Posts Tagged ‘Mf Global’
Thursday, May 24th, 2012
While the sur-realities of just what Corzine and the rest of the MF Global ‘traders’ did has been extensively discussed here and elsewhere, PBS’ Frontline provides the most succinct (and relatively in-depth) documentary on just what occurred from how the corrupt CEO lobbied regulators who had the power to stop his risky bets to the endgame realization of the missing customer money. A narrative, not just of “a bet that went bad”, but “a Wall Street morality tale“. Must watch!
The story of Jon Corzine, the former head of Goldman Sachs and political power broker, who took over MF Global in the spring of 2010 with oversize ambition and a passion for risk. But after a massive bet on European debt turned sour, the firm lay in ruins, with more than a billion dollars of customer funds missing.
Chapter 1: Six Million Dollar Bet – The Power of Jon Corzine
Chapter 2: Six Million Dollar Bet – The Final Days Of MF Global
Tags: ambition, Bet, Bets, Billion Dollars, Customer Funds, Endgame, Global Traders, Global Watch, Goldman Sachs, Jon Corzine, Mf Global, Morality, Narrative, Pbs, Pbs Frontline, Power Broker, Realities, Realization, Regulators, Six Billion
Posted in Markets | Comments Off
Thursday, May 10th, 2012
“It’s all for nothing if you don’t have freedom.” William Wallace
In this issue of The Institutional Risk Analyst, we return to the Lehman Brothers, Madoff and MF Global bankruptcies to talk about how the largest banks have wired US bankruptcy laws to their own advantage. Specifically, the 2005 changes to the bankruptcy code, combined with the traditional American caution regarding pre-judgement restraint on the parties surrounding a bankruptcy, has provided American banks with a free pass to facilitate fraud with no accountability.
On May 17th, IRA co-founder Christopher Whalen is making a presentation to the economic advisory committee of FINRA entitled “Policy issues regards customer account protection and bankruptcy.” This edition of The IRA is meant as a background to that discussion, which unfortunately is closed to the public. In that regard, thanks to Max Keiser for the quotation from his kinsman William Wallace.
You may also read our earlier comment, “Should the Courts Appoint an Equitable Receiver for Bank of America?,” where we argue that the degree of obvious fraud present in the operations at BAC and Countrywide justifies the appointment of a federal receiver now to run the bank.
But before we jump into this discussion, we just have to take a moment to note that Ally Financial has apparently received the blessing of the US Treasury to file a bankruptcy for the ResCap real estate unit, according to Dakin Campbell at Bloomberg News. This is a profoundly bad idea, as we have noted in past issues of The IRA. The subsidiaries of bank holding companies cannot default, especially when the sub has its own bond holders with a different agenda than the parent company creditors. Hello! Read Gretchen Morgenson in the Sunday NY Times: “Mortgage Unit Troubles Ally Financial”
Neither Secretary Geithner nor President Obama wants to deal with Ally before the election. The incompetence of Geithner in dealing with the portfolio investments of the US is a national scandal, but Ally is first among his failings because of the politics of GM and big labor. The obvious thing to do was sell the auto business back to GM and the servicing book to somebody a year or more ago, but the policy of “extend and pretend” continues in Washington. Sad thing is, though, that the business community is still abandoning the White House in droves despite or maybe because of such behavior.
The Case for Equitable Receivers in Bankruptcy
Article III of the US Constitution created the judicial branch of the American government and made it independent of the legislative and executive branches. District Courts, Courts of Appeal and the US Supreme Court are all authorized under this part of the Constitution and are thus known as “Article III” courts. The Supreme Court has ruled that only Article III courts may render final judgments in cases involving life, liberty, and private property rights, with limited exceptions.
Article I tribunals consist of certain federal courts and other forms of adjudicative bodies, including federal bankruptcy and administrative law courts, and many federal agencies such as the Fed, FDIC and OCC in the banking world. Article I of the Article 1, Section 8, Clause 4 authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” These bodies are creatures of the Executive Branch and the decisions of these “adjunct” tribunals are subject to comprehensive review by the Article III courts, as noted above.
The historical separation between bankruptcy courts and the US judiciary is complex and reflects the imperfect, often conflicted nature of the governances structures of the American republic. The concept of checks and balances, after all, implies conflict, not the phony notion of consensus. The policy on bankruptcy evolves with the country.
When it comes to business insolvencies, both Congress and the Courts have tended to want to leave bankruptcy courts in the commercial realm, operating more like mediators for corporations and social welfare agencies for individual, than as “equity courts” in the ancient sense. Out of this tradition has grown a great reluctance on the part of US Article III courts to allow the bankruptcy courts to operate outside the narrow confines of the interests of the estate of the failed individual or entity.
In the 1920s and 1930s, when financial fraud reached an apex, the Courts were not afraid to empower bankruptcy trustees also as receivers in order to protect the public from various types of criminality in existence at that time. In the landmark 1925 case Benedict v. Ratner, where Justice Louis Brandeis laid down the law on collateralized borrowing, the bankruptcy trustee in the underlying case was also appointed as a receiver.
The difference between a trustee and receiver is very significant. The trustee in a bankruptcy represents the estate and has no power to pursue other parties nor to make decisions affecting equity. The bankruptcy of the Madoff firm, for example, shows how the trustee in unable to act on behalf of the victims of the fraud. Irving Picard may only represent the interests of the failed broker dealer. Under the bankruptcy code, the trustee may only pursue money’s owed to the estate and may not pursue third parties for their actions against the victims of the fraud.
While many people are confused by the fact that the Madoff trustee has been unable to recover billions in funds stolen from the customers of the Madoff firm from JP Morgan and other banks, this situation simply reflects US law and the Constitutional limitations imposed upon the bankruptcy process. The well-established general rule was that a judgment fixing a debt was necessary before a court in equity would interfere with the debtor’s use of his property.
Thus in the case of Madoff, the bankruptcy trustee is unable to pursue claims against the third parties, in part because this “adjunct” tribunal lacks the authority to make such a final judgment. In addition, because the trustee’s authority stems from his association with the estate of the bankrupt entity, the concept of “in pari delicto” blocks the trustee from acting. Two key concerns for investors and risk managers are illustrated by the Madoff and MF Global bankruptcies:
o Unequal legal status of segregated accounts in bankruptcy vis-à-vis other creditors due to “safe harbor” changes to bankruptcy laws in 2005.
o Inability of bankruptcy trustees to pursue third parties that cause losses to investors due to fraud, other bad acts.
As a result of these two defenses working in tandem, today financial institutions can aid frauds such as Madoff and MF Global, to mention just a few, without being brought to task in civil proceedings. Because the federal courts and other agencies still do not recognize fraud as the paramount problem facing the US economy, the victims of the fraud are left defenseless. And once the perpetrator of the fraud files for bankruptcy, the individual victims often are left without any means of seeking redress and the bad actors among management and other customers literally walk away. As Peter Henning wrote for The New York Times last month:
“Most investors lose almost all of their money once a Ponzi scheme collapses, and the trustees appointed to clean up the mess try to find any deep pocket available to recover something. Unfortunately for the trustees, the legal doctrine of “in pari delicto,” Latin for “in equal fault,” may block any recovery.”
In a major 1920s case decided a few years before the Benedict v. Ratner decision, Brandeis famously precluded any right for unsecured creditors to seek a receiver, except the right to have freedom from fraud. This decision was upheld decades later in 1999 when Justice Antonin Scalia, writing for a unanimous Supreme Court in Grupo Mexicano de Dessarollo, S. A., et al, held that:
“This case presents the question whether, in an action for money damages, a United States District Court has the power to issue a preliminary injunction preventing the defendant from transferring assets in which no lien or equitable interest is claimed… [T]he English courts of equity did not actually exercise this [Mareva] power until 1975, and that federal courts in this country have traditionally applied the principle that courts of equity will not, as a general matter, interfere with the debtor’s disposition of his property at the instance of a nonjudgment creditor. We think it incompatible with our traditionally cautious approach to equitable powers, which leaves any substantial expansion of past practice to Congress, to decree the elimination of this significant protection for debtors.”
The problem with the prose used by Scalia in the unanimous Supreme Court opinion is that the justices still do not “get it” when it comes to fraud. While the decision in Grupo Mexicano was correct, the problem with the cases coming before the bankruptcy courts today such as Lehman Brothers, Madoff and MF Global is that fraud is once again the key problem. And many lawyers and judges, with all due respect, do not understand the fraud exemption to the general rule set forth by Brandeis, Scalia and many other members of the Supreme Court.
Bankrupt firms such as MF Global, Madoff and all of their officers and business counterparts deserve greater scrutiny that only an equitable receiver appointed and empowered by a federal District Court judge can provide. Unfortunately, many victims of fraud do not understand their rights and duties in such situations. Worse, their lawyers who’ve never read Brandeis or the brothers Learned and Augustus Hand on these core Constitutional issues often fail to appreciate that there is a way to demand the appointment of a receiver by a federal court in a bankruptcy where fraud is present.
The unspoken truth of 2007 financial crisis is that fraud on and off Wall Street just as pervasive in 2005 as in the 1920s. Lehman Brothers, Madoff, and MF Global all featured systemic fraud. Congress and the Supreme Court took a decade from 1929 to 1938 to wake up to root cause of Great Depression, namely securities fraud of 1910s through 1929, and acted accordingly. But today we have come full circle. A servile Congress and federal Courts have precluded just about every means for controlling fraud by large banks and have destroyed investor confidence in the process.
In the Grupo Mexicano case, Scalia’s opinion relies on (and favorably quotes) opinions of Brandeis for when a receiver is proper. That case is still good law and Scalia quotes that case as his primary authority. The facts of Grupo Mexicano involved only “preferences,” not “fraudulent transfers” (because they discharged obligations to creditors) and were not direct or indirect transfers to insiders or shareholders.
So while the Scalia decision is technically correct, the way his language is being misused today in the Madoff and MF Global litigations is the problem. Brandeis would agree with Scalia on the Groupo Mexicano “holding” that simple preferences of creditors should never be the basis for appointing a receiver. But that also means the use of receivers is allowed when there is evidence of insider dealings and actual or constructive fraud and thus is consistent with the “ruling” of Grupo Mexicano (though perhaps not reading Scalia’s prose). Scalia could rule in favor of receivers at any time he wants and wrap himself in the “garb” of Brandeis. Bottom line: The Grupo Mexicano case should never be used as a preclusion from use of a receiver whenever there is evidence of fraud on unsecured creditors in a bankruptcy.
There are a number of examples where a receiver function plays an important role in fighting fraud. In case of The Stanford Group, an Article III receiver was appointed by a federal District Court without any bankruptcy to pursue a wide ranging investigation, which included efforts to conserve customer funds and pursue third parties via criminal and civil means.
The FDIC is another excellent example of how receivership powers enable that bank agency to limit losses to the mutual insurance fund supported by insured banks and also pursue claims against bank officers, directors and other parties. Unlike a trustee in a bankruptcy, the FDIC acting as receiver has broad authority to seize assets, sue officers and directors, reject contracts and even make criminal referrals related to a failed bank.
The FDIC example is instructive for what a receiver’s role should be. The first job of counsel to any FDIC receiver is by regulation and practice to pursue claims against officers, directors, auditors, appraisers and attorneys (and their respective insurers). That is because when a financial institution goes bust, those are the ONLY sources for recovery of losses by taxpayers. Financial institutions NEVER go bust when their assets (loans) exceed their liabilities (deposits and debts) and losses, therefore, are all a result of asset deficiencies.
So what can be done to fight fraud and restore investor confidence? There are two key changes that Congress must make in current law. First, there needs to be a requirement for referral (by any trustee in bankruptcy AND by all bankruptcy judges) to the related District Court for appointment of receiver in ANY case where:
1. “in pari delicto” is asserted as a defense or as a basis for not proceeding in an adversary proceeding against any third party that the trustee or bankruptcy judge believes to be liable to the estate and/or its creditors, or
2. the trustee, any creditors’ committee or bankruptcy judge determines that “in pari delicto” is likely to restrain collection of an otherwise collectible sum, unless, after a hearing, the Bankruptcy Court rules that it is not in the interest of the estate to pursue such claim.
A trustee and/or any affected creditor can then appeal to the related District Court without limitation by reason of the bankruptcy stay.
It should then be up to the District Court to determine whether a separate limited receiver is to be appointed (like a “special master”) with respect only to those claims or to appointment of a full receiver.
When a full receiver is appointed, the District Court should be allowed to elect the trustee as a receiver, in the event there is found to be no conflict of interest, or to merely add receivership authority to the role of the trustee appointed by the District Court.
Empowering Bankruptcy Courts to use receivers appointed and empowered by federal District Courts restores the faith of investors that fraud is NEVER a “defense” and overcomes the desire of trustees (and even some bankruptcy judges) to keep Article III courts out of bankruptcy issues.
Expanded use of receivers in bankruptcy is also consistent with centuries of law that fraud overcomes any discharge of debt in bankruptcy. So this proposal is not so much a “change of law” but rather a recognition that markets suffer whenever fraud is an effective “defense” in bankruptcy or other venues.
Questions? Comments? firstname.lastname@example.org
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Tags: American Banks, Antonin Scalia, Bank Holding Companies, Bank Of America, Bankruptcy Code, Bankruptcy Laws, Bond Holders, Christopher Whalen, Dakin, Economic Advisory Committee, Geithner, Gretchen Morgenson, International Risk, Kinsman, Lehman Brothers, Max Keiser, Mf Global, Ny Times, Risk Analyst, Risk Analytics, Us Treasury, William Wallace
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Monday, April 23rd, 2012
- A Forecast of What the Fed Will Do: Stand Pat (Hilsenrath) – they finally realized that they have to leak the opposite…
- Draghi’s ECB Rejects Geithner-IMF Push for More Crisis-Fighting (Bloomberg)
- Wal-Mart’s Mexico probe could lead to departures at the top (Reuters)
- The Sadly Unpalatable Solution for the Eurozone (FT)
- US Regulators Look to Ease Swaps Rules (FT)
- Yuan, Interest Rate Reform to be Gradual: China Central Bank Chief (Reuters)
- Run, Don’t Walk (Hussman)
- Hollande Steals Poll March on Sarkozy (FT)
- Dutch Early Elections Likely After Wilders Opposes Budget (Bloomberg)
- China Lauds North Korea Friendship Despite Tensions (Reuters)
Overnight Media Digest:
* French President Nicolas Sarkozy was thrust into a fight for his political survival after lagging behind Socialist candidate François Hollande in the first round of France’s presidential poll.
* Beam Inc is expected to announce Monday a deal to buy Pinnacle vodka and another brand from White Rock Distilleries Inc for around $600 million, according to people familiar with the matter.
* A group of former officials from the old brokerage firm E.F. Hutton & Co plan to start a new boutique financial-advisory firm under the same name.
* Customers of MF Global Holdings Ltd are pushing regulators to get tougher on JPMorgan Chase about money that went missing from accounts just before the firm’s collapse.
* Wal-Mart Stores faces significant legal risks after it disclosed that it is investigating its operations in Mexico for possible violations of the U.S. law that prohibits bribery in foreign countries, legal experts said.
* Avon Products Inc, famous for sending its representatives door to door, is losing traction in the U.S., where many time-stressed consumers are increasingly buying their cosmetics on the Web. Operating profit per representative in the U.S. has plunged 75 percent over the past decade, according to an analysis by Sanford C. Bernstein.
* US Airways Group Inc’s move to garner support from three unions at AMR Corp’s American Airlines for a merger between the two companies is designed to woo American Airlines workers but stop short of saddling a combined carrier with contracts that would hobble operations.
* Despite renewed fears about the euro-zone debt crisis, recent gains in U.S. Treasurys have been modest, likely owing to increasing doubt that the Federal Reserve will provide further stimulus for the U.S. economy.
* Across the television landscape, viewing for all sorts of prime-time shows is down – chiefly among 18-to-49 year olds, the most important audience for the business.
* The entertainment entrepreneur Peter Chernin has made an arrangement with investors, who are taking a stake in the future earnings of his films and television shows and channeling him the money now.
* China’s prime minister is touring Europe this week, and with a recent increase in direct investment in Germany, the country will occupy a special place on his itinerary.
* The International Monetary Fund won significant pledges this weekend, but meetings ended without a consensus on how to speed up the economic recovery or stamp out the European debt crisis.
* NimbleTV is the latest example of technology companies trying to break into the closed system of television distribution in the United States. The start-up is introducing a way to move a whole subscription’s worth of TV onto the Web, with or without the subscription company’s permission.
* Amylin Pharmaceuticals is seeking a potential buyer, after it rebuffed an unsolicited $3.5 billion takeover offer from Bristol-Myers Squibb earlier this year, a person briefed on the matter said Sunday.
THE GLOBE AND MAIL
- Fiscal restraint is rippling through Canada’s national statistical agency, prompting it to start slicing surveys and warn staff of cost cuts and impending layoffs in what it calls a “year of sacrifice” at the organization.
- Federal officials are considering privatizing some of VIA Rail’s longest and most scenic routes – including the quintessentially Canadian journey between B.C. and Ontario, and the Rocky Mountain run between Jasper and Vancouver.
Reports in the business section:
- Canada’s insurance brokers have lodged a complaint with the country’s banking regulator, alleging that two big banks are flouting Ottawa’s rules by promoting insurance on their websites.
- North America’s largest garbage hauler, Waste Management Inc, is looking for Canadian partners to help create new technology that will convert waste to energy.
- Quebec’s gun-control advocates were buoyed Friday by a strongly worded Quebec Superior Court judgment that recognized the recently abolished long-gun registry as an effective and economical crime prevention tool, laying the groundwork for a long legal battle with Ottawa.
Reports in the business section:
- In late September 2004, just three days before Air Canada emerged from bankruptcy protection, the airline’s then-chief executive Robert Milton made some bold proclamations about the company’s future.
- Junior miners have always brought with them a high risk-reward ratio. For every success there are easily a dozen failed firms that never see their projects go further than a few drill samples.
European Economic Summary:
- France Own-Company Production Outlook for April -4. Previous 6. Revised 8.
- France Production Outlook Indicator for April -14. Previous -15.
- France Business Confidence Indicator for April 95 – lower than expected. Consensus 96. Previous 96. Revised 98.
- France PMI Manufacturing for April 47.3 – lower than expected. Consensus 47.4. Previous 46.7.
- France PMI Services for April 46.4 – lower than expected. Consensus 50.1. Previous 50.1.
- Switzerland Money Supply M3 for March 6.60%y/y. Previous 6.40% y/y.
- Switzerland Real Estate Index Family Homes for March 410.4. Previous 404.6.
- Germany PMI Manufacturing for April 46.3 – lower than expected. Consensus 49. Previous 48.4.
- Germany PMI Services for April 52.6. Consensus 52.3. Previous 52.1.
- Euro Area PMI Composite for April 47.4 – lower than expected. Consensus 49.3. Previous 49.1.
- Italy Consumer Confidence Ind. s.a. for April 89.0 – lower than expected. Consensus 96.2. Previous 96.8. Revised 96.3.
- Euro Area PMI Manufacturing for April 46.0 – lower than expected. Consensus 48.1. Previous 47.7.
- Euro Area PMI Services for April 47.9 – lower than expected. Consensus 49.3. Previous 49.2.
- Euro Area Euro-Zone Govt Debt/GDP Ratio for April 87.2%. Previous 85.40%. Revised 85.3%. Record high
Tags: Avon Products, Avon Products Inc, Beam Inc, Brokerage Firm, Central Bank Chief, E F Hutton, Financial Advisory Firm, French President Nicolas, French President Nicolas Sarkozy, Global Holdings, Hussman, Mf Global, Nicolas Sarkozy, President Nicolas Sarkozy, Presidential Poll, Socialist Candidate, Us Airways, Wal Mart, Wal Mart Stores, White Rock Distilleries
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Sunday, March 25th, 2012
by Peter Tchir, TF Market Advisors
Stop tomorrow’s problems today.
Just this week we had:
TVIX – an ETN that provides double the daily change in the vix futures. Who is smart enough to be able to take big bets on VIX futures that doesn’t have a futures account? Who is this designed for?
MF Global & “customer money” – months after the problem, no good explanation of where the money went, and even more scary, is that the it remains unclear whether MF did anything illegal with customer money. Our understanding of how our money should be treated, and the legal rights we have signed away don’t necessarily match up.
CPDO – the legal battle in Australia over this disaster continues. In the top 3 of mis-rated product of all time. You take something that is BBB+ on average, LEVERAGE it, and get AAA. It relied on “self-insurance” the thing partly responsible for the equity crash in 1987.
Greek CDS auction – finally a Credit Event occurred and settled this week. Very few people still seem to understand how lucky CDS holders were that the auction on New bonds delivered a real payout. The system didn’t fall apart as some had worried, but no reason that CDS cannot be at least 90% cleared, or better yet, traded on an exchange.
BATS – “Making Markets Better” according to their website had to pull their own IPO. Maybe they didn’t realize algo’s don’t provide actual liquidity, all they do is take real liquidity from exchange and run around the electronic world trying to scalp a few fractional cents not available to individual investors anyways. If they have to list on a proper exchange, people really should question the need for these other exchanges, sub-penny trading, etc.
I’m all for some complexity and innovation, but it does seem after a week like this, that the financial markets have become too complex, and some real effort should be made to simplify things and put everyone on an even playing field.
Which brings me to a story I’m just getting up to speed on. It seems like banks and investment banks are working on ways to satisfy their customer’s demand for yield. They should come with a warning that “yields in hindsight may be smaller than they appear”. I haven’t been able to confirm that this is being sold to retail or how much has been done, but I decided to poke around in some bonds listed by Citibank – mostly because somehow they seemed to have needed more support from the taxpayers than any other bank (except for BAC which I have picked on too often).
So let’s take a look at what appears to be a Citibank NA Certificate of Deposit – how dangerous could that be?
It seems a bit long for a CD – 2032 final maturity, especially since it is callable at any time. According to this it hasn’t been issued yet, so maybe this is all a bad dream, but since I was able to find it on Bloomberg, it probably is something they are trying to sell.
So on any “fixed income” product, the big question is what is the coupon? It pays 6%!
Ok. I could buy Citigroup Inc 5.85% bonds with a 2034 final maturity. They are non-call and priced around 103.5 to give a yield of 5.57%. So stop right there. The CD may be marginally higher in the capital structure and slightly safer, but for 20 years I would much rather have 5.57% non callable bond rather than a 6% bond callable at any time. I would spend more time working out the value of the call and if the trade-off is even remotely fair, but there is no point, because the coupon isn’t “fixed” it resets annually.
So after 1 year, the coupon will be 5% minus 6 month LIBOR at the time. If today was a “setting” date, the coupon would be only 4.25%. So as short term rates rise in the future, this coupon on this Inverse Floater will go do. If 6 month Libor is ever at 4% or above on a setting date, then this bond will have the “floored” coupon of 1%. So if the Fed starts raising rates or LIBOR goes up because bank credit risk deteriorates, you own a low coupon bond in either a high rate environment, or weak bank credit environment.
But this “Certificate of Deposit” looks tame compared to another they seem to be marketing at the same time. Again, I don’t know for certain that they are marketing this, but it does show up on Bloomberg under a list of Citi bonds, so I have to assume it isn’t there by accident.
So this one is a “dual range accrual”. So it look like you have to track the number of days in a period where 3 month Libor is between 0% and 5% and the Russell 2000 is above 75 (maybe they mean 750?). If both conditions are met for the entire period, you get a 4.25% coupon. So a Citibank CD that is callable at any time, has a best case coupon of 4.25%, and could be 0% in either a high rate environment (libor above 5% or in a weak stock market the RTY is below the threshold). Retail investors are selling options hand over fist with the promise of some decent yield in the first year. I find it hard to believe they understand the options they are selling, and I find it impossible to believe that they are selling the options at anything close to fair value.
Stop tomorrow’s problems today, but if you are show a “fixed income” product where the coupon is too good to be true, it is too good to be true!
Copyright © TF Market Advisors
Tags: Bats, Bbb, Bets, Bonds, Complexity, Electronic World, Etn, Financial Markets, Fixed Income Products, Greek Cds, Homer Simpson, Individual Investors, Ipo, Leverage, Mf Global, Nbsp, Proper Exchange, Real Liquidity, Self Insurance, Tf, Vix Futures
Posted in Markets | Comments Off
Tuesday, March 13th, 2012
Submitted by Nomi Prins
The Audacity of Bonuses At MF Global
In the spirit of George Orwell’s Animal Farm commandment: “all animals are equal, but some animals are more equal then others” comes the galling news that bankruptcy trustee, Louis Freeh, could approve the defunct, MF Global to pay bonuses to certain senior executives. This, despite the fact that nearly $1.6 billion of customer funds remains “missing” or otherwise partially accounted for, yet beyond the reach of those customers, perhaps forever, since before the firm declared bankruptcy on October 31, 2011.
Another commonality between the MF Global incident and Animal Farm is the abject rewriting, or re-interpretation, of rules. At the farm, the rule ‘No animal shall drink alcohol” was ultimately ‘re-remembered’ as ‘No animal shall drink alcohol to excess.’ Absent opposition to this particular fact alteration, the pigs got drunk. It wasn’t pretty.
The Orwellian nature of finance is spiraling out of control. It was acutely demonstrated during the fall 2008, merge-and-be-bailed period, and subsequently, through mainstream acceptance that “too big to fail” validates the subsidization of reckless banking practices (bail first, ask questions or consider tepid regulation later), and the European debacle.
Three wrinkles of audacity underscore the potential MF Global bonus approvals. First, there is the moral responsibility layer. MF Global, classified as a broker-dealer wasn’t specifically subject to the investment-advisor fiduciary rule that requires ‘systemic safety and soundness’’ with respect to retail customers. But, comingling customers’ funds inappropriately with the firm’s, as former chief, Jon Corzine’s European bets were blowing up, was an abject misinterpretation of the rule’s intent.
Aside from that, MF Global lied about funds segregation to its customers, which constitutes fraud. The final page of the firm’s brochure touts “the strict physical separation of clients’ assets from MF Global accounts.”
Separately, MF Global broker-dealer activities were subject to SEC oversight and restrictions on its use of client funds. During any normal investigation, like say for embezzlement, funds should be frozen until issues are resolved. Releasing any bonus pay until this matter is settled is just plain wrong.
The reason for possibly allowing bonuses for MF Global chief operating officer, Bradley I. Abelow, finance chief, Henri J. Steenkamp, and general counsel, Laurie R. Ferber follows the same twisted logic pervading Wall Street: no one else can do the job as well.
These people are apparently so special that despite incompetence, negligence or potential malfeasance in diverting customers’ funds away from their rightful spots, their expertise is critical to the bankruptcy proceeding. In that realm, their ‘job performance’ will help Freeh “maximize value for creditors of the company”. Translation: it will ensure banks like JPM Chase keep their cut, since customers are not creditors. Again, plain wrong.
But forget simple matters of right and wrong for a moment. After all, this is Big Finance: what’s most important is what’s not necessarily what’s legal or illegal, but more practically, what you can get away with and what you can’t. In that regard, the sheer impotence of regulators, the Department of Justice, and the FBI are enabling factors in perpetuating financial crimes.
In early 1933, during the Depression that followed the 1929 Stock market Crash, Democratic president, FDR and Republican Treasury Secretary, William Woodin, declared a bank holiday, during which Treasury Department agents examined banks’ (which included at the time, broker-dealers) books to determine solidity and solvency.
Today, our regulatory bodies are incapable, or simply don’t want to be bothered with, tracing money and returning it to the public customers to whom it belongs. The inability to independently examine MF Global’s books, without its executive involved, reveals the sorry state of our financial system. In this post-Glass-Steagall-repeal world, the mixing of customer money and speculative betting – whether at a super-market bank or broker-dealer, whether involving subprime loans packages or European Sovereign debt, poses too dangerous a level of complexity. If regulatory bodies can’t, or won’t, diminish the related risk, more concrete Glass-Steagall boundaries throughout the financial framework should be resurrected.
Meanwhile, two senators have taken on the bonus-pay fight. Senator Amy Klobuchar (D., Minn.), member of the Senate Agriculture Committee investigating MF Global, wrote to Freeh that the plan is “unacceptable.” Senator Jon Tester (D., Mont.), whose constituency includes a number of farmers with funds in the ‘missing’ category, called it “outrageous.”
On Sunday, Freeh’s spokesperson released a statement saying the senators’ concerns were ‘noted’ and a final decision on the bonuses hadn’t been made. But to the extent that the money trails shrouding MF Global’s final moments remain more apparent to its former employees than external examiners, it’s likely the people involved in the wreckage, will be paid extra for sorting thru it. And, that’s an expensive, outrageous, shame.
Copyright © Nomi Prins
Tags: Agriculture, Animal Farm, Audacity, Bankruptcy Trustee, Broker Dealer, Comingling, Commonality, Customer Funds, George Orwell, Investment Advisor, Jon Corzine, Louis Freeh, Mainstream Acceptance, Mf Global, Misinterpretation, Moral Responsibility, Nomi Prins, Retail Customers, Senior Executives, Subsidization, Systemic Safety
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Thursday, February 23rd, 2012
Tadas Viskanta is the founder and editor of the finance blog Abnormal Returns. Tadas has over twenty years of professional experience in the financial markets. He is also the author of the forthcoming book, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.
There has never been a better time to be an individual investor.
Said another way one could argue that we are in the golden age of the individual investor. That might seem like an odd thing to say coming off what some people call a ‘lost decade for stocks.’ However over that same time period the technological advancements that made Web 2.0, like Facebook, Twitter and LinkedIn, possible have also led to unprecedented opportunities for investors not previously seen.
We are for the moment leaving aside the state of the markets at the moment. We could have written this same post a couple of months ago when the stock market was 20% lower. We are also leaving aside the issue of whether the zero interest rate policy of the Federal Reserve represents a “war on savers” or is simply the byproduct of necessary policies. The failure of MF Global and the systemtic risks it poses for all account holders are also outside the scope of this post.
This is not a novel theme for us. Indeed one thing we note in our forthcoming book, Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, is that investing has never been “cheaper or easier.” Some of this has to do with the rise exchange traded funds. In other respects it has to do with the blossoming of the options markets. In large part, it has to do with technology. In short, never before have investors had access to data, analysis, opinion and social tools that are commonplace today. Let’s take these points one by one.
- Easier: Investors today can with a brokerage account and a computer is now only a few mouse clicks away from a globally diversified portfolio of ETFs that in terms of expenses rivals what institutions paid a decade ago. For all intents and purposes the expense ratio on the big ETFs is closer to 0.0% that 1.0%. Many brokers now allow online trading of individual bonds and overseas securities.
- Cheaper: Brokerage commissions continue to get driven towards $0 over time. In fact, many brokers today provide commission-free trading of a range of ETFs. Options strategies that would have been cost-prohibitive a few years ago are now viable strategies today. Do you remember when you used to have to pay extra for real-time quotes? Today those are a commodity.
- Richer: The range of asset classes, sectors and strategies available via ETFs is truly dizzying. It is even for interested parties hard to keep up. Will most of these more exotic strategies fail? Probably. But sometimes a strategy, like low volatility investing, that is based in deep academic research, becomes available to investors.
- More social: Blogging and microbloggging (StockTwits & Twitter) has opened up the world of idea generation to the masses. Anyone with a computer these days can put their ideas out there. The blogosphere and Twittersphere is a meritocracy, albeit imperfect, where the smartest and most generous contributors rise to the top. The social model is pushing into things like earnings estimates with Estimize and institutional-grade services like SumZero. Many bloggers these days make fun of the raft of ‘free’ webinars that go on these days. But if you think about it the software and Internet speeds were not there to make mass online seminars possible not all that long ago.
- Smarter: The raw material for investment analysis and trading is of course data. Financial and price data is for the purposes of most individual investors is free these days. Many firms are using data in interesting ways. In the area of fundamental data some firms like Trefis and YCharts are making fundamental analysis easier. A firm like AlphaClone allows you track the moves of (and invest) like the big hedge funds. When it comes to portfolio level data firms like Wikinvest are aggregating account data making analysis easier for investors.
Most of the above discussion focuses on do-it-yourself investors. However on the managed portfolio front things are changing for the better as well.
- Brokers vs. RIAs: The wirehouse brokerage model is going the way of the dodo bird. Brokers and their clients now recognize in increasing numbers the conflicts inherent in that model. Brokers are going independent as registered investment advisors in order to provide their clients with a conflict-free model. That does not necessarily mean they are going to generate above-market returns, simply that these firms are no longer working at cross-purposes to their clients.
- Online access to managers: Not only is the fee-only model taking hold. It is taking hold online in a big way. If you can eliminate, to a degree, the human element inherent in portfolio management you can also reduce the end cost to the investor. Some firms that are operating in this space include: Wealthfront, Personal Capital, Covestor and Betterment.
In the New York Times this past weekend there was an article talking about the many changes we are seeing through the analysis of “big data.” The applications of big data has taken hold faster in the world of personal finance, like BillGuard, than it has in investing. However one can easily see how access to data on individual trading decisions could make for an interesting recommendation engine. In the end, more algorithmic investment tools and services coming one way or another. The fact is that a simple, well-designed algorithm can do a better job of managing in real-time a portfolio than the vast majority of investors or investment advisors.
In many ways the automation of much of what constitutes investing today will be a godsend for investors. The majority of investors really don’t want to manage their own portfolios. Not do they a hyper-personalize portfolio. An algorithmic service that managed in a low-cost fashion portfolios it would allow those investors to focus on the things over which they have some control. The stuff of truly personal finance like: savings rate, lifestyle choices and retirement options.
Sometimes in the midst of volatile markets we can forget just how far things have come. Just a few years ago who thought you could trade a leveraged on $VIX futures. But today you can. Who would have thought you could buy an ETF for the Egyptian market, but you can. However this example points out the double-edged sword that is today’s markets. Now we do have access to all manner of investment and trading vehicles. However like any tool these vehicles need to be used responsibly. The vast majority of investors should likely take a pass.
The reason is that despite the many technological advancements we have seen in investing our brains are still largely hardwired for an age of scarcity. That is why so many of the behavioral biases we have accumulated over time work against us when it comes to investing. That is why we consistently buy high and sell low, i.e. the behavior gap. That is why we oftentimes only seek out (and recognize) that information that conforms to our long held beliefs, i.e. confirmation bias. In the end the most difficult hurdle to investment success is not the market environment or the range of investment vehicles, it is us.
So despite the advances we have seen, most investors would be well-served in investing in a low cost, globally diversified portfolio which they systematically rebalance and occasionally revisit. The upside is that this sort of investment process is, as we said, now cheaper and easier than before. In the end no one knows what the markets will do, but the vast majority of investors can do more by doing less.
The full application of technology to the investment world will simultaneously open up novel areas of investment for adventurous investors and simplify the mechanics of portfolio management for the average investor. Investors have to choose which path they will follow. They simply need to recognize that their own, somewhat flawed brains, are coming along for the ride.
*I know I have likely omitted some very cool startups in the investing and personal finance space. This is not meant to be a comprehensive accounting of the field. Feel free to include in comments any interesting firms in this space.
(H/t: Barry Ritholtz)
Tags: Abnormal Returns, Access To Data, Better Time, Blogosphere, Brokerage Account, Byproduct, Exchange Traded Funds, Forthcoming Book, Frontlines, Individual Investor, Interest Rate Policy, Mf Global, Necessary Policies, Options Markets, Professional Experience, Same Time Period, Technological Advancements, Twitter, Unprecedented Opportunities, Zero Interest
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Scared by Precious Metals Volatility – Identify Severe Undervaluation Points in Gold and Silver vs. Tyring to Call Perfect Bottoms
Thursday, January 26th, 2012
For a new investor in gold and silver, here is the most lucid piece of advice I can offer. Identifying severe undervaluation points in gold and silver, buying gold and silver assets during these times, and not worrying about interim short-term volatility, even if the immediate volatility is downward, is much more likely to impact your accumulation of wealth in a positive manner than trying to perfectly time market tops and bottoms in the highly manipulated gold and silver game. I am posting this article today to help all gold and silver investors, especially those new to the game, to frame their perspectives about gold and silver price behavior in the proper manner. I hope this article helps gold and silver investors so stand firm and maintain their faith in the face of anti-gold, anti-silver banker propaganda and that it helps investors to identify significant corrections in gold and silver as huge buying opportunities, and not as times of despair, that do not require perfect timing to yield very significantly rewards. During the last week of 2011 and the first couple of weeks of 2012, I posted two articles on our blog that I felt would be critical to investment success this year.
In the first article, “Did Bankers Deliberately Crash MF Global to Crash Gold and Silver Prices?” I discussed two crucial points that are important to anyone that keeps any amount of digital savings in a bank (due to the fractional reserve system, the majority of the global currency in circulation today exists in digital form only). One, bankers deliberately invented paper markets in gold and silver to kill the influence that the physical demand and supply determinants of gold and silver have over prices. Two, bankers have historically rapidly contracted and expanded paper gold and paper silver contracts (that are backed with nothing but air) to introduce volatile movements in gold and silver with the express intent of scaring people away from real money (physical gold and physical silver) and keeping people invested in their bogus paper and mostly digital money (Euros, USD, Yuan, Yen, Pounds Sterling, etc.).
In relation to the MF Global debacle, we released private messages to our members that warned them that the MF Global liquidation and theft of client assets provided hard direct proof and critical legal precedent, that in the event of a bankruptcy of a major financial firm, clients had zero rights and property theft was now being sanctioned by and approved of by the State. There are still millions of people today that don’t understand the very dangerous precedent that MF Global set for future bankruptcies of financial firms that WILL HAPPEN in coming years.
If you have not been keeping up-to-date with the MF Global dispute over hundreds of millions of dollars of client money, then I highly urge you to read these three articles below:
The first MF Global article shows you that it is still a strong possibility that clients will lose $700+ million of their money they had with MF Global before it declared their bankruptcy. That is not a sum to sneeze at by any means. The second MF Global article is in regard to a Minnesota farmer that has not been able to recover $253,000 he held at MF Global. The farmer claimed, “This money was real money in real banks. It wasn’t under somebody’s mattress,” a statement that underscores the lack of understanding about our monetary system that exists among the masses. In fact, the opposite of what the farmer stated is becoming true today. The vast majority of money that is used in global financial transactions today exists only in digital form, not even in paper form, so paper money stored under one’s mattress is more “real” than any digital bytes on a computer at your bank. Secondly, real money is not fiat digital or paper currency but real money is physical gold and physical silver, NOT paper gold and paper silver as those that bought gold futures contracts with MF Global, hoping to take delivery of physical gold with their paper contracts, sadly discovered. The third MF Global article emphasizes, just as the US & many EU countries demonstrated during the 2008 free fall of financial stocks, that lawmakers and regulators are in the back pockets of bankers and will always change the laws at their whim to benefit the bankers and to defraud the people.
In 2008 to prevent bank stocks from plummeting that were deservedly plummeting, lawmakers in the EU and the US forced a short squeeze higher in financial stocks by arbitrarily changing the laws and banning any short sale of any bank stocks. Even though MF Global was clearly operating as a commodities firm, they applied for and were granted, the right to be dissolved as an equities firm. In this case, everyone from the legal system and the trustee of MF Global are merely ignoring the law to profit the bankers and defraud the clients.
“Rather than being treated as a bankruptcy of a commodities brokerage firm under sub-chapter IV of the Chapter 7 bankruptcy law, MF Global was treated as an equities firm (sub-chapter III) for the purposes of its bankruptcy, and this is why the MF Global customer money in so-called segregated accounts ‘disappeared’. In a brokerage firm bankruptcy, the customers get their money first, while in an equities firm bankruptcy, the customers are at the end of the line.”
In laymen’s terms, the unfolding debacle regarding MF Global also has critical repercussions and implications regarding the implied safety of any money you have in a money market account or savings account at a bank. Remember MF Global clients believed that their money was being held in “segregated” accounts that protected their assets in the event of a bankruptcy. If you don’t believe that the MF Global bankruptcy proceedings has affected how banks view their clients’ deposits, then you are hugely mistaken. At the end of last year, Bloomberg ran a story titled “BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit.” In this article, the journalist stated, “The bank doesn’t believe regulatory approval is needed”. ZeroHedge explained why BofA was making this move in their article “Bank Of America Forces Depositors To Backstop Its $53 Trillion Derivative Book To Prevent A Few Clients From Departing The Bank”:
“it shifted anywhere up to the total of $53 trillion of the total derivatives it held as of June 30 (as Zero Hedge previously reported) on its books at Q2 from the Holding Company, which was downgraded last by Moody’s from A2 to Baa1 (the third-lowest investment grade rating) to its retail bank, which was downgraded to the far more palatable A2 (from Aa3). The reason for the transfer? Bank customers who were uneasy with the fact that suddenly the collateral backstoping the operating entity handling their counterparty risk was downgraded to just above junk, demanded that said counterparty risk be mitigated by the bank’s $1 trillon in deposits.”
The MF Global case has clearly demonstrated that any insurance of banking accounts up to $100,000 or $250,000, no matter what country in which you reside, is simply MEANINGLESS if
(1) the insurance company insuring the aggregate deposits in your country is severely underfunded;
(2) the ruling corporatocracy allows financial firms to steal your property in the event of a bankruptcy; and
(3) banks are using customer deposits as collateral against the riskiest of their junk assets.
All three of the above have already been proven to be the case inside the United States and will likely be the case in countries around the world as well. From the US Federal Deposit Insurance Corporation’s (FDIC) own website, you can find this statement:
“On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act established a minimum designated reserve ratio (DRR) of 1.35% of estimated insured deposits, [and] mandates that the FDIC adopt a restoration plan should the fund balance fall below 1.35 percent.”
As recently as March, 2009 the US Deposit Insurance Fund had as little as $13 billion to insure nearly $4.83 trillion of deposits in US banks. By mid-2009, five US banks, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo, held about 39% of all deposits in the US and in 2012, that figure is almost certainly higher given the large number of US bank failures since mid-2009 until the present day, including very large US banks like Washington Mutual (which yours truly predicted in advance). It doesn’t take a math genius to understand that should just one of these top US banks fail,
(1) the Deposit Insurance Fund would be completely wiped out, thus rendering the $250,000 guarantee of bank deposits worthless and meaningless; or
(2) necessitate the creation of trillions of new money to maintain the guarantee, thus severely degrading the value of all existing money, thereby making the guarantee worthless once again.
Should a large US bank or European bank go bankrupt, a highly likely event in the future that can only be prevented by excessive monetary creation out of thin air, backed by nothing, (which in essence is an admission that the bank is bankrupt), then once can refer to the recent MF Global debacle to understand that no one will have any rights in recouping any money that is lost during a bank’s bankruptcy. If push truly comes to shove during a bankruptcy of a financial firm, and a decision must be made to either make the clients whole or the creditors of the bank whole, we all know that the clients (us) will lose the battle.
These critical talking points lead nicely into our second blog article, “Gold & Silver Banker-Cartel Prolonged Price Suppression Has Set the Foundation for an Explosive Move Higher in 2012.” As we stated in that article, sentiment was the lowest in nearly three years regarding gold & silver mining stocks at the end of 2011 and that entering 2012, bankers were still heavily distributing propaganda that silver was going to crash to $20 an ounce and gold was going to crash to about $850 to $1,000 an ounce. I made it clear in that article that strong fundamentals in the gold & mining sector combined with super low bullish sentiment in the mining sector produced a super strong buying opportunity and fantastic valuation for gold & silver mining stocks. In this article, I stated:
“there are still many reasons to expect a stellar next couple of years from gold and silver performance, including the mining stocks. From a technical standpoint, gold and silver appear to be on the verge of making a very significant run higher. I’m not saying that this will happen tomorrow, but it does look very probable within a short-time period. From a manipulation factor standpoint, gold and silver also look poised for a run higher too.”
“we see 2011 as nothing more than a temporary setback in gold/silver mining stocks…from a technical standpoint, gold and silver appear to be on the verge of making a very significant run higher. I’m not saying that this will happen tomorrow, but it does look very probable within a short-time period.”
Given the severe undervaluation of gold and silver and the fact that nobody should ever trust paper gold and paper silver futures as a means of taking delivery of real physical gold and real physical silver ever again. We believe that the divergences between paper gold and silver futures and spot prices and real physical gold and silver prices will eventually become enormous, as we first started predicting would happen in 2008, with premiums in the price of physical gold and physical silver eventually rising so high above the paper prices that the paper gold and paper silver markets will either
(1) eventually be ignored for purposes of price discovery; or
(2) eventually implode into its own current cesspool of lies, fraud and deceit.
Many new investors to gold and silver investing always make the mistake of trying to time exact bottoms and also to repeatedly time exact tops and to exit and re-enter markets repeatedly during the year. Given the enormous amount of volatility that the global banking cartel has introduced into all paper gold and paper silver products, including mining stocks, we believe that this type of mentality is counter-productive when the long-term picture in gold and silver has been as clear as it has been for the past several years. For example, when silver dropped below $30 an ounce last year, it was entirely irrelevant to one’s long-term wealth whether one purchased silver at $30, $29 or $28 an ounce given the fact that the probability silver will eventually rise to triple-digit dollar prices is extremely high.
We have always told our members that is a mistake to try to time the absolute bottoms of these corrections. When tremendous value exists in a sector, as existed in mid-January in the mining sector, then we always tell all new members to our services to “go all in” in their buying strategies during these times and to not worry about any short-term downside volatility or any of the misinformation being spewed by the financial mass media during these times about collapsing gold and silver bubbles. Furthermore, when the US Federal Reserve announced recently on January 25, 2012 that they would be extending low-rates into late 2014 and jump-started a one-day 5%, 6%, 7%, 8% explosion in gold and silver stock, this underscores my point even further. When the global banker cartel slams gold & silver mining stocks by 10% or more as they did at the end of last year, taking an already undervalued sector to greatly undervalued status, if one understands fundamentals, one will always view this as nothing more than a buying opportunity and not as a time to panic.
The performance of our Crisis Investment Opportunities newsletter portfolio, in August of 2010, was flat YTD, but then piled on whopping +33% gains in the last four months of the year. In 2008, our portfolio gains of a nominal 3.21% gain was followed by explosive gains of +63.32% in 2009. Though last year was our most difficult year to date since we launched our newsletter in June of 2007, our cumulative gains from June, 2007 to December 31, 2011 of +135 .18% has still outperformed the S&P 500, the FTSE 100, the ASX 200 respectively by +153.12%. +152.37%, and +169.20%. Thus, our track record of outstanding performance over time backs up our strong belief that worrying about every rise and fall in gold and silver every year will do nothing but drive you crazy and merely prevent you from handling your investments properly and intelligently. It is impossible to predict every single global banking cartel smash down of gold and silver with perfect accuracy; however, as long as one can foresee enough of them, as our outperformance of the PHLX Gold/Silver index by +104.75% over the last 4-1/2 years proves, and maintain the nerve and confidence to stay invested in gold and silver even when the “pundits” are screaming at you to get out, as they were at the end of last year and the beginning of this year, then you will do quite fine in continuing to build wealth as the monetary crisis deepens.
If one understands the possibility that all digital credits in your bank and investment accounts could disappear given the failure or a major global bank (an inevitable event it seems right now), then one should clearly understand that owning physical gold and physical silver is NOT an option but a necessity if you are to survive the second phase of this global monetary crisis. Even if we are wrong about the failure of digital financial products and fraudulent paper derivatives in the future, we will still be right, as owning physical gold and physical silver will continue to protect the purchasing power of people’s money as this monetary crisis deepens. Remember, though many have been jumping on the gold and silver bandwagon this week, we, at SmartKnowledgeU, have been publicly advocating gold (and) silver ownership since 2006, and privately, for years prior to 2006, for the same exact reasons we’re still advocating it today.
The global banking & monetary system is a fraud, a mess, and there is no turning back from US dollar & Euro destruction at this point.
Just click here to read our 2006 article “Gold’s Speculative Stigma is Unwarranted.”
It has taken about five years since we wrote that article for the public-at-large (at least in the Western world) to understand that gold’s label as a speculative investment is not deserved and is mere banker propaganda. Within the next five years, the remaining skeptics will be forced to finally recognize that gold and silver are real money, and that Yen, Pounds, USD, and Euros are not. Given the severe undervaluation of gold/silver mining stocks, junior mining stocks in particular, and the undervaluation of gold and silver right now, we believe now is an optimal time for new investors to gold and silver to begin their journey. To help all newbie investors to gold/silver begin their journey, we are currently cutting as much as 30% off of all our major services during a special, limited two-week sale that will run from January 26, 2012 to February 9, 2012. To receive the coupon codes for this sale, please visit us at www.smartknowledgeu.com and please join our mailing list.
About the author: In 2006, fed up with the rampant immorality of Wall Street, JS Kim, walked away from his job with a Wall Street firm to found and become the Chief Investment Strategist of SmartKnowledgeU, a fiercely independent investment research & consulting firm. Since then, JS has tirelessly campaigned to increase understanding about real money like gold and silver and about the fraudulent nature of fiat money.
Tags: Explosive Move, Fractional Reserve System, Global Currency, Gold And Silver, Gold And Silver Prices, Investment Success, Market Tops, Mf Global, New Investor, Paper Markets, precious metals, Price Behavior, Silver Assets, Silver Game, Silver Investors, Silver Price, Supply Determinants, Term Volatility, Tops And Bottoms, Tyring
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Saturday, January 14th, 2012
The Financial System is a Farce: Part Three
by Eric Sprott and David Baker, Sprott Asset Management
2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore.
Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.
Let’s start with MF Global. With more than two months passed since the scandal broke, federal officials are still unable to find the estimated US$1.2 billion of missing customer funds.1 The whole episode has been a disaster for the CME, the self-regulatory body in charge of making sure the futures brokers play by the rules. Normally in instances of broker bankruptcy, the CME is supposed to backstop client accounts and keep them liquid – i.e., allow them to continue trading while the bankruptcy gets settled. It never happened in this case. Client accounts were frozen for weeks. Funds have remained missing for months – an eternity for clients who were caught short. The great shock was watching how inept and incapable the CME was in 1) preventing the fraud in the first place and 2) recovering client assets during the aftermath. The CME essentially copped out of their responsibility, offering little more than some perfunctory press releases along the way. They were also surprisingly quick to offer excuses for their non-action. According to CME, it really wasn’t their fault, since CME had “no control over the disposition of customer segregated funds that are held by MF Global and not by CME Clearing”.2 Their on-site review of MF Global’s operations the week before its bankruptcy suggested that the brokerage firm was in full compliance of all the rules, so it wasn’t really the CME’s problem. But of course it was their problem. That’s what the CME is there for – to protect clients in cases of fraud or bankruptcy. To protect the “integrity of the exchange”.
In the weeks that have passed, a curious web of transactions have surfaced between MF Global, JP Morgan and Goldman Sachs. Before its bankruptcy, MF Global had been drawing down a $1.2 billion revolving line of credit with JP Morgan. In bankruptcy court, JP Morgan was able to negotiate a lien on some of MF Global’s assets in exchange for paying $8 million towards bankruptcy costs. According to Reuters, “The lien puts JPMorgan’s interests ahead of MF Global customers who have not yet received an estimated $900 million worth of money from their accounts, which remain frozen as regulators search for missing funds.”3 It is also alleged that JP Morgan accepted a roughly $200 million transfer from MF Global the day before its bankruptcy to cover an overdraft in MF Global’s trading account held with them (it still isn’t clear if JP Morgan has the cash).4 MF Global also appears to have sold hundreds of millions worth of securities to Goldman Sachs in the days leading up to its collapse, but did not immediately receive payment for them from the MF Global’s clearing firm, none other than JP Morgan.
To be fair, on November 22nd, the CME did offer to pledge $550 million as a guarantee to the SIPC Trustee in the event that they did not recover all of the missing client funds, but we cynically wonder if that pledge was made after they finally figured out where all the money had gone. The CME seems to have had a good idea by early December, based on comments made by Commodity Futures Trading Commission (CFTC) member, Jill Sommers.5 The bottom line is that MF Global’s client interests and security appear to have been side-stepped to buy time for bigger, more important players to cover their losses (asses), and that is not the way the regulatory system is supposed to function.
We’re not naïve – we know the government will always protect the interests of the big banks over paltry retail investors, but do they have to be so brazen about it? The MF Global episode is basically shameless. Then there’s Dodd-Frank. Remember Dodd-Frank? It’s the massive financial regulatory reform act that was signed into law by President Obama back in 2010. We are certainly not fans of cumbersome overregulation, but in its essence, Dodd-Frank was supposed to provide a new framework to address the potential failure of a too-big-to-fail bank. There’s nothing wrong with that. Given the sheer size of the off-balance sheet derivatives market, we don’t see a problem with at least attempting to prepare for another large scale banking failure in the US. But almost two years later, we have to laugh at how little of the Dodd-Frank framework has actually been implemented. According to law firm Davis Polk, a mere 21% of the act’s 400 rulemaking requirements have become finalized since the law passed in July 2010. Of the 200 Dodd-Frank rulemaking requirement deadlines that have already passed, 74.5% of them have been missed to date.6 The lawyers must be having a field day with all the paperwork.
One part of the Dodd-Frank story that interests us is the CFTC positions limits rule set to go into effect on January 17, 2012. The new position limits are aimed at preventing excessive speculation in the commodity markets which are believed by many, including ourselves, to have driven wild fluctuations in the gold and silver spot price over the past decade. Position limits are an obvious threat to large futures speculators like the big banks, so it was no surprise when two Wall Street lobby groups, the Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association (ISDA) launched a lawsuit against the CFTC demanding that the new rules on commodity trading be thrown out, or at the very least, delayed. The CFTC voted on the request to delay implementation and officially rebuffed it on January 4th, which is a heartening development in an otherwise cynical saga.7 Back in December, however, the CFTC had already quietly waived the position limit filing requirements on all CME participants until May 31, 2012.8 So even if the new rules go into effect this month, banks won’t have to report their position levels until May 31st either way. Given the lobby groups’ outstanding lawsuit against the new rules, combined with the CFTC’s apparent tendency to grant temporary reprieves, we don’t expect the new position limit rules to be enforced any time soon. Once summer approaches, there will probably be more delays and more deferrals, granting the big players plenty of time to protect themselves. Extend and pretend. Delay and defer. That’s the song we sing on the merry-go-round.
Then there’s Europe and the European Central Bank (ECB). Back in December, the mighty ECB had to step in with yet another massive liquidity injection to avert a total meltdown in the EU banking system. On December 21st, they flooded 523 separate EU banks with a “Long Term Refinancing Operation” (LTRO) program totaling €489.1 billion ($626 billion).9 The program consists of loans that are due in three years and will charge an accommodating 1% interest rate. The liquidity injection will allow the EU banks to participate in a delightfully convenient carry-trade whereby they can take the borrowed money at 1% interest and invest it in various sovereign debt auctions that will likely pay them 3% or higher. The banks will keep the difference in profit, and the EU PIIGS countries get to breathe easier knowing they’ll be able to sell their garbage paper to the EU banks at suppressed rates as long as the LTRO loan money lasts. And the best part? It doesn’t involve any money printing, so there’s really no risk of inflation, you see? So just so we’re on the same page, if everything goes according to plan this year, European sovereign governments will fund their debt auctions with borrowed money lent to them by over 500 European banks who have themselves borrowed hundreds of billions of euros from the European Central Bank,… who as far as we can tell, borrowed those euros from the various EU sovereign states (or simply printed them). Do you get it? Do you see the circularity? Do you see the can being kicked down the road? And guess what? Since €489.1 billion is clearly not enough to avert disaster this year (most EU banks are so undercapitalized they’ve simply parked the borrowed LTRO money back with the ECB at 0.25% interest), the ECB has promised to launch another LTRO injection this coming February!10 No wonder gold was down in December. They completely solved the European debt crisis!
Last but not least, we must mention an alarming component of this year’s National Defense Authorization Act (NDAA) that was quietly signed into law by President Obama on December 31st, 2011. This year’s defense bill, officially known as Senate Bill 1867, includes a specific provision that seems to grant the US government the power to detain accused terrorists, including US citizens, indefinitely, without trial.11,12 There has been much uproar and confusion over the language used in the sections of the Bill related to the subject, and it’s still not clear how the Bill will change the existing laws related to terrorism detention in the US, but it doesn’t bode well for constitutional freedom within the country. There’s obviously no direct market impact to the legislation, but we mention it only to remind investors how quickly the rules can change when governments feel vulnerable. ‘Political risk’ should no longer only be applied to mining investments in third world countries. In 2012, it may apply to us all.
It’s very difficult to predict what lies in store for the stock market this year. Anything could happen. Government intervention in the financial system has never been more extreme. We hope the examples above have shed some light on that. As we enter 2012, there are significant debt-related financial risks festering within the three great economic theatres of the world: the US, Europe and China. The market may rally, it could crash, it could tread water, we just don’t know. A lot will depend on how the central banks react. But we are eager to maintain the positioning that we held in 2011. We will maintain our exposure to precious metals equities and bullion. We will maintain our large gross short weightings in our hedge funds. We are confident that they will protect us on this farcical merry-go-round that seems to spin faster and faster with every passing day.
1. Associated Press (January 11, 2011) “MF Global trustee will meet with customers”. The Wall Street Journal. Retrieved January 11, 2012 from: http://online.wsj.com/article/APcb5dba3691894bb4a61b19357ebe8824.html
2. CME Group (November 6, 2011) “CME Group Statement Regarding MF Global”. CME Group. Retrieved January 5, 2012 from: http://cmegroup.mediaroom.com/index.php?s=43&item=3202&pagetemplate=arti…
3. LaCapra, Lauren Tara and Goldstein, Matthew (January 3, 2012) “MF Global sold assets to Goldman before collapse: sources”. Reuters. Retrieved January 5, 2012 from: http://www.reuters.com/article/2012/01/04/us-mfglobal-goldman-idUSTRE803…
4. Patterson, Scott and Lucchetti, Aaron (December 21, 2011) “MG Global Transfer Draws Scrutiny”. The Wall Street Journal. Retrieved January 5, 2012 from: http://online.wsj.com/article/SB1000142405297020405840457711076166560264…
5. Roeder, David (December 15, 2011) “Regulator: We know where MF Global cash went”. Chicago Sun-Times. Retrieved January 5, 2012 from:
6. (January 3, 2012) “Dodd-Frank Progress Report”. Davis Polk. Retrieved January 5, 2012 from: http://www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/
7. Protess, Ben (January 4, 2012) “New Limits on Commodity Trades Are Approved”. DealBook. Retrieved January 6, 2012 from:
8. CME Group Market Regulation Department (December 20, 2011) “Temporary Waiver of Annual Update for Position Limit Exemptions”. CME Group. Retrieved January 5, 2012 from: http://www.cmegroup.com/tools-information/lookups/advisories/market-regu…
9 Jones, Marc (December 21, 2011) “Banks gorge on ECB loans, market cheer short-lived”. Reuters. Retrieved January 11, 2012 from:
10 Cottle, David (December 21, 2011) “ECB’s Massive LTRO Gives Risk Assets Wings”. The Wall Street Journal. Retrieved January 5, 2012 from: http://online.wsj.com/article/BT-CO-20111221-703943.html
11 Miles, Donna (January 6, 2012) “Obama signs Defense Spending Bill despite having reservations”. American Forces Press Service. Retrieved January 5, 2012 from: http://www.fortgordonsignal.com/news/2012-01-06/Viewpoint/Obama_signs_De…
12 US Library of Congress (December 1, 2011) “112th Congress, 1st Session, S. 1867”. (See Sections 1031-1032) Retrieved January 11, 2012 from: http://www.gpo.gov/fdsys/pkg/BILLS-112s1867es/pdf/BILLS-112s1867es.pdf
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Tags: Asset Classes, Backstop, Client Accounts, Customer Funds, David Baker, Eric Sprott, Eurozone, Farce, Federal Officials, Futures Brokers, Glaring Exception, Global Debt, Government Interference, Investment Outlook, Mf Global, Positive News, Regulatory Body, Sprott Asset Management, Stock Picking, Treasuries
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Friday, November 4th, 2011
While MF Global and the situation in Europe significantly reduce the importance of any economic release, I thought I would highlight today’s ADP employment figure anyhow.
The chart below outlines the change in goods producing, service providing, and total employment figures going back ten years. Note that over this time there have been no jobs added, while the population has grown roughly 10% (i.e. it looks bad, but it’s been even worse).
The good news: service providing jobs (the type that make up the majority of jobs these days) are rebounding
The bad news: goods producing jobs (the type that actually produce stuff) are down almost 25% (yes 25%) since 2001
Tuesday, November 1st, 2011
While much was made of the MF Global news today, we suspect that the tipping point for risk assets was more likely driven by the plethora of reality-based analysis of the situation in Europe combined with the afternoon news that Greece is facing a referendum and a lack of demand for the EFSF issue today. Heavy volume arrived into the close to the downside, suggesting asset allocation rotation from equities to bonds, which helped propel TSYs even further down in yield. The entire complex flattened notably with 30Y outperforming -24.5bps, the largest single-day yield move since March 2009, as the much-watched 2s10s30s butterfly has retraced all of last week’s increase. ES closed at its lows (down over 2.5%) only to extend those losses in the evening session as we post.
At over 4 standard deviations, today’s drop in 30Y yields was the highest for a single-day since 3/18/09.The roundtrip in the entire TSY complex from last Wednesday is quite impressive and remains surprising as to how a broad market can interpret what was so clearly no-real-news in such a schizophrenic way without some ‘help’.
35bps sell-off in 30Y at its best early Friday – only to give it all back and some by the close of today – perhaps there is something to our perspective on MF Global and its TSY inventory last week. The drop in TSY yields was initially shrugged off by ES but very quickly it became clear that fears were gathering and ES accelerated to the downside – with IG and HY credit tracking wider also. VWAP acted as natural resistance at every small rally suggesting there was more of an institutional bias to selling today – which again fits with the rotation we would expect after such an aggressive month’s performance in stocks.
As the day wore on, all risk-drivers were reverting back to what is more realistic (as opposed to the intervention-dislocation from the overnight session). EURJPY has retraced almost the entire move and as we closed CONTEXT and ES were back in line – rather surprisingly given the amount of movement (and lack of recalibration) in asset classes today – though we did note earlier that risk-off in broad markets was dominating any correlation-drivers.
Under the surface, HY and HYG underperformed stocks (having not really seen the kind of risk-on moves to bring them back to fair even with last week’s ebullience) but IG was the worst relative-performer (as we suspect low-cost hedges /shorts were laid back out). Financials in the US were not pretty (even though Materials and Energy underperformed broadly) as CDS widened and stocks tumbled in the majors (e.g. MS -9% and 35bps wider!!). We have to say it was rather quiet and slow to start with – which makes sense given last week’s violence – but by the close equities and credit were losing ground fast once again.
EURUSD lost 1.39 and DXY managed a 2% gain from Friday’s close (as JPY’s 3% loss contributed). PMs slid lower as the dollar rallied and aside from what appeared to be a liquidation (and unique to itself) rip-fest in WTI in the middle of the day, moves in commodities were all negative.
Volumes were in general light until the last hour or so. Whether this was MF related as traders were anxiously re-arranging clearing or a month-end wait to transact is unclear. It is clear, however, that firms are clearly derisking (as IG reaches back to fair-value and HY cheap once again and the European financials and sovereigns face renewed pressures).
Tags: Asset Allocation, Bonds, Broad Market, Commodities, Dislocation, Downside, Evening Session, Global News, Institutional Bias, Mf Global, Natural Resistance, News Today, Overnight Session, Plethora, Real News, Risk Drivers, Roundtrip, Selling Today, Single Day, Standard Deviations, Tipping Point, Tsy
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