MF Global: Is This the Second Coming of Bernie Madoff?

By John Cassimatis  NOV 01, 2011 2:45 PM

Here, a response from just one of the many people left reeling in the wake of MF Global's fall.

 


Yesterday's late day update to the ongoing MF Global saga -- news that Federal regulators were investigating the brokerage firm after learning that hundreds of millions in customer money had gone missing from the company's accounts only recently -- caught many of the firm's clients by surprise. "Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse," the New York Times reported. Investors who were customers of the now bankrupt brokerage were naturally outraged. Here's a response from just one of the many left reeling in the wake of MF Global's fall.


We all know the banks are bigger than the rules.  But segregated customer accounts?  If MF Global (MF) did in fact comingle customer monies to provide collateral for prop bets, then nothing is safe anymore.

Yes, I have a great deal of my past, present, and future all locked up, no wires, no trades, with a unit that could have very well been sold to Interactive Brokers early Monday morning.  The “discrepancy” changed all that.  I just put in a call to the CME group asking for clarity, the CTFC for some language, and you should too.  From my perspective, if nothing is announced TODAY concerning the safety of customer funds, then the futures pits will change forever.  Who will hold any real cash in these broker-dealers any more if the regulators have such little safeguards in the system that the cardinal rule, the third rail, of customer protection has been so easily violated. 

My money was used to satisfy higher collateral requirements for a misguided prop bet by MF Global and Jon Corzine.  It is outrageous, and only reinforces the thesis that in the low 20s, get your silver, get it out of the banking system and wait for the parabola.  Future volumes have dropped by one-third.  The CME is now becoming a culprit.  How can an exchange that holds collateral for customers stand by as idle as it has been? Who will ship grains, and energies, metals, and softs anymore  when they can become comingled so easily? But it’s really the cash.  That’s what the dirty hands went for -- if in fact they did, which seems highly probable at this point. 

True, MF Global is smaller than the “global” implies, but the breach is as serious as ever.  Glass-Steagall repeal, 40-1 leverage, ignoring Paul Volcker—how much more can we take?  Make no mistake, if a guarantee of some kind is not issued soon concerning customer funds and the expeditious return of such, the futures industry will take a decade to recover. 

And for those elsewhere, if you can’t even read the rules anymore, than there is anarchy.  This will be a first step.  A big one.  Any regulator thinking this is non-systemic is right in a short-term micro (just futures) sense.  But if those safeguards are worthless, what’s next?

The system is breaking down, and the banks, as Thomas Jefferson worried, are the prime culprit in their relentless pursuit of profits.

MF Global has taken collateral, that I 1) had to earn the money (minus taxes paid)  to purchase; 2) bought; 3) paid to store for eight years.

And then it illegally pledged those certificates to counterparties demanding more collateral to hold its ill-advised, greedy, and ultimately sinking European bond portfolio. 

Is this the New America, where nothing is safe?  If the CME of CTFC does not address this situation in the next few days, the futures market will never be the same again.

Think about that.  The theft -- not the market.

(For more on Madoff and other financial swindles, please read Inside Five of the Most Pervasive Investment Scams.)

No positions in stocks mentioned.

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