Thompson Reuters News and Insight:
A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.
MF Global’s bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
[…]
Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy.
Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name — a legal loophole that may mean that MF Global clients never get their money back.
[my emphases]
Hey, I know! Let’s push for the International Criminal Court thingie next. I mean, national sovereignty is so jingoistic. Whereas internationalism — of the transnational progressivist kind — is so liberating!
Particularly if you’re other people’s wealth.
(Thank you. I’llbehearallweektrythevealanddontforgettotipyourserver!)
(h/t geoffB)
This is what my lefty-one-world-government cousin is always saying.
OBVIOUSLY, all of this “client money” is being redistributed from stupid rich white people to haitians.
right?
Well, how about that?
The only intelligent thing to do right now is to pull all your money out of brokerage firms. If I had any money in one, I would.
Here is one place that some legislation would be a really good idea. A regulation to prevent this sort of activity would seem to be pretty straightforward. However, we have a few people around here who know a heck of a lot more than I about this kind of thing, so perhaps they will chime in.
Democrats are the smarter ones you know. Leaders of …..something or other.
I just put all of my money into property. I am feeling pretty good about that decision.
What I don’t get about all the people on Wall Street is their complete lack of self interest. You would think the people working with the likes of Corzine would be somewhat self policing, simply because when things fall apart, they’ll be the first ones to take an axe to the forehead. And they’ll be the lucky ones.
Something I mentioned to Geoff by email is that I’m concerned with using (the entirely correct term of) hypothecation. Is collateralization perhaps more quickly grasped in order to spread this story?
That’s my feel as well. The one area that complicates this is that the clients agree to this in their contracts. Let me see if I can find the relevant section, okay, here:
Now, my understanding of contract law is that two parties can’t contractually agree to something that is illegal. So, I think statutory law could fix this but I’m no lawyer.
Notice how prior to this, Corzine was always touted as a brilliant and shrewd business mind, but once a couple billion dollars go missing on his watch, it is Bush’s fault, or his predecessors fault, or I don’t know what happened.
I’d be interested in Roddy’s take on the linked piece if he’s around today.
The drudge headline on this right now is priceless.
“Where is the money, MF?”
I’m curious why Corzine isn’t saying this.
If this is what happened, they’re essentially in the clear from criminal and civil suits. Yet, they’re not saying it. Corzine is saying stuff like this:
Now, is that a dodge? That these were not technically segregated funds because they were now funds functioning as collateral as agreed to by the clients? Why is he leaving rogue traders and commingling out there in the minds of the public and the regulators/legislative oversight if he actually has a much better position (that won’t result in jail time or billion dollar civil suits)?
Why isn’t he using the “it was a completely legal set-up even if it had a completely unfortunate outcome” sort of defense? Is it that he improperly influenced the regulatory agencies to not take action on the more aggressive use of London’s re-hypothecation rules and he has some sort of exposure on that front?
I don’t quite get it yet.
Further too bh, if Corzine is (or was) aware of any purposive re-hypothecation scheme put to work, he’d be perjuring himself now, no?
I would guess that he’s not said anything that would leave himself on the hook for a real perjury charge but if this is what happened then he’s clearly not answering the questions to the best of his knowledge. Can only earn himself further ill will from the public and the relevant regulatory bodies.
Why do that?
If you have an explanation that is legal and agreed to by your clients and the other possible explanations involve felonies and criminal mismanagement, why not go right to your best explanation?
Sure, we can see the “specific” providing the weasel out. But still.
So, maybe there is a personal problem with that best explanation to be found in his history. Maybe he improperly influenced the regulators or snuck some bit of legislation in when he was in the Senate.
If we’re looking for weaselisms in general, do we have to read “I didn’t intend to break any rules…” as an implicit admission that he knows he did break rules?
I wonder if other brokerage houses have the same contract. There would be a good deal of power in being able to use client money on your balance sheet, as opposed to just the fees the clients pay to the brokerage to make trades.
I can take his statements as pointing to one of three things.
They really do have something illegal hidden away in the details.
There is some Democratic Party political advantage to having it seem as if MF and Corzine were doing something illegal not just tricksey but legal.
Corzine really is just an empty suited idiot and was only there to “lead not read”.
Another thing.
Also didn’t Anne Barnhart say something to the effect that MF Global’s clients were mostly small commodities brokers?
And just think of the Anti-Globalist signs the OWSies can make out of the name MF Global. An epic name.
Would that it were so. However, I think that could be weaseled out of as well. He could still argue that he’s not aware of any rules he has broken and not be inconsistent.
According to the article Lehman Brothers had the same arrangement and went belly up for a similar reason.
Well, you didn’t really expect me to read the linked article, right?
Right?
Thanks, geoffb.
So you’re a leader not a reader cranky-d? Right?
Pays better I hear.
Here is one place that some legislation would be a really good idea. A regulation to prevent this sort of activity would seem to be pretty straightforward.
A regulation making it legal to torture and kill the principals would be more fun.
Pay per View goes to the restitution fund.
I really don’t need to read about any topic to form an opinion on it.
Guess who bought up the MF Global holding at the liquidation sale?
The MF customers.
BH, I’ve been hollering about this since 2007. I actually pitched an article on this at Fortune and was told “Forget it.”
I’ll make it easy: Look at the balance sheet of any major financial services firm with an institutional securities business.
Then disregard it, since what you just read doesn’t matter.
I think this fellow oversells, and sharply so, the risk to client capital from this at most firms. That said, it exists and it does go on everywhere.
More importantly, meltdowns happens so every link in the chain–even the strong seeming ones–is a possible risk for not getting you 100 cents on the dollar they were loaned, or (more likely) the collateral they posted is worth less than when it was posted.
Globalization and interconnection continues to have hidden costs that were never anticipated.
Once again, defensively speaking, we need to carve the brokerages out of the major moneycenter banks–C, BAC, WFC, JPM spring to mind–and make them free-standing. The collateral issues at the core of the hypothecation daisy chain would get properly straightened tout suite. Also, and this is just asking for too much, but since we don’t let law or accounting firms be publicly held, why do we let brokerages raise equity publicly?
They have certainly more than proven that they will readily abuse the public trust for revenue, which was and is the issue at the center of not letting CPAs or JDs float shares.
27. Soros is a smart guy in this context. I wish I had the capital, I’d have beaten him to the punch. The trick to money, of course, is having some.
I’m betting that the main fallout from this will be political moves by the Democrats to increase the power in Washington over the financial industry and to make gains for the 2012 elections. These would be political reasons for Corzine to make it appear they did illegal things.
A federal bailout of farmers will be pushed by the Dems no doubt and any resistance by those wanting to hold down the deficit will be demonized.
Regulation of the Derivatives market will be proposed probably in line with whatever they haven’t gotten from this 2009 wish list.
Getting Cordray approved is another thing that the MF Global mess helps them to do.
And maybe a renewed push for a global (UN?) regulation and tax regime. From the 2009 article.
Thank you for your comments Roddy.
Soros seems to always be there to benefit from the messes made by Democrats. Smart and perhaps getting some inside info.
Thanks, Roddy.
I wonder if you’d be willing to hazard a guess as to whether or not this explains what happened to the clients funds at MF Global? Secondly, if you do think so, any guess as to why they’re not embracing that legal explanation?
30. Geoffb, You are correct as far as I can see it. Fundamentally, the Dems are heavily populated by lawyers and as such, see social remedy within the context of legal documents. Not regulation per se, since there are some arguments to be had for sensible regulation in every field, but the expansion of filings. Like all practicioners, lawyers see themselves as performing a public “good” and so the expansion of a document filing regime–traveling under the moral imprimatur of “regulation”–is something they will positively reinforce.
It is rank bullshit.
Think of the arguments over hedge fund regulation. Essentially, they wanted to make every hedge fund over $100 million in assets file their positions quarterly and list the names of principal employees et al, under the guise that this would help prevent fraud.
How on earth, if you were a Bernie Madoff (who technically wasn’t a hedge fund manager) or any one of a number of other money manager frauds, would a document filed 45 days after the previous calendar quarter closed deter you from staging a ponzi scheme or misvaluing your positions? It wouldn’t in the least. But it was absolutely nirvana for the financial services practices of 50 seperate law firms that advised funds on these filings.
Real financial regulation has a lot more to do with a manageable set of rules that you are willing to send people to jail for breaking, complemented by a common sense delineation of risk capital and consumer finance.
Everything else is just a jump ball between the gamed and the gamers.
32. BH, I am guessing two corridors, one sharply more ugly–and likely–than the other.
I had supposed that the week long death spiral of MF had led to a clogging of the normal hypothecation process, where assets and liabilities were not netted properly electronically as clients raced to pull funds or demand collateral, but, like a knot on a string, would eventually be squared away.
That should have been remedied by now though, especially in light of all the publicit since a lot of manpower is investigating this right now.
That it’s not suggests that the funds were diverted improperly, almost certainly to meet collateral calls as asset values plunged. But again, it’s a fairly easy pathway to trace electronically on their books. One way or another a sense of what happened should have taken shape by now.
So yes, we can now say that something is wrong, but how or what is beyond me. This stuff is messy but should track easily enough on standard broker-dealer trade processing software.
meanwhile America’s fascist Department of Justice is striving mightily to limit BP’s contractual liability with respect to the Macondo mishap for so they can ass-rape a largely Texas-based company
That makes sense to me. There must be a number of ghost transactions booked in there. Then everyone lawyers up and afterwards it’s hard to tell what trades happened and what trades were simply entered to make the numbers balance.
I noticed in that WSJ piece I linked that Soros took his fund private a month or so ago in order to not have to meet many reporting requirements.
Corzine just stuck his nads in the Sarbanes Oxley vise.
Ain’t no way for a CEO or COO Or CFO to get around signing that nice little piece of parchment.
It states that they expressly stand behind the numbers and representations in their fin disc and that they are fully aware of substantial financial transactions that took place under their watch on penalty of criminal and civil action.
“I don’t have my notes” or “I wasn’t aware” aren’t gonna cut it.
That was the Enron defense. It didn’t work then, it shouldn’t work now. And that was before the SarBox supposedly strengthened the laws about fiduciary responsibility. Due to the Enron accounting.
Congress: “Where is the money?”
Corzine: “It’s in the wallet that say Bad MF Global.”
Zerohedge on the Soros buy.
geoffb, that lunch money piles up after a while. A billion here, a half-billion there…
More interesting times ahead for the markets and, in the end, all of us I’d bet.
The interest on the just “Lunch Money” for a month and I’d be fine for life.
Let me see if I’m understanding this correctly — Obama/Pelosi/Reid quadruple the federal deficit, so that Washington can push more taxes. Holder “loses” 2,000 rifles to Mexican drug cartels, so that Washington can push more gun control. Then Corzine “loses” a billion dollars of Other People’s Money, so that Washington can push more finance regulation.
Am I the only one seeing a pattern here?
that deserves a post quote squid.
Woo hoo! Combine it with my last one, and we’ll have Jerry Sandusky named to head up the new Division of Child
MolestationProtection at HHS, so that Washington can push surveillance of anyone who spends time with children![…] in the comments to my post on MF Global: Let me see if I’m understanding this correctly — Obama/Pelosi/Reid […]
This is the moral hazard that we keep going on about with these bailouts. The f*ckers just keep taking bigger and bigger risks because, hey, there realy aren’t any risks to anyone connected enough.