Tuesday, December 27, 2011

Was MF Global the canary in the coal mine?

Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal. 
My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.
Read the rest Gonzalo Lira
A Run On The Global Banking System - How Close Are We?
(h/t Zero Hedge)

Here's the clincher:
 ...I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.
From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the nearterm future.
More indication that distrust of the financial system is growing, and that doesn't bode well.


SchittReport said...

gonzalo lira is a good looking version of gerald celente.

Tom Hickey said...

Not commenting on its correctness. Just that a lot of people are mightily turned off by this fiasco.

A friend of mine had cash in his "segregated" account that he got partially stiffed on.

What I am hearing is, WTF! Who can you trust on Wall Street anymore.

And that is out here in Iowa. Not a good sign.

Again, whatever you think of Celente, he got stiffed and is letting everyone he can know about how corrupt the Street is,

The result is going to be the development of alternative systems as workarounds.

This also threatens the premier position of Wall Street and the City as centers of global finance. The state of NY depends on the Street for revenue, and the whole of the UK on the City.

The level of rehypothecation that MFG engaged in was illegal on WS so the transferred the operation to the City, where it was permitted. This transfer outside the US was part of the fine print of the account agreements. Perfectly legal, apparently.

Couple this with the fraud that Bill Black has been documenting and preaching about, and there is widely perceived problem that is now going viral.

Tom Hickey said...

I should clarify this a bit. This friend happened to be all in cash, no open positions at the time of the bankruptcy. Therefore, there could be no question of rehypothecation. Moreover, he did not have an equity account. He is a bond trader.

His account just disappeared at the time of the bankruptcy, and some time later he got a partial settlement from another company, not MFG nor CME, where his account had landed.

Now no one, including Corzine testifying before Congress, can tell where those funds went. MFG was a primary dealer, not some side show. Is this how we do business now?

Of course, TPTB are trying to pass this off as an isolated case and a fluke. But few and fewer people are buying into these explanations now.

Same thing for the GFC. No one was accountable, other than the bad government that forced innocents bankers to make loans to deadbeats who couldn't make the payments because they were too lazy to work.

Fool me once, shame on you. Fool me twice, shame on you.

SchittReport said...

tom, the incident will be swept under the carpet.

fact is, there have been no major repercussions to date and there won't be in the foreseeable future.

what will happen are some minor rule changes and a lot of campaigning to tell you that this won't happen again. until it happens again.

wall streeters are not so naive that they would believe that "segregated accounts" are sacrosanct. they may tell you WTF! how can this happen? blah blah but every player inside the biggest casino in the world knows it is the law of the jungle right now and it is a not an issue of fiduciary trust, it is about knowing the right people in the right firm to put your money into. after all they changed the rules so that you could basically "mortgage" the money in your segregated accounts if you are buying "safe" sovereign debt - what a joke. and if you have enough influence like the koch brothers, someone will tell you when your money is in danger.

i can tell you with conviction that no one will ever dare touch our money since ICBC is one of shareholders. unless they want to eat a bullet in the head afterwards. that is how you protect yourself in these times - it's sad but it's reality.

Matt Franko said...

Tom ran into a trader for Constellation Energy the other day and he expalined it thus...

Its like if there was a pawn shop and from inside, You heard two gunshots and then a guy comes running in with a bloody watch and you pawn it for him. Then he runs out the door and the cops nab him in the parking lot.

The victim is the MF account holders. The robber is MF Global. The pawn shop owner is the bank. and the cops are the exchange...

Now they have to straighten it out. The banks have the balances and the exchange is "on the hook".

This may turn into a battle between the banks and the exchange...


SchittReport said...

matt, you left out the most important players in the second part of the saga: the lawyers, the judges and father time. the "battle" you refer to is not between the banks and the exchange (or the victims) - it is between a bunch of lawyers.

look for a settlement sometime around 2032 when obama's son becomes president.

SchittReport said...

ps. roger altman's take on mf global, corzine and paulson.


no big deal - just regulate the shadow banking system better is what he is basically saying.

Matt Franko said...


What this kid said (he was sharp imo) was that if MFG had one client long and one client short then MFG was net flat as far as the exchange was concerned but.... they still had the two client's margin dollars, which to MFG was at that point a net asset which they could "take to the bank".

So in the past Commodity Brokers would take this asset to the bank and borrow a bit and invest in short term USTs (when they had a positive interest rate).

Short term UST interest rates are now effectively negative so Corzine tried to do the same thing but with Euro Sovereigns which pay higher interest rates.

He just bought OTR Euro sov bonds with a few months left to redemption which he felt that they would redeem at face at maturity (actually not a bad assumption imo) next year.

He over leveraged the trade.

the bonds moved against him and the banks shut him down. He was giving Bill Clinton $50k/mo and probably thought with the influence he was buying that JPM would never close him down.... he was wrong.

So the banks were in first position and now the exchange is holding the bag...... hence you big legal battle coming up...

This is what these people do for a living...


SchittReport said...

matt, good points re. influence & jpm. to jpm, mf is just another brokerage - they don't care.

corzine sorely over-estimated his influence(which probably explains why he thought he could turn mf into a i-bank cum hedge fund in the 1st place) and importance (he probably still doesn't realize that he is just another rich nobody after he got booted from the power spot at goldman).

jpm took him (and mf and shareholders, investors etc.) for a ride and mark my words again, nobody is getting a dime back from them until after a long legal process. by which point 1.2b will be worth 1.2m.

Matt Franko said...


Dont disagree.

Look for the CME to go to the govt to get the investors "bailed out" vice let the exchange members have to eat it if they think they cant get over on the banks...