Monday, January 30, 2012

MF Global's Missing $1.2 Billion in Missing Funds

"Funds From MF Global Feared Gone." The Wall Street  Journal, Jan 30, 2012 p. A1, A2.

The article reports that $1.2 billion in customer money has "vaporized" due to "chaotic trading."

Most of the funds reported missing are from "customer segregated" accounts.

These accounts were primarily (or even exclusively) collateral accounts that customers posted in order to do business with the company. These accounts are technically off-limits for trading purposes.

However, it appears that MF Global did trade with this money. Where did it go?

The article states that "As money poured out of MF Global, much of it likely passed through J.P. Morgan Chase and Co. and other banks..."

What the heck?

Some background is in order.

Christopher Elias wrote an illuminating article titled "MF Global and the great Wall St re-hypothecation scandal" Dec 2011 at Thomas Reuters News and Insight

[excerpted] (Business Law Currents) A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back.... it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients. 

MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.... 

I recommend reading the entire article at the link above.

Several weeks ago (sorry I cannot find the particular episode), Max Keiser suggested that MF Global may not have been alone in re-hypothecating customer accounts.
That is, Max stated that MF Global, J.P. Morgan and other entities may have all drawn upon the same pool of customer funds pledged as collateral at MF Global. 

So, MF Global employees could have used customer accounts as as collateral while JP Morgan employees then used the same pool as collateral for trades and so on. 

What happens when the collateral is called in?
It gets vaporized, that is what happens, at every step that re-hypothecation occurred.

The significance of re-hypothecation of re-hypothecation is that the structure of debt is based on such a tiny pool that if the system starts crumbling there is grossly insufficient capital reserves in the system to shore up losses.

Re-hypothecation produces a house of cards.
MF Global appears to be one of the bottom cards.

Who knows were the markets will go as this unfolds.

Greed and corruption at every level and yet it will be the populace who pays the price as small and mid-sized companies find it more and more difficult to access capital for their businesses as the big players actively destroy it.


1 comment:

  1. How about MF intentionally took the wrong side of bets at high leverage, that were controlled enough by the big boys so they guaranteed "lost". Client money evaporates, MF guys get a 50% kickback through some Cayman island exchange of other consideration. The big boys keep the other half, and the clients "legally" have their money vaporized. Indeed that was the official SEC word, vaporized. my my my.


Note: Only a member of this blog may post a comment.