MFing Global. My thoughts.

[llepard]

MF Global: Was It A Hit?

By: Lawrence Lepard

Imagine you are Ben Bernanke, or on the Board of Governors of the Federal Reserve. The time frame is July and August of 2011 and the price of gold is on a tear. Commodities inflation has been persistent and is breaking out everywhere. Your prediction that inflation “is contained” and is a “temporary phenomena” are beginning to look absurd. What do you do?

Simple. Hint that QE3, the primary drive of inflation, is coming and then fail to deliver at the September FOMC meeting. That takes care of the price of gold and the gold stocks. Ah, but those pesky commodities speculators keep making money and trading against what you want the markets to do. So what is to be done there? Hey Jon Corzine, how about you tank the largest broker for the small commodities punters in the world, and we let them twist in the wind? That will serve them right. Teach them to bet against the government approved scenario.

Think it did not happen? Well think again. All of the pieces fit. It sure is convenient that all those commodities speculators are now out of the box. Also, who will want to speculate on commodities in the future given customer funds are no longer protected. Furthermore, commodities speculators are not a very “All American” group. From the authorities point of view they can say: screw them, who will feel sympathy? Hell, James Bullard, Fed Governor, in an interview on CNBC yesterday said the MF Global collapse proves that the system works. Yes it does Jim, for you. Personally, I have $90,000 at MF Global and I would like to have my honestly earned money returned. Unfortunately, the odds of that happening any time soon seem slim. In part because when MF Global entered bankruptcy the judge appointed a Trustee whose law firm has done substantial work for JP Morgan, a deeply interested party.
We will probably never find out what happened here. But for those of us whose eyes are open the results speak for themselves.

This whole mess stinks to high heaven. I am with Gerald Celente, if the largest commodity broker in America can go bankrupt and nothing is done, then where can you put your money and expect it to be safe? I, for one, do not accept that Jon Corzine is stupid enough to lever up MF Global 40:1 and use the proceeds and customer money to bet on European sovereign debt. This was a hit, pure and simple. That is why there is no resolution to the problem, and it is just another example of the deeply corrupt US political/financial axis. It may take money away from a bunch of commodities speculators, and it may cool down the perceived inflation, but it is just another hole in the dike which is The US Financial System. A dike whose life can probably now be measured in months, not years.

[Brian4Liberty]

Was this a cash account that they won't return? Was it insured at all? SIPC or FDIC?

[teacherone]

I was certain this would be the trigger to blow up the trillion dollar derivative market and bring the end of mankind as we know it...

Stayed in bed a few days; the sky didn't fall.

Very surprised the effect of this unexpected failure didn't cause more waves.

[libertyjam]

Was this a cash account that they won't return? Was it insured at all? SIPC or FDIC?

http://barnhardt.biz/
BCM Has Ceased Operations (Part 1)
Posted by Ann Barnhardt - November 17, AD 2011 10:27 AM MST
Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. 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.
...


http://www.theblaze.com/stories/going-galt-hedge-broker-shuts-down-firm-with-chilling-letter-about-the-market/

[Brian4Liberty]

Cash is usually insured, either government (SIPC, FDIC) or private insurance. It would be interesting to know what the case was at MF Global.

[Brian4Liberty]

Found this MF Global document. Usually when FDIC handles a bank failure, customer funds are available the next week.




SIPC

The Securities Investor Protection Corporation (“SIPC”) is a non-profit membership corporation created pursuant to the Securities Investor Protection Act of 1970. SIPC has two primary purposes: (i) establish and administer procedures for the liquidation of failed broker-dealers that are SIPC members; and (ii) to provide limited financial protection, to be paid out of SIPC’s funds, to securities customers of such failed broker-dealers.
In the event of a liquidation of a broker-dealer, all customer property held by the broker-dealer for securities transactions is returned to the customers of the broker-dealer on a pro rata basis to the extent of each customer’s net equity claim against the broker-dealer. To the extent that this distribution does not satisfy a customer’s claim, the Securities Investor Protection Corporation (“SIPC”) will provide insurance coverage for customers with unsatisfied claims in an amount up to $500,000, subject to a limit of $250,000 for a claim for cash.

FDIC

MF Global Inc. holds customer segregated funds not required to be deposited with a U.S. or foreign clearing organization to margin open positions in one or more banks whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Each account is properly designated as a “customer omnibus account.” In the event a bank in which MF Global maintains a customer omnibus account fails, FDIC rules provide that each customer whose funds are held in such an account is entitled to insurance in an amount up to $250,000 (less any other deposits the customer may have at that bank). 12 CFR § 330.5.

[Travlyr]

http://barnhardt.biz/
BCM Has Ceased Operations (Part 1)
Posted by Ann Barnhardt - November 17, AD 2011 10:27 AM MST
Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. 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.
...


http://www.theblaze.com/stories/going-galt-hedge-broker-shuts-down-firm-with-chilling-letter-about-the-market/

Good article.

Sounds like Ann is a No One But Paul supporter too. Even if she isn't saying it directly. ;)

Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.

[Bern]

TCTJ = Too Connected To Jail

:(

[donnay]

As Gerald Celente say on the Alex Jones show today-- (paraphrasing) "Why do they call them brokers--we are broker, not them!" He also went on to say, "let's not call them bankers, shall we, they are loan sharks!"

I think this is definitely bigger than the Bernie Madoff scheme. I hope Jon Corzine is put in the hot seat when all the dust settles!

Everyone needs to pay attention to this, because it will affect all of us in the end.

Mr. Lepard, I am so sorry to hear that they got to you too! In the end, "Justice is Just Us!"

[Brian4Liberty]

So the bottom line here is that the SIPC is not only incompetent, but that it may not truly cover people's cash accounts. This is not good, as this applies to all brokerage accounts (unless cash is specifically held in an FDIC insured instrument).


“I'm a high net-worth person, and I don't want to see $1 million get smoked by another misunderstanding,” Monjure said, recounting how he had thought the Securities Investor Protection Corp. covered any losses due to a meltdown such as the one at MF Global. He's now been told SIPC may not cover the money because it was in a futures account while he faces months of uncertainty as he files a claim seeking recoveries.

Monjure is one of many MF Global customers who can't access cash from segregated accounts they once thought were as safe and accessible as bank deposits. Frustrated by a lack of legal options to reclaim frozen funds and dead-end inquiries to call centers and hotlines since MF Global's Oct. 31 bankruptcy, many aren't able to trade and say they've lost faith in retail brokerages and the regulatory system.

...
While the brokerage's parent, MF Global Holdings Inc., filed for bankruptcy to apportion returns to creditors, a trustee, James W. Giddens, took over to liquidate the brokerage under SIPC.

SIPC is a private, government-sponsored company that insures brokerage accounts for up to $500,000 in securities, as much as $250,000 of which may be in cash, in case the brokerage goes bankrupt. While SIPC covers losses in stocks and bonds, it doesn't cover commodity futures contracts unless defined as specific property under certain conditions.

http://news.businessweek.com/article.asp?documentKey=1376-LUGNZK1A1I4J01-17HAIH5NS889ARGQ9O16F63PJI

[Kords21]

Sorry to hear that you got robbed Mr. Lepard. It is amazing that the feds will crack down on sidewalk lemonade stands, but no one has been taken to jail over this bank robbery. I hope you get your money back and some justice is doled out on these criminals, this may just be the start of something bigger though.

[Brian4Liberty]

From the SIPC website. They should cover cash, but they are certainly dragging their feet, possibly looking to not cover this as a case of "fraud". If that occurs, and the SIPC does not pay-out cash accounts in full, then the SIPC itself is guilty of fraud.




http://www.sipc.org/how/covers.cfm

What SIPC Covers... What it Does Not

The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC.

Among the investments that are ineligible for SIPC protection are commodity futures contracts (unless defined as customer property under the Securities Investor Protection Act) and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

It is important to recognize that SIPC does not work the same way as the Federal Deposit Insurance Corporation in terms of blanket protection of losses.

Why We Are NOT the FDIC

"Insurance" for investment fraud does not exist in the U.S. The Federal Trade Commission, Federal Bureau of Investigation, state securities regulators and other experts have estimated that investment fraud in the U.S. ranges from $10-$40 billion a year. In the case of microcap stock fraud, the toll on investors has been estimated as $1-3 billion annually.

With a reserve of slightly more than $1 billion, SIPC could not keep its doors open for long if its purpose was to compensate all victims in the event of loss due to investment fraud.

It is important to understand that SIPC is not the securities world equivalent of FDIC–the Federal Deposit Insurance Corporation. Congress specifically considered creating a Federal Broker-Dealer Insurance Corporation, but lawmakers wisely concluded that such a designation would be both misleading and out of step in the risk-based investment marketplace that is so different from the world of banking.

[A Son of Liberty]

Congrats on your article making it to Zero Hedge, Mr. Lepard!

[llepard]

Cash is usually insured, either government (SIPC, FDIC) or private insurance. It would be interesting to know what the case was at MF Global.

No, no insurance. FDIC is for Banks. SIPC if for stock brokerages. Commodites accounts are on their own. The commodities space is self regulated by the CME which is supposed to monitor and regulate its member firms. How is that working out? The amazing thing here is no one is in cuffs. If I had access to the records I could make an arrest in two days. If I walked into a bank and robbed it without a mask i would be arrested in hours. Here? Nothing. What is up with that?

The amazing thing is that the CME has stood down. They are a public company, have a market cap of $16.5 billion, make $2.4 billion per year in cash flow, or $572 in EBITDA per quarter. They brag about how no customer segregated accounts have ever been lost: EVER. Well, are they going to let this be the first? If so, there goes their enormously profitable business. What is up with that? Who would trade with a CME member firm if they knew that their money could disappear without a trace? Frankly the whole episode is amazing.

Lots of additional interesting comments here:

http://www.zerohedge.com/news/guest-post-mf-global-was-it-hit

[gonegolfin]

So the bottom line here is that the SIPC is not only incompetent, but that it may not truly cover people's cash accounts. This is not good, as this applies to all brokerage accounts (unless cash is specifically held in an FDIC insured instrument).
No. This does not apply to all brokerage accounts.

SIPC only covers securities accounts (though they make it clear that they do not cover cases involving fraud ... I think politically the SIPC would be forced to step up here ... as not doing so would usher in a much larger risk). It does not cover futures accounts (what are referred to as "commodities" accounts in industry parlance, even though not nearly all investments made here are "commodities" investments). MF Global securities customers will be covered. MF Global futures customers are not. These customers include everyone from commercial hedgers (Ex. farmers), small speculators, small brokerages and financial advisory services with accounts for their customers, to both small and large introducing brokers on behalf of individual retail customers.

But there is certainly much misleading information in the industry concerning the safety of these accounts. For example, E*Trade is an introducing broker to MF Global (was) and if you open a futures account with E*Trade, the futures account is actually with MF Global as MF Global holds the positions and cash and is also the clearing merchant. E*Trade provides the customer services and is the gateway for funds transfers. You can see on the E*Trade futures page (https://us.etrade.com/e/t/investingandtrading/futurestrading) that they advertise SIPC coverage (see graphics at the bottom and the disclosures). In the disclosures at the bottom of the page, they even state "Futures products and services offered by E*TRADE Securities LLC, Member NFA.". This leads you to believe that futures products are considered "securities" ... and that SIPC coverage is available on these accounts. But futures are not considered securities and SIPC coverage is not available. Thus, the E*Trade baby is certainly not innocent in all of this.

The CME, in my opinion, bears significant liability in all of this. Their marketing material advertises safety guarantees for customers and touts complete segregation of customer funds from the private assets of the futures clearing merchant (FCM). It promotes itself as the regulatory agency that assures this. Now they are claiming no liability. Recently the CME announced it would provide guarantees of $300 million such that these futures customers missing their cash would receive some of their monies. Maybe the CME became convinced that the trustee had recovered at least that much and that it would be prudent to get this money back into customer hands (for reasons of both market stability as well as public relations).

The bottom line is that trust has been violated and it may never return (or a significant portion of it) to the futures market. The futures industry has suffered a huge black eye ... and those that do not understand the differences between futures accounts and securities accounts, will chalk it up as general mistrust in the financial system (w/respect to the safety of cash in their financial accounts). The CME has already suffered a huge hit in market cap. Fully backstopping this negative event would be the prudent thing for the CME to do, but they must do it quickly. This would help restore some of the lost trust, thus there is still some value in them doing the right thing. But some of that trust has certainly permanently left the barn.

On a related note, I should mention that some futures brokers (such as Interactive Brokers) sweep unused cash collateral daily into FDIC protected bank accounts. Thus, if the sweeps actually occurred, that cash would have been protected. However, any required cash collateral (to back open positions) would not be safe.

MF Global was not doing this. It was using customer cash to back existing positions/invest in sovereign debt securities and replacing the cash with collateral (Ex. US Treasuries) ... until it was no longer replacing the cash with collateral and conducting outright theft of customer cash.

Addendum to the discussion ...

Now, just because SIPC covers cash and securities in securities accounts, an MF Global event can still place securities investments at risk. This is because SIPC does not cover loss of investment value. It is simply required to replace the securities and cash in a securities account. Take a moment to think about all of the investment vehicles available in the traditional brokerage account that utilize futures in that particular vehicle's portfolio. Some vehicles use futures exclusively. Think about ... TBT, MEAFX, MERKX, DBA, any "enhanced" mutual fund or ETF. They are numerous. An MF Global type event at another FCM or God forbid a systemic event could crater these investments.

Brian

[Brian4Liberty]

It's always been clear that futures contracts themselves are not covered by insurance (and additionally that capital losses in equities or other investments are not covered). I was questioning whether the cash sitting there as collateral was insured.

The MF Global document I quoted below certainly infers that there is SIPC coverage. I believe that the trustee handling the bankruptcy was appointed by the SIPC. The eye opener here for many people is that the cash itself was not covered. Of course many people would be shocked to find out that loss of principal (breaking the buck) in money market cash accounts is not guaranteed by anyone either. (Behind the scenes, one of the reasons for the TARP program was to ensure that no money market accounts busted the buck. IIRC, there was one institution where they temporarily busted the buck on their money market accounts).




SIPC

The Securities Investor Protection Corporation (“SIPC”) is a non-profit membership corporation created pursuant to the Securities Investor Protection Act of 1970. SIPC has two primary purposes: (i) establish and administer procedures for the liquidation of failed broker-dealers that are SIPC members; and (ii) to provide limited financial protection, to be paid out of SIPC’s funds, to securities customers of such failed broker-dealers.
In the event of a liquidation of a broker-dealer, all customer property held by the broker-dealer for securities transactions is returned to the customers of the broker-dealer on a pro rata basis to the extent of each customer’s net equity claim against the broker-dealer. To the extent that this distribution does not satisfy a customer’s claim, the Securities Investor Protection Corporation (“SIPC”) will provide insurance coverage for customers with unsatisfied claims in an amount up to $500,000, subject to a limit of $250,000 for a claim for cash.

FDIC

MF Global Inc. holds customer segregated funds not required to be deposited with a U.S. or foreign clearing organization to margin open positions in one or more banks whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Each account is properly designated as a “customer omnibus account.” In the event a bank in which MF Global maintains a customer omnibus account fails, FDIC rules provide that each customer whose funds are held in such an account is entitled to insurance in an amount up to $250,000 (less any other deposits the customer may have at that bank). 12 CFR § 330.5.

[gonegolfin]

It's always been clear that futures contracts themselves are not covered by insurance (and additionally that capital losses in equities or other investments are not covered). I was questioning whether the cash sitting there as collateral was insured.

I was addressing cash in these futures accounts specifically. SIPC does not cover the cash in these futures accounts as they are not considered "securities" accounts.



The MF Global document I quoted below certainly infers that there is SIPC coverage. I believe that the trustee handling the bankruptcy was appointed by the SIPC.

I am glad that you noticed this. Good eye Brian4Liberty. I have found it quite ironic/rich that during this process, the trustee works at the behest of the SIPC.



The eye opener here for many people is that the cash itself was not covered. Of course many people would be shocked to find out that lose of principal (breaking the buck) in money market cash accounts is not guaranteed by anyone either. (Behind the scenes, one of the reasons for the TARP program was to ensure that no money market accounts busted the buck. IIRC, there was one institution where they temporarily busted the buck on their money market accounts).

As I illustrated with the E*Trade example, these SIPC guarantees are all very misleading ... as are the guarantees marketed by the CME Group. If I did not know any better (snicker), I would say that the misleading is intentional. ;-)

Brian

[Brian4Liberty]

The commodities space is self regulated by the CME which is supposed to monitor and regulate its member firms. How is that working out? The amazing thing here is no one is in cuffs. If I had access to the records I could make an arrest in two days. If I walked into a bank and robbed it without a mask i would be arrested in hours. Here? Nothing. What is up with that?
...
Who would trade with a CME member firm if they knew that their money could disappear without a trace? Frankly the whole episode is amazing.


It certainly sounds like a bank robbery. Hopefully you get the cash back at some point.

I wonder if MF Global was ever audited by outside auditors? Is there a big name accounting firm involved?

[Brian4Liberty]

As I illustrated with the E*Trade example, these SIPC guarantees are all very misleading ... as are the guarantees marketed by the CME Group. If I did not know any better (snicker), I would say that the misleading is intentional. ;-)

Brian

Very misleading indeed! It seems like that MF Global document describing their "protection" would constitute fraud. Then again, when you are stealing all the cash, a few lies in their prospectus seems minor. :mad:

[Brian4Liberty]

Lots of additional interesting comments here:

http://www.zerohedge.com/news/guest-post-mf-global-was-it-hit

Very good comments thread there!

I noticed that someone talked about MF Global inferring SIPC protection:


FYI, a former work acquaintence of mine has in hand a MFG client presentation that spells out accounts that weren't as being SIPC insured -- so there's a fraud aspect to this over and beyond the bankruptcy issue. I've suggested he forward it to TD for publicity.

There was also some interesting speculation that this was a way to avoid massive failures to deliver...

[Johnnybags]

Of course Uncle Ben does not want John Q maintaining his buying power or the entire qe PROGRAM is futile. The poor and most middle classers have no access to futures accounts and are fair game for Ben. These hits will continue and the big boys will always be forwarned to move their assets before the theft. It is the canary in the coal mine. I would also advise anyone with annuities to be careful, the state backup programs for them are unable to provide the promise when it turns ugly. Mostly the older generation relies on these gauranteed contracts and when the shed hits the fan soon, he who cashes out first wins, all others are stuck til some theft process plays its way thru the courts. Watch the equity value of insurance companies carefully. If you see any strange movements to the downside, act fast. I do not believe the state pools have the capacity to honor all the contracts and although technically at some point you are backed by all the assets of the insurance company itself, I doubt in a calamity as we are seeing the first wave hit that the process will be smooth or fair and by the time you get your money back, prices will have soared leaving you impaired.

[LibForestPaul]

My thoughts, the generals are trying to hide, but the colonels all got screwed...this were major investors who just got their eyes wide shut...