I try to not do apocalyptic posts because I do not want to unduly alarm our readers. But I can’t dodge this one because I believe the subject is genuinely disturbing.
I apologize for springing this on you all at Thanksgiving — a time when we should all be enjoying being with family and friends, instead of worrying about our finances and the condition of our country’s economy.
On October 31, 2011, MF Global, a huge global financial derivatives broker, declared bankruptcy. In so doing, it became the largest Wall Street firm to collapse since the Lehman Brothers incident in September 2008, and the 8th largest bankruptcy in U.S. history.
As a financial derivatives broker, MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting. MF Global was also a primary dealer in United States Treasury securities.
The Wall Street Journal reported that MF Global filed for Chapter 11 bankruptcy protection after its misguided investment of more than $6 billion in sovereign bonds issued by some of Europe’s most indebted countries. That is bad enough. But it gets worse.
MF Global broke its (and the U.S. government’s) rules on keeping customer money separate from its own trading accounts, and used some of its clients’ funds to invest in sovereign bonds issued by indebted European countries. When that investment went bust, leading to MF Global’s bankruptcy, lost too are the clients’ assets the brokerage wrongfully had used for its investment.
Here’s a timeline of what happened:
- On August 31, 2011, MF Global had $7.3 billion in customer assets, according to Commodity Futures Trading Commission (CFTC) data.
- On October 25, 2011 MF Global reported a $191.6 million quarterly loss as a result of trading on European government bonds.
- In response, Moody’s and Fitch cut the company’s credit rankings to junk.
- Through the weekend of October 29/30, the firm’s board met in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. MF Global’s CEO Jon Corzine, — a Democrat, former U.S. Senator, former New Jersey governor, and former Goldman Sachs chief executive — reportedly tried, unsuccessfully, to find a buyer.
- MF Global was stopped from doing new business with the New York Fed until it showed it was able to fulfill its responsibilities as a primary dealer, according to a statement on the regulator’s website. Trading in MF Global’s stock was halted.
- On October 30, 2011, MF Global filed for bankruptcy.
- That same day, Oct. 30, one of MF Global’s units reported a “material shortfall” (translated: “missing cash”) in customer funds — a shortfall estimated by James W. Giddens, the trustee overseeing the wind-down of the brokerage, to be $1.2 billion.
- That same day, the parent company froze customer accounts with $5.45 billion. It is feared that MF Global Holdings Ltd. may have moved hundreds of millions of dollars from its futures client accounts to other accounts before its Oct. 31 bankruptcy.
- On November 4, 2011, Corzine quit MF Global.
- One of MF Global’s clients who lost money is Gerald Celente, the founder and publisher of The Trends Journal. Celente revealed that he has lost his gold futures funds (valuing more than six figures) that he had with Lind-Waldock, a commodities futures brokerage owned by MF Global.
- In papers filed in U.S. Bankruptcy Court in Manhattan, MF Global listed debt of $39.7 billion and assets of $41 billion. U.S. regulators have subpoenaed MF Global’s auditor, PricewaterhouseCoopers LLP, for information on the segregation of assets belonging to clients trading on U.S. commodity exchanges. The company is being investigated by regulators for money missing from client accounts. The U.S. Securities and Exchange Commission is also reviewing trades in MF Global Holdings Ltd. convertible bonds to determine whether some investors sold the debt based on confidential information before the firm’s demise.
On the subject of whether some investors had insider info before MF Global’s demise, Lew Rockwell writes on Nov. 16, 2011, quoting Gary North:
“Both the Commodity Futures Trading Commission and the Chicago Mercantile Exchange were charged with overseeing MF Global, their clearing member. If we are to believe them, they had no idea of any difficulties within the firm before customer accounts went missing just a few days before the collapse. But someone clearly knew of the cratering positions and imminent collapse of MF Global, as billions of dollars of accounts were “coincidentally” withdrawn, writes Huffington Post’s Daniel Dicker, noting how funds in accounts owned by the billionaire Koch brothers were withdrawn just in time, clearly suggesting that big players got a “heads up” that MF Global was going down.”
All of which led Gerald Celente, speaking to Eric King at King World News, to issue this warning to the public:
“What’s the take away from this? It’s to make sure you have every penny in your pocket. Because just like MF (Global) screwed everybody else, you’re also gonna get the shaft, I don’t care who it is. What’s gonna happen when you get a message from your brokerage, from Fidelity or somebody… You have ETFs [Exchange-traded fund]? Oh, there’s a little error over here, we don’t have your money. We don’t have your positions…. So the takeaway is to make sure you have every penny in your possession.”
The MF Global bankruptcy also prompted Ann Barnhardt, the president of Barnhardt Capital Management (a cattle and grain hedge brokerage), to take the unprecedented and heroic step of shutting down her firm and liquidating all customer brokerage and options accounts, so as to prevent losses in what she says is a system that “is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.”
“No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.
I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.“
Karl Denninger was the CEO of MCSNet in Chicago, one of the area’s first Internet providers. He is a founding contributer to conservative blog, The Market Ticker, and was one of the early members of the Tea Party movement. He now supports the Occupy Wall Street movement, and is the author of Leverage: How Cheap Money Will Destroy the World, November 2011. In his Market Ticker of Nov. 22, 2011 (h/t FOTM’s Joseph!), Denninger wrote:
“We’re done folks.
CNBC is reporting that there are now clients running out of the markets entirely because they do not believe their customer funds are safe.
That’s the end of it. The belief that there are more MF Globals has now taken hold. The thieves have pushed it too far and now we’ve got the start of a global liquidity run, and with good reason.
The authorities both in the regulatory side and on the prosecutorial side have refused to put a stop to the thievery and now the risk factors have turned into realized risk.
The market is done folks. You can be right but if you make your bet in the markets, are right, and then get screwed anyway when someone steals the money and nobody goes to jail there comes a time when people begin to understand that it can happen to them and will unless they depart the market.
We’re there folks.
Oh sure, there will be rallies and there will be selloffs. But there is no longer a market, there is no longer a thing to trade, and there is no longer a reason to believe that superior analysis will lead to profit or even safety.
This isn’t just about speculators – it is also about farmers, shippers, airlines, manufacturing concerns, everyone in business who has a need to hedge.
More than four years ago I said that the government had to step in and demand that both off-balance sheet games be ended permanently and in all forms and that all derivatives had to be put on an exchange, without exception, and that every dollar of underwater position had to be backed by an actual dollar of capital in real money, held and known to be safe.
The regulators refused and now it appears that what was put up on a regulated exchange was effectively stolen.
Well folks, then none of your investment accounts — not your IRA, 401k, not even your bank account — is safe.
Diversification is a strategy but the risk remains. It is up to you to decide how much you’re willing to risk losing to a crook. If the answer is “none” or you cannot reduce the at-risk portion of your assets to what you’re willing to lose to fraud then you can no longer participate in the market at all, in any form, nor even do business with a bank.
That sucks, but it is what it is and if this meme spreads — and it will until it’s stopped — we run the risk of a “sudden stop” economic event.
I hope you’re ready for it — I am to the best of my ability, and you ought to be.”
What this all means is the following:
- The contract between financial corporations like MF Global and the people is broken.
- The “little people” entrust their hard-earned cash to the corporation to manage, for a handsome fee. But, instead of stewarding their clients’ money, the corporation takes that money to invest in dubious vehicles, such as government bonds issued by heavily indebted countries — without their clients’ knowledge, much less permission. Put bluntly, this is theft.
- Our government is supposed to regulate and supervise the financial corporations’ activities. But the regulators, as in the case of Bernie Madoff, didn’t and do not do what taxpayers are paying them to do.
- The corporation’s investments go bust. It declares bankruptcy. Its clients’ monies have disappeared or are “frozen” (which means the same thing: You can’t withdraw your money from the institution).
- Bankruptcy means the corporation’s total debts are more than its total assets, which means there is no money to pay the clients. And since the various financial instruments offered by brokerages such as MF Global are not government-insured, this means the clients cannot recover their money, unless Congress decides to step in with a bail-out, which only means even more debt for an already broke United States of America.
This is not the first time a large financial institution has robbed and lost the money of its clients. Think the S&L crisis of the 1980s, the Madoff investment scandal in 2008. and the Lehman Brothers bankruptcy of 2008.
Nor is this the first time government regulators failed to do their job.
When institutions — financial and government — violate their compact with the people, basic trust erodes. But societies, especially highly complex societies like ours, cannot operate without a certain level of basic trust. In its place, we increasingly see short-sighted selfishness and rapacious greed. It’s every man for himself….
I’m not a financial adviser and I’m not offering any financial advice here. But if you have any money invested with brokerages, get professional independent financial advice. Better yet, learn about the various investment vehicles by reading and listening to financial advisers on talk radio. It’s not really that complicated. Then, THINK FOR YOURSELF.
On Nov. 23, 2011, a judge ruled that MF Global’s clients won’t be allowed to form a committee to represent their interests in bankruptcy court.
Gary Gensler, the head of CFTC — the federal government agency that’s supposed to oversee MF Global — just so happens to have worked under Jon Corzine when both were at Goldman Sachs.
Jon Corzine, who has been publicly silent since his brokerage’s spectacular collapse, has been asked to appear before the Oversight and Investigations Subcommittee of the House financial Services Committee on 15 December. Read about his hearing, here.