Friday, November 4, 2011

Could MF Global Be The Lehman/AIG Event Trigger?

 Segregated reserve bank accounts under SEC Rule 15c3-3:  The SEC Act of 1934 requires broker dealers to maintain "special reserve bank accounts" strictly for customers which are separated from the broker dealer's own accounts.
First off, I just want to say that if Jon Corzine does not see jail time over this then our system is seriously corrupt and fraudulent and we're all a bunch of lifeless serfs if we don't join the Occupy movement to protest the raping and pillaging our country by a select few.  That's the bottom line.

The brokerage accounts of MF are being moved to several different brokers who are presumably on sound financial footing.  Here's the problem:  it looks like there must be some missing collateral associated with those customer accounts to the tune of about $1 billion:
Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must post some $1 billion in additional collateral to new brokers almost overnight, or be forced out of their trades.
In other words, a large portion of the collateral that should be attached to each and every one of those accounts is not accounted for and the customer will have to pony up the funds to cover the margin requirements or have their accounts liquidated. Here's the story:  LINK  Tragically, if the markets for the various commodities and metals associated with those accounts experience some downside volatility during the transfer process, the account could be wiped out.  I know of at least one fund that is closing down because of this. The ONLY failure on this guy's part is that he trusted the firm being run by Jon Corzine, former Goldman CEO and former Governor of New Jersey.  I guess if you lie down with dogs you wake up with fleas.  In this case, if you lie down with someone who is BOTH a Wall Street executive AND a politician, you wake up with a combination of late-stage pancreas cancer and hep-C.

The bigger problem, at least for the rest of us, is what the hell happened to the collateral.  The missing collateral should be cash - readily liquid - and futures contracts and securities - mostly liquid.  Where is it?  Why are these customer accounts not being transferred intact?  According to the SEC Act of 1934, these funds and securities should have been in a separate account - not one penny of money should be unaccounted for.

I have said a few times that when one big financial firm starts doing something and gets away with it, they all start doing it.  Remember the repo game Lehman was doing to dress up its quarterly balance sheet for regulators and investors?  It turns out every big Wall Street firm does this, everyone knows it now and the regulators are doing nothing about it.  Well it turns out that MF was doing this too, among other things. But they were also likely illegally rehypothecating the customer collateral and misappropriating the funds obtained by rehypothecating customer collateral.  Now the collateral and the funds are gone.

Once people understand what hypothecation/rehypothecation is - if they care about their money they will, that is - the MF situation could lead to a confidence crisis in the brokerage industry.  Almost everyone who opens a margineable brokerage account, from little guys to sophisticated hedge funds, knowingly or typically unknowingly also signs a hypothecation agreement, which enables the brokerage firm to take the securities in your margin account and re-pledge them as collateral to obtain bank financing for your margin account.  It looks like MF was taking this collateral and obtaining financing but using that money for other purposes - like investing in short term Greek sovereign paper paying 50% now that pays 100%, which means MF's investment was wiped out and now the bank that provided the funds for those investments has the customer securities as collateral for the MF trade and the customer is screwed.  Please note, I don't know for sure that is exactly what happened, but I'm 90% certain that is generically what was going at MF and why at least $700 million in customer cash and $1 billion in collateral is missing and possibly more.

You know, if we were on a gold standard and did not have an extreme fractional banking system, this couldn't happen.  But I digress.  I will say that based on the most recent news flowing out of Jeffries securities, if you have an account there I would move it.  Jeffries was downgraded by Egan-Jones recently to BBB-.  S&P has not budged.  Usually the ratings agencies are way behind the curve in downgrading financial firms.  Moodys usually keeps a high rating intact until the day before a firm goes under.  Egan-Jones is typically a bit more ethical and forthright with putting out the truth.  The fact that  questions are being raised about Jeffries should raise the hair on the back of your neck if you have an account there.  Jeffries has an unsavory history and culture.   The current CEO originally worked as a junk bond trader directly for Michael Milken at Drexel Burnham.  Remember that saga?  A lot of ex-Drexel guys who didn't get thrown in jail ended up at Jeffries.  If you keep your brokerage account there just remember that "when you lie down with dogs..."


  1. Ron Paul is the only hope for this country.

  2. I totally think that is could be the trigger. It's amazing to me and not that it's broken that JPMorgan is involved all I can go is wow!

    Now, what will happen, will there be criminal charges? Like you, if there isn't then our system is toast.

  3. I don't know about any of you, but when I was a kid I'd hear stories about life in 3rd world countries, like Mexico, where corruption was just part of life. It was how their systems worked. You'd reach into your wallet, take out a few bucks, hand it to the man so you could move on.

    Corrupt is corrupt and slightly corrupt is no different than "seriously" corrupt.

    It's like somebody telling me in the last election that they voted for "the lesser of the two evils" (excuse me while I puke)

    If America has joined the ranks of countries like Mexico, which the most obvious indicators appear that it obviously has, then incidents like Corzines, if left unpunished, will verify and validate corruption as the norm. It's a hard pill to swallow because it means you'll have to start living your life under a whole new set of rules... or non-rules.

    Kind 'a sheds a new light, or dark, on financial forecasting, doesn't it?

  4. Off topic but relevant...

    Professor Murray Sabrin admits Ron Paul is silenced by the media because of the Federal Reserve!

    Go Murray!

  5. A little corruption is like being a little such thing...the problem is the US is like Octomom!

    Karl Denninger - MF Global and OWS - Crony Capitalism = Theft

    The SIPC does not have allot of funds backing up stock and futures accounts. We could easily have a run on the SIPC resulting in total failure. We talk about criminal activity and moral hazard as people use a backstop to fleece people..

  6. Dave - looks like the CME has raised maintenance margin requirements on ALL commodities:

    Looks like it's a consequence of the MF Global issue. Dominoes falling?

  7. Chilton, Gensler good cop, bad cop difficult but not criminal. Just don't see through the curtain and sue the CTFC for constructive collusion in theft.

    We should do an even deeper data dive, that we shouldn’t just accept, nor should the CME accept, the bottom line total on a balance sheet that says that these funds are there. The CME and us, we need to see what’s behind that to make sure that the money is there because what we have learned is that when we went in last week to make sure the customer was there, that just like Jagger sings, ‘We got no satisfaction.’