Wednesday, December 28, 2011

The MF Global bankruptcy - institutionalized theft?

We've spoken before about the MF Global bankruptcy in these pages. Now, Gonzalo Lira identifies what may be the single most important - and most dangerous - aspect of this bankruptcy, and asks: "A Run On The Global Banking System—How Close Are We?" Here's an excerpt.

Brokerage firms hold clients’ money in what are known as segregated accounts. This is the money that brokerage firms hold for when a customer makes a trade. If a brokerage firm goes bankrupt, these monies are never touched — because they never belonged to the firm, and thus are not part of its assets.

Think of segregated accounts as if they were the content in a safety deposit box: The bank owns the vault — but it doesn’t own the content of the safety deposit boxes inside the vault. If the bank goes broke, the customers who stored their jewelry and pornographic diaries in the safe deposit boxes don’t lose a thing. The bank is just a steward of those assets — just as a brokerage firm is the steward of those customers’ segregated accounts.

But when MF Global went bankrupt, these segregated accounts — that is, the content of those safe deposit boxes — were taken away from their rightful owners — that is, MF Global’s customers — and then used to pay off other creditors: That is, JPMorgan.

. . .

In the case of MF Global, what should have happened was for all the customers to get their money first. Then everyone else — including JPMorgan — would have picked over the remaining scraps. And the monies MF Global had already pledged to JPMorgan? They call it clawback for a reason.

The Chicago Mercantile Exchange, which handled the bankruptcy, should have done this — but instead, the Merc was more concerned with making JPMorgan whole than with protecting the money that rightfully belonged to MF Global’s 40,000 customers.

Thus these 40,000 MF Global customers had their money stolen — there’s no polite way to characterize what happened. And this theft was not carried out by MF Global — it was carried out by the authorities who were charged with handling the firm’s bankruptcy.

These 40,000 customers were not Big Money types — they were farmers who had accounts to hedge their crops, individuals owning gold (like Gerald Celente — here’s his account of what happened to him) — in short, ordinary investors. Ordinary people — and they got screwed by the regulators, for the sake of protecting JPMorgan and other big fry who had exposure to MF Global.

That, in a nutshell, is what happened.

Now, what does this mean?

It means that nobody’s money is safe. It means that regulators care more about protecting the so-called “Systemically Important Financial Institutions” than about protecting Ordinary Joe investors. It means that, when crunchtime comes, central banks and government regulators will allow SIFI’s to get better, and let the Ordinary Joes get f****d.

. . .

As I write this, a lot of investors whom I know personally — who are sophisticated, wealthy, and not at all the paranoid type — are quietly pulling their money out of all brokerage firms, all banks, all equity firms. They are quietly trading out of their paper assets and going into the actual, physical asset.

Note that they’re not trading into the asset — they’re simply exchanging their paper-asset for the real thing.

Why? MF Global.

“The MF Global scandal has made it clear that the integrity of the system has disappeared,” said a good friend of mine, Tuur Demeester, who runs Macrotrends, a Dutch-language newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on — and that will start a panic.”

He hit it on the head: Some of the more sophisticated people — like Tuur, like some of my acquaintances, (like myself, frankly) — have realized that the MF Global scandal means that there is no safety for any paper investment: The integrity of the systems has been completely shattered. If in the face of one medium-sized brokerage firm going under, the regulators will openly allow ordinary people to be ripped off for the sake of protecting the so-called “Systemically Important Financial Institutions” — in this case JPMorgan — what will happen if there is a system-wide run? What if two or three MF Globals happen simultaneously?

Will they protect the citizens’ money? Or will they protect the “Systemically Important Financial Institutions”?

I think we know the answer.

There's more at the link. Bold print is my emphasis.

This is a critically important article, one I can't recommend too strongly that you read in full. If Mr. Lira is correct, we can no longer trust any of our financial authorities. Under those circumstances, a wise man will get his money out of the global banking system as fast as possible, and into hard assets that he physically controls! I'm not a wealthy man, and don't have enough investments to make that necessary: but if any of my readers do, I most strongly suggest they read Mr. Lira's article in full, then act upon it - now.



Old NFO said...

It's only yours if you physically HAVE it in your hands... Or buried where only you and your family know how to find it...

Dad29 said...

"Hard assets" include brass/lead/powder, by the way.

MrGarabaldi said...

Ann Barnhardt had a good writeup relating to the MF Global debacle. She did this stuff for a living and quit the futures and trading market because the rule of law no longer applied. Also I commented that they "lost" 1.2 billion dollars Former Governor Corzine and Obungler pal didn't know what happened to it and yet Obungler has a billion dollar reelection war chest. Coincidence?

Maybe I am paranoid and ready for the tinfoil hat....naaa I doubt it.

Erik said...

The problem is what to do invest it in. And where to put it physically. I'm not really fond of the idea of keeping lots of assets at home.

There's always safe deposit boxes, but once they think it's ok to grab money in segregated accounts, raiding safe deposit boxes isn't really that far away. (It can easily be done under the pretense of searching for "hidden taxable assets" or some such)

Matt said...

MF Global was illegally allowed to file a Chapter 7 liquidation which puts the creditors (JP Morgan) in the front of the line instead of a Subchapter IV liquidation where the customers go to the front of the line.

Anonymous said...

Kinda like what happened to the GM bond holders...

trailbee said...

This smells like Enron, but with a twist. But, the bottom line is that investors like you and me lost their assets.
Our pension fund is funded by investments, and I have often wondered if it can be raided or just fold, like Lincoln S& L those many years ago, leaving us with nothing.
It seems in the financial world nothing is sacred, especially not trust!

Anonymous said...

Note that the Chicago Mercantile Exchange acted as the Bankruptcy agency. Just a coincidence that MF Global has a Chicago entity handle the challenges of properly and legally executing their Bankruptcy? As many pundits and wiser folk have noted in recent years, we need to follow the money trail.....