This is a story about greed. This is a story about the new MF Global
(MF)—Jon Corzine’s adaptation of the former Mann Group started in the 1790s. It’s a story being told in parts all over the Internet, and this part will include some of the more human elements of the story.
First off, it’s important to go over the most current facts as I have come to understand them. At this point it seems clear that MF Global has comingled customer funds with that of its own, even if no such shortfall exists currently: The company's main exchange regulator, CME, said earlier Tuesday that MF Global did not separate its customers' accounts from the firm's funds as required by law, Reuters reported. Even if MF Global’s lawyer’s recent statement that all serious customer funds have been accounted for is true, this begs the question how a firm the size of MF Global to the futures exchange could not have its customer and prop accounts properly segregated. To discover this in hindsight is simply not good enough
. The CME regulator’s statement alone suggests that no such partition truly ever existed making this case a whopping failure on both the regulators and the regulations themselves. The CFTC and the CME should be ashamed.
I have traded futures for 10 years now. I have had the same broker through all of them, a hardworking, modest Chicago man who does what he’s supposed to do for me -- call me on price breaks of different levels if I’m writing for Minyanville or cooking lunch for my son, get my orders in right, scan the news, be my right hand man, my caddy. Years ago, let’s say my first seven in the futures pits, I had barely left my computer, you see. Gold and silver, I’d tell my friends glamorizing my working-from-home lifestyle, never
stop trading (save 5:15-6:00 p.m. every day, but that’s even a blur). For years, I had set up alarms that would siren through the house at 3 and 4 in the morning with prices collapsing or exploding, sometimes to strengthen up good positions, others to problem-solve disasters. An hour rarely passed where prices and downtrend lines, triangles and COT reports, RSIs and Fed meetings, now China and Europe, did not cross through my mind. Yes, this was my life, and really the only guy who really went through it with me was my broker, Jim Barrett. He cared, that’s for sure, and in that business that’s half the job. In general, it had been a good run for me, I am blessed with that yin
, but I had taken my lickings along the way. Bigger than the lickings, though, was the personal toll, the yang
on my life—from my average-to-poor health to my ability to fully listen to my wife or concentrate on a movie, I rarely felt like I was a real human, simply living in the dear moments of my life. But it was a sacrifice that being a futures trader demanded and I accepted those conditions for the fruits.
You can imagine my horror on Monday, upon learning that all the words and laws pertaining to the safety of customer segregated accounts, was not true. It is as if the entire concept of a customer segregated account is an urban myth. I cannot go into a bank and say that I am Jon Corzine and take all of his money. The firewalls are enormous—from pins to licenses, the two of us don’t even look anything alike. In the reverse scenario, the pinnacle promise of safety purported by the entire system
was that he had too many firewalls to do that to me. Those firewalls turned out to be made of straw. The reason individuals can still afford the massive and rising margins in certain commodities, is that faith that they can put some real money into a segregated account. Ruin that and the floor of the futures exchange will come to resemble the NYSELIFFE market where silver spreads are 20-plus cents. A customer segregated account—that means it's mine and only mine, and MF Global can’t touch it, and that it’s separate from all their bets, good or bad. If one cannot believe in the rules, like I wrote yesterday
, there is anarchy.
Make no mistake, heavy damage has already been done. The CTFC and CME have proven largely ineffective by this fiasco in not being able to prevent its occurrence in the first place.
How is someone able to pledge MY fully paid for collateral without my consent to cover a debt for themselves? This is not Russia or Libya! Property rights are the basis of the entire US system of order. This case is not an SIPC case for a failed brokerage. This is a case of theft, plain and simple, the claims of which will quite obviously be at the top of any reimbursement pyramid because the integrity of the rest of the system depends on that. My stuff, that the regulations said was separate, was pilfered by the biggest futures broker dealer in the country if the allegations prove true. That is some scary business. Yes, regulators continue to fail. Consider this from the AP:
The Securities and Exchange Commission and the CFTC have said they and other regulators were monitoring MF Global's situation for days "in anticipation of a transaction that would include the transfer of customer accounts to another firm."
What am I supposed to make of this statement? You watched and waited. Why? If there is no criminal prosecution at the end of this, which there should clearly be, why put thousands of traders like myself through the torture of the past week? They’ve allowed liquidation-only trades. Do you know how much money was lost as your broker tries to get a phone line for market orders only that get filled at some point in the future? Just getting a live line takes 10 minutes. I got lucky, I was light. Why not tell MF Global, “We are watching you, don’t do anything stupid!” My grandfather always said that “an ounce of prevention was worth a pound of cure." And who was the counterparty who accepted stolen goods as collateral if the news that MF Global tapped into client’s collateral was true? The headshakers, rather the mindblowers
continue. Remember, this wasn’t some rinky-dink operation, though it clearly turned out to be.
The world has always been, and remains, in largely different forms, a scary place. The US is no exception. Instead of charging with a two-handed sword and plated mail, Jon Corzine obviously directed his underlings to make the pain and sacrifice of clients' lives completely worthless in an effort to buy himself another day before the world would find out that he had failed again. Greed blinds those that are ruled by it. It made him blind to the perils of 40-1 leverage, and ultimately to the rule of law. Unfortunately for him and his firm, the apparent heist did not work, and a day later he had folded after the authorities stepped in. To think he could have pulled that over on Interactive Brokers too suggests an ego as large as the offices to which he aspires.
You know, I can really take a great deal. After all, I primarily trade silver futures -- the most dangerous of the most dangerous. I have handled the alleged manipulation for a decade. I handled the recent massive margin hike
from the CFTC after silver had dropped over 18% in the two prior days. A week later I see them lower Dow margins after
the best October since the 1980s.
Look, I get it, I really do. I’ve moped around the house for months sometimes following my biggest tsunamis. I’ve cancelled vacations, and made my family sit at 24 hours Denny’s from 2 to 5 in the morning so I could plug in and trade off a cell phone. Whatever’s required, I’m in. I’m a trooper. Most days I flip with one finger on the mouse clicking orders and the other hand on the keypad writing for Buzz and Banter
. It can be a tough life, and I do take it all personally despite my thick skin. What I cannot accept, however, nor will ever accept, is for things to be literally stolen.
Despite the outcome, whether monies comingled were magically returned, my relationship to this industry will be forever changed. Regulators now need to provide enough deterrent by filing criminal charges against these perpetrators if the eventual facts, clearer than those today, prove a theft, no matter how temporary and what intention. That is the easy part in restoring a confidence shattered. The harder part will indeed be convincing those brave enough to press on that their collateral and funds will be there when they demand it in any and all circumstances.
My brokers having a tough week too as are all his colleges. They have a book of clients all scared. By the end of today, it could be back to business or they could just be getting ready to float their resumes for the first time in decades, attempting to get a job elsewhere catering to a space with a bunch of injured and fearful players who still cannot access any of their money. Heck, the CFTC has not even launched a formal investigation yet. All eyes I know will be on that decision—and if the CFTC has the nerve at this point to fail to do so, than all bets are off on just how radical the change in the futures industry will be. Just like with Bernie Madoff, the day you can’t get your money is the day everyone knows that real problems lie just under the surface.
Keeping customer funds separate from a brokerage firm's own assets is "sacrosanct," said Sharon Brown-Hruska, a former acting chairman of the CFTC and now vice president at National Economic Research Associates.
(See also: Is This the Second Coming of Bernie Madoff? For more on Madoff and other financial swindles, please read Inside Five of the Most Pervasive Investment Scams.)