient.

  • Report this Comment On November 18, 2011, at 6:05 AM, shakazoid wrote:

    Trading futures or contracts is not gambling like 'merton123' suggested. They actually help control prices of commodities from oil down to what & cotton. It helps manufacturers hedge against unusual price increases of raw materials in order to sell their finished products @ a relative steady price without passing cost to consumers. Be thankful we have them if not you might pay $10 for loaf of bread one day and then $20 next day. They regulate prices against unusual fluctuations.Please kindly read about them b4 you comment on their importance.

  • Report this Comment On November 18, 2011, at 6:06 AM, Stonewashed wrote:

    Matt writes:

    <i>"The real issue here is that even if they were, there are regulations on the books that absolutely prohibit the broker from using client funds to fund itself. Though the investigation still churns on, it appears that this may have been exactly what happened.

    While you or I may not agree that trading futures is the best way to invest, the bottom line is that their money should be protected per the existing regulations.

    Matt"</i>

    There are rules on the books that corporations and the government should pay their bills in a timely manner, within the terms of the contract. These rules have not been enforced for decades and anyone who does take it upon themselves to enforce it can expect to pay hundreds of thousands in legal fees and in NYC know that the judges are bought and paid for by the ones breaking the rules, or have complicated the rules to such an effect as to "legally" not having those rules apply to them.

    Most of the real estate in this country, in particular large malls, is being managed and built in this manner, with the exception of a very few. You don't like it, tough. There are plenty of money launderers out there to do the work.

  • Report this Comment On November 18, 2011, at 10:06 AM, THEMATHISNEAR wrote:

    The fact that the government can't do the basic things that it HAS to do makes things like government-run healthcare even more ridiculous. If the government can't do what's already on its plate, adding more doesn't help.

  • Report this Comment On November 18, 2011, at 10:50 AM, DJDynamicNC wrote:

    @Whereaminow: "Is this actually a problem of regulation or a problem in the court system? It must be terrible to have your funds locked up while this works through the courts, but I don't see what you think regulation could do here. In the case of FDIC, the bank no longer has the actual funds to repay depositors. The FDIC "replaces" those missing funds. In this case, the funds in question aren't missing, they are frozen while the courts work it out. That's a completely different situation."

    I don't know if we've ever agreed before, but you're absolutely right.

  • Report this Comment On November 18, 2011, at 10:52 AM, DJDynamicNC wrote:

    "The fact that the government can't do the basic things that it HAS to do makes things like government-run healthcare even more ridiculous. If the government can't do what's already on its plate, adding more doesn't help."

    To be fair, we don't really give the government the resources to do its job properly. If you look at a branch of the government that is given ample funding and support - the military - you find an extremely effective organization.

    If we spent that kind of time and money on domestic investments, I imagine you'd see some pretty serious improvements in the delivery of government services.

    Honestly though, the fact that I can reliably get a letter anwhere in a continent-wide country in two days for 44 cents is pretty damn impressive, if you ask me.

  • Report this Comment On November 18, 2011, at 12:57 PM, nickjob wrote:

    Why isn't Corzine in jail? Since he was the one who encouraged the $ 6.3 bln Eurozone bond investment, then it's obvious that when he got in trouble, he made a desparate move by grabbing customer account cash. Is this story going to turn out to be another good old boy gets off and they put the blame on some low MF underling? Smells of Lt. Calley at My Lia (Vietnam,1968). Why is it that the Generals always go free? Secondly, why has the mainstream press swept this under the rug? Is it because Corzine was close to Obama and Biden? Must be since he was supposedly in line for Secretary of Treasury. Wow! We could have had an egomaniacal thief running Treasury. I guess the real question is When will the good people of this country step up to the plate and stop this self serving, despicable behavior?

  • Report this Comment On November 18, 2011, at 1:06 PM, DJDynamicNC wrote:

    ^^ Exactly. That's why we're Occupying. The rule of law should apply to ALL Americans, not just the working class.

  • Report this Comment On November 18, 2011, at 1:49 PM, TMFKopp wrote:

    @nickjob

    "Why isn't Corzine in jail? Since he was the one who encouraged the $ 6.3 bln Eurozone bond investment, then it's obvious that when he got in trouble, he made a desparate move by grabbing customer account cash."

    Whooooooa there! It's way too soon to use a word like "obvious." The idea that Corzine gave the go-ahead to use client funds to backstop MF is one of the theories at this point, but just a theory. If that turns out to be the case, I can't think of a good reason why he doesn't go to jail.

    But we have to wait until the investigators figure out exactly what happened here first. You can't punish somebody for a crime before you even know what the crime is.

    I think one of the most interesting questions will be whether Corzine faces jail time if the missing funds *weren't* due to a last-ditch funding effort. That is, if they were fraudulently misappropriated at a lower level of the company and Corzine didn't necessarily know about it. Under SarbOx, and the idea that the CEO signs off to take responsibility for the company's finances, it would seem that he should be punished for that as well.

    Matt

  • Report this Comment On November 18, 2011, at 3:06 PM, whatevmatil wrote:

    I hesitate to blame regulators for the bad actions of others. It is similar to expecting cops to catch a robber in the act and stopping the robber every single time a 7-11 is robbed. Now, if it comes to light that regulators had all the details and didn’t act on it and therefore screwed up, then they are ALSO and PARTLY to blame. But ultimately the blame goes on the 7-11 robber, who decided to do the bad action.

    I read an article the other day stating that there are legal uses that MF Global could have used the customer cash for. I am kicking myself now as I cannot locate it, but apparently brokers can use customer cash to invest in government and other sovereign securities to generate extra income for the broker. As these securities are generally perceived to be low risk, this appeared be a safe practice. But since the government debt markets are crapping out in some areas/ways, this could now be a problem, perhaps an unforeseen consequence of allowing brokers to invest customer cash. This is at least one theory as to where the missing cash went, I guess we will find out the real reason as all the legal stuff plays out.

    All the best,

    whatevmatil

  • Report this Comment On November 18, 2011, at 3:23 PM, Merton123 wrote:

    Thanks Matt for your followup on my posting. I learned a lot. You are right that there is a place for future trading, trading on margins and so-forth. Farmers use the future market for a legitamate business purposed of securing a price for their crop. Kraft Foods as you pointed out uses these trading techniques for legitamate business purposes.

    MF Global appears to have been doing a lot of speculative type trading based on what your original article states. MF Global attracted similiar type of traders that also appear to have been involved in speculative type of trading. The corporate culture that is encouraged in that type of environment as in Enron probably generated large profit but when the markets when south the margin calls were called in and the day of reckoning occurred.

    Berkshire Hathaway also had a trader that was involved in insider trading. He was asked to leave and he did.

    We need hedge funds to provide liquidity to the markets. When speculative fever (gambling) takes over legitamate investing then sooner or later the other shoe falls in my opinion.

  • Report this Comment On November 18, 2011, at 3:31 PM, TMFKopp wrote:

    @Merton123

    You're right on. Internally MF Global took on a lot of additional risk and it precipitated all of these problems. There needs to be a real close, hard look at whether a broker that customers are relying on should be taking risks like that.

    Matt

  • Report this Comment On November 18, 2011, at 3:36 PM, TMFKopp wrote:

    @whatevmatil

    "I read an article the other day stating that there are legal uses that MF Global could have used the customer cash for."

    This is correct. Under CTFC rule 1.25, there are allowable investments that a futures broker can make with segregated customer funds to earn interest for itself. The argument in support of this is that the broker can earn extra money this way and it's a mechanism to keep commissions lower. And, assuming the investments are low-risk enough, there is little worry of losing big money there.

    Could this be where the missing $600 million went? It's possible for sure. But the head-scratcher here is that if the loss of customer funds simply related to a bad above-the-board bet with segregated funds that was allowable under 1.25, then that should be readily apparent in MF Global's books. But it's not. As of right now, that missing money appears to be "whoosh gone magic trick" missing, as opposed to "oops bad bet" missing.

    Matt

  • Report this Comment On November 18, 2011, at 3:39 PM, reflector wrote:

    it is growing increasingly clear to people that our financial institutions are not to be trusted.

    it is not safe to keep money in any bank or account, nor even holding cash which is being destroyed by the ravages of fed-inspired inflation.

    only holding real physical assets, such as gold and silver bullion, provide protection against dishonesty and theft at the highest levels of our governmental and financial institutions.

  • Report this Comment On November 18, 2011, at 4:29 PM, whatevmatil wrote:

    Yes thats the rule I read about. Interesting, I wasn't aware that the money was outright missing as in not apparent on the books (I just figured "the man" hadn't figured out where it went yet). Perhaps managment spent the money on the Groupon IPO?

  • Report this Comment On November 18, 2011, at 5:16 PM, TMFKopp wrote:

    @whatevmatil

    "Perhaps managment spent the money on the Groupon IPO?"

    Or spa coupons from Groupon daily deals?

    :)

    Matt

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