12/13/2011 Portland, Oregon – Pop in your mints…
Today the Agricultural committee of the US Senate played host to what has become the political and financial spectacle of the year: The Hearings on the MF Global collapse. We have equated these hearings to professional wrestling. While high in entertainment value, the spectators are left to wonder how much of it is real and how much of the action is staged.
Today, Jon Corzine, MF Global’s former CEO, the ultimate insider who has become the poster boy for the corporate and political corruption that seems to rule the day, was joined by Bradley Abelow, former President and COO of MF Global and Henri Steenkamp, who is still acting as the firm’s CFO.
You can watch the sad spectacle on C-SPAN at the following link: http://www.c-span.org/Events/Senate-Looks-into-MF-Global-Bankruptcy/10737426222/
It appears that the addition of two more members of MF Global’s senior management team was intended to give the illusion that there may be more information forthcoming at this hearing than at the earlier hearing held by the House Agricultural Committee. That illusion was quickly dispelled as soon as each of them opened their mouths.
In summary, they are very, very sorry. They are aware that this situation has undermined confidence in the markets. They do not know where the $1.2 billion of missing client funds are. They are pretty sure that the funds went missing from their treasury group, where the funds are held.
Strangely, the Patriot Act of 2001, in addition to steamrolling the US Constitution, included provisions which required every banking institution in the US to “know their customer,” which in practice means that no transfer from US accounts could have taken place without the authorities being able to quickly track who the money went to. This provision, which on its face would make theft and money laundering in US Financial institutions impossible, makes “not knowing” who the money went to an untenable defense.
Nonetheless, Corzine and his cohorts stated again and again that they have no idea where it went.
The only revelation, apart from the names of a few MF Global employees who were offered as sacrificial lambs before the inquisition style questioning, was that the CFO of North American division was apparently on vacation when the funds went missing.
They never mentioned whether or not this individual had returned.
Corzine went as far to say that nothing he said, such as “I don’t care where you get the money, we have to make this margin call,” for example, “should have been construed” as permission to transfer client funds into MF Global operating accounts and then out to counterparties. He is obviously slipping towards a plea and hoping to do time with his Goldman buddies at a posh jail in Manhattan.
By the end of the morning, nothing that was said, either by a member of the Senate or former MF Global executive, served to instill any measure of confidence.
The afternoon, however, looked promising. The regulators who were on the case and had their noses close to the ground were set to testify. CME Group Executive Chairman Terrence Duffy, MF Global Trustee James Giddens and CFTC Commissioner Jill Sommers sat down before the committee and took the obligatory oath.
Mr. Giddens lead off, restating the obvious. He is in charge of ensuring that MF Global assets are liquidated and that the proceeds distributed to the creditors based on the criteria laid out in the US Bankruptcy code. He would later state that efforts to recover assets abroad had been blocked by sovereign governments (those across the Atlantic), who are likely protecting their banks from what would be a devastating clawback of funds.
Then, just as we thought that the afternoon would be a snoozefest, Mr. Duffy of the CME Group dropped a bombshell. In his opening remarks, he stated that he was “in the room” when a CME employee was on the phone with an MF Global employee who stated that Mr. Corzine had direct knowledge that client funds were missing (or in industry parlance, “loaned out”) well before the weekend of October 31st.
This directly contradicted Mr. Corzine’s testimony under oath in which he stated that he had “no knowledge” of the missing client funds until that fateful weekend.
Et tu, Brute?
The diversion only lasted for a moment. The committee then proceeded to flagellate Mr. Duffy and the CME Group for defending the idea that their exchanges can properly self regulate themselves.
Mrs. Sommers of the CFTC was then flagellated by the committee for the failure of the government agency to regulate entities such as the CME Group and MF Global which are supposed to, if we understand correctly, self regulate themselves.
As today’s chapter of the spectacle came to a close, there were more questions than answers. Like the old WWF, no scores were permanently settled and we will have to tune in Friday to see how the next stage in this drama unfolds. It promises to be exciting, as the committee includes none other than Ron Paul (R-TX), the one man in Congress who may actually understand what happened.
The Witness list for Friday can be found here.
For those who have not been following, the MF Global situation is extremely important because a number of things that investors have been able to count on have been called into question. A brief list of these now invalid assumptions:
– Client funds are properly segregated from a brokerage company’s operating funds.
– Exchanges such as the CME Group will backstop (make whole) clients in the event that one of their approved brokerage firms goes bankrupt.
– Exchanges will halt trading in the event of a bankruptcy until any missing client funds can be accounted for and that trades from customers of the bankrupt brokerage can be executed.
– Once a brokerage firm declares bankruptcy, all assets must be handed immediately over to a trustee who from that moment on has a fiduciary duty to sell the bankrupt firms assets to the highest bidder to satisfy as many creditors as possible.
– Regulatory agencies such as the CFTC have controls and monitoring in place which will prevent clients from suffering losses if a brokerage firm misappropriates their funds.
– Sarbanes Oxley has effectively eliminated corporate fraud.
– The commodity exchanges, such as the CME Group, can effectively self regulate.
– Theft is illegal.
Every day which passes in which there is not a full recovery of the client funds held by MF Global adds to the list of questions. And every day that passes serves to call further into question the ability of all brokerage houses, exchanges, and government regulators to make good on their promises.
The MF Global situation is not simply about the bankruptcy of a large brokerage, it is about whether or not the rule of law can be trusted to operate in the financial markets of the United States of America.
For all of the bankruptcies and bank seizures that have occurred in the wake of the 2008 financial crisis, in most cases there has been confidence that the framework of the markets could be trusted, and that the myriad of regulatory entities which are supposed to make Capitalism safe for all have everyting under control.
After MF Global, one has to question whether any asset, paper or physical, entrusted to a financial institution is safe.
In related news, Mr. Giddens (the MF Global Trustee above) announced today that JP Morgan would be probed in the MF Global investigation.
This can only serve to further disrupt futures markets. Is the end of the current system nigh?
Stay tuned and Trust Jesus.
Key Indicators for December 13, 2011
Gold Price Per Ounce: $1,632 PERMANENT UNCERTAINTY