30 November 2011

The Other One Percent: Corporate Psychopaths and the Global Financial Crisis

Anyone who has ever worked in a large corporation has seen the empty suits that seem to inexplicably rise to positions of power.  They talk a great game, possessing extraordinary verbal acuity, and often with an amazing ability to rise quickly without significant accomplishments to positions of great personal power, and often using it ruthlessly once it is achieved.

Their ruthless obsession with power and its visible rewards rises above the general level of narcissism and sycophancy that often plagues large organizations, especially those with an established franchise where performance is not as much of an issue as collecting their rents.

And anyone who has been on the inside of the national political process knows this is certainly nothing exclusive to the corporate world.

Here is a paper recently published in the Journal of Business Ethics that hypothesizes along these lines. It is only a preliminary paper, lacking in full scholarship and a cycle of peer review.

But it raises a very important subject. Organizational theories such as the efficient markets hypothesis that assume rational behaviour on the part of market participants tends to fall apart in the presence of the irrational and selfish short term focus of a significant minority of people who seek power, much less the top one percent of the psychologically ruthless.

Indeed, not only was previously unheard of behaviour allowed, it became quite fashionable and desired in certain sections of American management where ruthless pursuit of profits at any cost was highly prized and rewarded.  And if caught, well, only the little people must pay for their transgressions.  The glass ceiling becomes a floor above which the ordinary rules do not apply.

If you wish to determine the character of a generation or a people, look to their heroes, leaders, and role models.
This is nothing new, but a lesson from history that has been unlearned. The entire system of checks and balances, of rule of law, of transparency in government, of accountability and personal honor, is based on the premise that one cannot always count on people to be naturally good and self-effacing. And further, that at times it seems that a relatively small group of corrupt people can rise to power, and harm the very fabric of a society.

‘When bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle.’

Edmund Burke

'And remember, where you have a concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that.'

Lord Acton

These things tend to go in cycles.  It will be interesting to see how this line of analysis progresses. I am sure we all have a few candidates we would like to submit for testing.   No one is perfect or even perfectly average.  But systems that assume as much are more dangerous than standing armies, since like finds like, and dishonesty and fraud can become epidemic in an organization and a corporate culture, finally undermining the very law and principle of stewardship itself. 

'Our government...teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.'

Louis D. Brandeis

MF Global, and the reaction to it thus far, is one of the better examples of shocking behaviour that lately seems to be tolerated, ignored,  and all too often met with weak excuses and lame promises to do better next time, while continuing on as before.

"These corporate collapses have gathered pace in recent years, especially in the western world, and have culminated in the Global Financial Crisis that we are now in.

In watching these events unfold it often appears that the senior directors involved walk away with a clean conscience and huge amounts of money. Further, they seem to be unaffected by the corporate collapses they have created. They present themselves as glibly unbothered by the chaos around them, unconcerned about those who have lost their jobs, savings, and investments, and as lacking any regrets about what they have done.

They cheerfully lie about their involvement in events are very persuasive in blaming others for what has happened and have no doubts about their own continued worth and value. They are happy to walk away from the economic disaster that they have managed to bring about, with huge payoffs and with new roles advising governments how to prevent such economic disasters.

Many of these people display several of the characteristics of psychopaths and some of them are undoubtedly true psychopaths. Psychopaths are the 1% of people who have no conscience or empathy and who do not care for anyone other than themselves.

Some psychopaths are violent and end up in jail, others forge careers in corporations. The latter group who forge successful corporate careers is called Corporate Psychopaths...

Psychologists have argued that Corporate Psychopaths within organizations may be singled out for rapid promotion because of their polish, charm, and cool decisiveness. Expert commentators on the rise of Corporate Psychopaths within modern corporations have also hypothesized that they are more likely to be found at the top of current organisations than at the bottom.

Further, that if this is the case, then this phenomenon will have dire consequences for the organisations concerned and for the societies in which those organisations are based. Since this prediction of dire consequences was made the Global Financial Crisis has come about.

Research by Babiak and Hare in the USA, Board and Fritzon in the UK and in Australia has shown that psychopaths are indeed to be found at greater levels of incidence at senior levels of organisations than they are at junior levels (Boddy et al., 2010a). There is also some evidence that they may tend to join some types of organisations rather than others and that, for example, large financial organisations may be attractive to them because of the potential rewards on offer in these organizations."

Clive R. Boddy, The Corporate Psychopaths Theory of the Global Financial Crisis, Journal of Business Ethics, 2011

Gold Daily and Silver Weekly Charts - Crony Capitalism and More On Modern Monetary Theory

Bernanke and the western Central Banks stepped in to provide a jolt to the paper markets, and of course, the commodity markets including precious metals.

Intraday commentary on this here.

Steve Schwarzman, Chairman (and co-founder with Peter G. Peterson) of Blackstone and a Prince among crony capitalists, was on Bloomberg television today. Blackrock is the world's largest private equity fund.

Last year Steve referred to any attempt to raise taxes on his income via changes to the 15% rate on carried interest as 'a war,' the equivalent of 'Hitler invading Poland in 1939.' This was said in a private meeting, and was a big departure from his smoothly polished public persona.

His solution to the financial deficit is to have poor and lower income people pay more federal income taxes, in addition to state, sales, gasoline, and payroll taxes, to 'broaden the tax base' as it were, so they can have 'more skin in the game.' His own taxes should obviously remain unchanged.

I was intrigued by this particular general principle that Steve shared: "Whenever credit is more constrained, it is extended to someone. The key is to be that someone."  No matter what it takes.  And at advantageous rates I presume, in order to buy distressed assets like sovereign assets on the cheap.

Steve strongly endorsed Mitt Romney for President as a personal choice saying, "I've made money with that man." 16x their money on the first, and 24 x on the second to be exact. And he hopes to make and keep even more with Mitt as President.

Speaking of money, here is a short primer on Modern Monetary Theory.

And the Regulatory Process in Efficient Markets

SP 500 and NDX Futures Daily Charts

What European crisis? What Bank downgrades? lol

As a reminder, today was the end of the month, and the funds had a lot of catching up to do after one of the worst Thanksgiving week markets on record.

Currency Wars: Fed Acts To "Increase the Availability of Dollars Outside the United States"

Several people have asked what I think about this.

I wrote about this just yesterday.   I could not ask for a better straight man than Ben Bernanke.

"I think the major monetization is already occurring in the Eurodollar markets, and an ongoing stealth bailout of European debt, in order to save the big money center banks at home and broaden the reach of the Dollar.

And this is why the Fed stopped reporting on Eurodollars some years ago, as a component of M3. It was to pave the way for the monetary equivalent of a financial neo-con, to addict European governance to the US dollar and pave the way for a stronger position for the dollar as a one world currency."

Currency Wars: The Anglo-American Century and Why the Financial Engineers Hate Gold and Silver

Here is a primer on the Fed Swaps. Keep in mind that it is written by the Fed.

I had also suggested after the bell that there would be an effort to blow off the downgrade of the big money center banks. I suspected there would be a more singular effort to pump up the SP futures from the Fed's house banks, but it appears the Central Banks, led by the Fed, decided to hit the markets with a major sugar rush of cheap dollars. That is US dollars.

"I will be surprised if they do not try and rally stocks in the face of this to put the brave face on and whistle past the graveyard once again. This is what traders like to do when they have been caught offsides by the news. But they may not be able to sustain it without official help from the strong trading desks of the financial sector."

The Chinese cut reserve requirement ratio on their banks by .5 percentage points. This will help them release more of their huge hoard of US dollars back into the global financial system.

This action, led by the US Fed, has had a marked effect on commodity prices in dollars. So the beneficiaries, or at least those protecting their wealth, are those holding precious metals and positions in dollar sensitive commodities.

Although the Fed will say that there is no potential loss in this to US taxpayers, in fact there is ALWAYS a loss to be realized at some point in the deliberate mispricing of risk.  This loss will be taken by all holders of US dollars.

This is not QE3 and does little to help the US economy per se.  This is just a big serving of a quick energy drink to ease the short term liquidity problem in Eurodollars. It is also timed to dull the news impact of the bank downgrades.

When the sugar rush wears off, and it will because this is does little to help the average person in the real economy, we will see how the markets react to the ever growing piles of paper dollars covering the landscape of a mismanaged and ruined economy.

But it was extraordinarily kind of the Fed to announce this just in time for the banks and the hedge funds to repair some of the damage from the stock market decline before they close their trading books on November.

The Eurozone problems have not been solved by this. The US domestic economy has not been improved by this, except to weaken the dollar and increase commodity prices.

It has only bought the Western banks some time, and further addicted the world to US dollars. This is government of the one percent, by the one percent, and for the one percent.

NY Times
Central Banks Take Joint Action to Ease Debt Crisis
By Binyamin Appelbaum
November 30, 2011

WASHINGTON — The Federal Reserve moved Wednesday with other major central banks to buttress financial markets by increasing the availability of dollars outside the United States, reflecting growing concern about the fallout of the European debt crisis.

The central banks announced that they would slash by roughly half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans will be available until February 2013, extending a previous endpoint of August 2012.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the banks said in a statement. The participants in addition to the Fed are the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

The move makes clear that regulators increasingly are concerned about the strain that the European debt crisis is placing on financial companies, which are facing increasing difficulty in borrowing through normal channels the money that they need to fund their operations and obligations.

The European Central Bank borrowed $552 million through the existing facility during the week ending Nov. 23 to meet the liquidity needs of European banks. Data for the past week is not yet available.

Under the new terms of the program, the existing interest rate premium of 0.1 percentage points on those loans will be reduced by half, to 0.05 percentage points, effective Dec. 5.

The other central banks said they had also agreed to make similar loans of their own currencies as necessary, but they noted that the only extraordinary demand at present was for dollars.

Stocks surged after the action was announced, with European markets up more than 4 percent in afternoon trading, while United States stock futures were up sharply.

“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the Fed said in its statement.

29 November 2011

$500 Million in Missing MF Global Customer Money Found in London and at JPM

As predicted, the London operations of MF Global, the group that received bonuses the day before the bankruptcy filing, was apparently involved with the 'misplacement' of customer account money. And some of that customer money was in the hands of JP Morgan.

KPMG Recovered $500 Million of MF Global U.K. Client Assets
By Kit Chellel
Nov 29, 2011 2:12 PM ET

MF Global (MF)’s U.K. administrators have recovered about half of the estimated $1 billion of customer funds frozen when the brokerage collapsed on Oct. 31.

The final recovery amount will depend on how much can be taken back from the third-party financial firms which held money for MF Global’s U.K. clients, said Richard Heis, a partner at KPMG LLP.

KPMG, which was appointed to supervise the administration of MF Global UK Ltd., said Nov. 27 that it hoped to return some money to the broker’s clients by March.

MF Global Holdings Ltd., the New York-based holding company, sought protection on Oct. 31 in the fifth-largest financial company bankruptcy by assets. There may be more than $1.2 billion missing from MF Global Inc.’s customer accounts in the U.S., according to the court-appointed trustee in the U.S., James Giddens.

About $200 million of the missing customer funds may have been found at JPMorgan Chase in the U.K., the New York Times reported today.

While KPMG wouldn’t confirm the accuracy of the report, it said it didn’t believe the $200 million reportedly found would affect recoveries for U.K. clients.

“Based on the information available, the joint special administrators are not aware of any threat to the segregated money held on behalf of MF Global U.K. clients arising from the matters set out in the New York Times report,” the firm said in an e-mailed statement today.

S&P Cuts Credit Ratings On 37 Global Banks

If Europe wobbles any harder, the global money center portion of the financial sector may slide into the sea. Or more likely onto the backs of the unsuspecting public.

I will be surprised if they do not try and rally stocks in the face of this to put the brave face on and whistle past the graveyard once again. This is what traders like to do when they have been caught offsides by the news. But they may not be able to sustain it without official help from the strong trading desks of the financial sector.

S&P Goes On Downgrade Spree, Hits Most U.S. Banks
By Michael Aneiro
November 29, 2011, 5:04 PM ET

Standard & Poor’s on Tuesday afternoon grabbed its downgrade stick and went on a rampage, whacking just about every major financial institution in sight. Most big U.S. banks got hit, as did many European institutions. The downgrades were part of the rating agency’s application of its revised bank criteria to 37 of the largest rated banks. Here’s a partial list of the carnage:

Bank of America Corp. (BAC) to A- from A
Bank of New York Mellon Corp. (BK) to A+ from AA-
Barclays PLC (BCS) to A from A+
Wells Fargo Bank N.A. (WFC) to AA- from AA
Citibank N.A. (C) to A from A+
Goldman Sachs & Co. (GS) to A from A+
JPMorgan Chase & Co. (JPM) to A from A+
Morgan Stanley (MS) to A- from A

BofA, Goldman, Citi Credit Ratings Reduced by S&P
By Dakin Campbell and Hugh Son
Nov 29, 2011 5:14 PM ET

Nov. 29 (Bloomberg) --Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the largest global lenders.

Standard & Poor’s made the same cut to Morgan Stanley (MS) and Bank of America’s Merrill Lynch unit. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. (939) to A from A- and maintained the A rating on Industrial and Commercial Bank of China Ltd., giving all three lenders higher grades than most big U.S. banks.

The moves may increase pressure on firms bracing for Europe’s mounting sovereign debt crisis and navigating economic weakness. Bank of America, which has plunged 62 percent this year in New York trading, said in a regulatory filing this month that it may have to post billions of dollars of additional collateral and termination payments on its trades if it were to be downgraded one level by rating companies.

“It’s evident that stress from the European banking system is taking its worldwide toll,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an e-mail.

S&P, a unit of New York-based McGraw-Hill Cos. (MHP), has been changing the way it looks at debt after its faulty grades contributed to the credit-market seizure that brought down Lehman Brothers Holdings Inc. and Bear Stearns Cos. It started to review the methodology in December 2008, months after the collapse of those two firms.
`Adverse Impact'

Downgrades “could likely have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical,” Charlotte, North Carolina-based Bank of America said in this month’s filing.

The company, which noted the risk of downgrades from S&P and Fitch Ratings in its third-quarter filing, previously said it has prepared by lining up funding for a year.

The following table shows firms that were downgraded by S&P, followed by a list of banks that were upgraded.

Banco Bilbao Vizcaya Argentaria S.A.
Bank of America Corp.
Bank of New York Mellon Corp.
Barclays Plc
Citigroup Inc.
Rabobank Nederland
Goldman Sachs Group Inc.
HSBC Holdings Plc
JPMorgan Chase & Co.
Lloyds Banking Group Plc
Morgan Stanley
Royal Bank of Scotland Plc
Wells Fargo & Co.

Bank of China Ltd.
China Construction Bank Corp.

Gold Daily and Silver Weekly Charts - S&P Downgrades the Credit of Most Big US Banks After the Bell

Intraday commentary on gold, silver and the world currency situation here.

American Airlines declared bankruptcy today.

After the bell S&P downgraded JP Morgan, UBS, Wells Fargo, Citi, Goldman, Bank of America et al.

"Bank of America Corp. (BAC), Goldman Sachs Group Inc. and Citigroup Inc. (C) had long-term credit grades downgraded to A- from A by Standard & Poor’s after the ratings firm revised its criteria for the banking industry.

Standard & Poor’s also made the same cut to Bank of America’s Merrill Lynch unit. S&P listed its ratings for 37 of the largest financial institutions in a statement today.

The move may increase pressure on Bank of America, which has plunged 62 percent this year in New York trading. The second-biggest U.S. lender by assets said in a filing this month that a ratings cut could trigger billions of dollars in collateral payments and crimp access to credit markets.

Downgrades may be costly for banks. Bank of America said in a regulatory filing this month that it may have to post $5.1 billion of additional collateral and termination payments on its trades were it to be downgraded one level by rating companies.

Ratings downgrades “could likely have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical,” Bank of America said in the filing.

The company, which noted the risk of downgrades from S&P and Fitch Ratings in its third-quarter filing, previously said it has prepared by lining up funding for a year."

Some of my friends and I noted in our discussions today that the Banks were lagging the SP 500 noticeably, especially on FAZ and some other plays on bank stock declines. Because of the divergences between the SP 500 and the Banks, as well as the weakness in the NDX 100 I shifted my positions to decidedly bearish into the close.  Long gold bullion, a little silver, and short stocks.

Bloomberg says the SEC will look into any unusual activity on the bank stocks today in light of these after hour downgrades. Yeah, uh huh, sure. And they will file the information with the silver manipulation report from the CFTC.

When it comes, the financial reckoning will be like a thief in the night. Or like MF Global if you prefer. There will be a bank holiday, and after a few days you will be informed by the bank on how much of your money you have left, and when you can expect to have access to it.

SP 500 and NDX Futures Daily Charts - Bank of America And Citi Credit Ratings Cut After the Bell

American Airlines declared bankruptcy today.

After the bell the credit ratings of Bank of America and Citigroup were cut from A to A- with a negative outlook.

Additional news includes other banks including Goldman, UBS and JP Morgan.

One of my friends remarked during the day that the banks index was lagging badly, but it was not fully reflected in the SP 500 futures. Perhaps now we see why.

Currency Wars: The Anglo-American Century and Why the Financial Engineers Hate Gold and Silver

"It is only with the heart that one can see rightly; what is essential is invisible to the eye."

Antoine de Saint Exupéry

'Nominal GDP targeting' is a way of raising the Fed's inflation target without admitting to it explicitly.

Nominal GDP means that one can meet their growth target simply by inflating the money supply to make up the difference between 'real growth' and 'headline growth.'  Some parties are raising NGDP as the next policy initiative from the Federal Reserve.

NGDP targeting is so obvious and clumsy that I doubt that the Fed will try and hide their enormous efforts at monetization of the debt under such a small fig leaf, as Jim Rickards suggests, except to direct attention away from their more serious efforts.   The growth in money supply would be apparent to many and the Internet would be used to spread the word.   No, a more clever and covert attempt at persuasion is required, and more in keeping with the Bernanke Fed's penchant for secrecy.

I think the major monetization is already occurring in the Eurodollar markets, and an ongoing stealth bailout of European debt, in order to save the big money center banks at home and broaden the reach of the Dollar.

And this is why the Fed stopped reporting on Eurodollars some years ago, as a component of M3. It was to pave the way for the monetary equivalent of a financial neo-con, to addict European governance to the US dollar and pave the way for a stronger position for the dollar as a one world currency.

Money is power, and the ability to control the distribution and value of money and wealth is power in its most refined and effective form. One only needs relatively small armies to retain the power to control the money in order to subordinate vast resources and peoples if you can control their definition of wealth and the distribution of money, and all that follows from it.  

If you are able to create money at will, and give it to your friends and allies with even relative discretion, you are able to confiscate, without visible effort, the labor and wealth of every person who holds that currency, wherever they are and however they seek to protect it. It is the end of sovereignty and the right to private ownership of all goods and property that are valued by that currency. And it is a power too great to be held inviolate by any small group of men with the ability to act in secret.

I believe that the original purpose of this effort to shape the world economy was well-intentioned, or at least was represented as such to many participants as the logical solution to the devastating wars that repeatedly bloodied the last century.  

Most of what is transpiring now has not been planned, but events make the moment, and moment gives rise to the man.  And history shows us that too much power in too few hands never fails to end in exploitation.  With the rise of a single world super-power, no matter how good it might have been at its heart, the tide of corruption rose with it.  This is why central planning invariably fails.

The dominant global currency regime 'could' come in the form of the SDR for global trade if the composition of the SDR continues to contain a significant dollar-pound component.  Yes, the IMF has the ability to 'print' SDRs, but the SDR is a currency for use between nations, and its value is linked to a basket of individual domestic currencies.   Hence, it cannot be printed limitlessly, but must be linked to the value something else, some external standard.

Here is a prior blog entry here that explains the struggle for the SDR that is now occurring.   Even the 'reformed' basis for the SDR is ludicrous, with its over-representation of the dollar and the pound.  And now proceeds the dismantling and pacification of the eurozone.  And the hysterical antagonism by the Western bankers against the inclusion of gold and silver in the SDR basket as proposed by the BRICs.

Here is a broader overview of what I call the Currency Wars.

A slightly different plan has been underway for Asia, whose economies have become addicted to export production for US dollar paper, which makes up a huge portion of their reserves and financial system.

At some point those Eurodollars may come home, in the event that Europe finds a way out of its dilemma that was caused in part by the US banks and hedge funds, and of course Europe's own political weakness and greed. And the Fed is confident they have a way to stem that tide of dollars 'back in the system.'

But they do not expect this to happen, because the ratings agencies and the funds have the power to submit any government to a relentless credit assault on their sovereign debt.

Have you ever bothered to wonder why there have been no real investigations and prosecutions of the bankers and the credit ratings agencies?  And why they have been permitted to continue to operate, largely unimpeded?  The credibility trap is one explanation, but it fails to include so many other seemingly random events. Some of the banks may have become instruments of state policy, too big and important to prosecute. They and the state are becoming one.

As I have suggested in the past, the model has been to bring the system to a crisis, and then to have the bankers' representatives make an 11th hour 'offer which they cannot refuse' to the people of the nation, as they did in the adoption of TARP in the US.  'Adopt our plan, or suffer the consequences.'  

And I believe that the Anglo-American banking cartel will make this same play again, but this time with Europe and the world.  Financial crises are an effective tool in the mass redistribution of wealth and power, and often done in secret, making their appearance only at the offering of terms.

In a remarkably effective ploy of misdirection and mass persuasion, the kleptocrats and oligarchs have focused the attention and the anger of the middle class on the 'welfare state,' the poor and the elderly and the weak, under the moralistic banner of austerity. Meanwhile they are scooping up the income and wealth of nations for the top one percent, who are ironically portrayed as champions of freedom.

The sticking points in the US financiers plan are the key commodities, precious metals like gold and silver, and of course food and oil. It is a pivotal point of control that will become much more prominent in the future.  China and Russia will play that card with some of their BRIC allies.  But in the short term the Anglo-Americans are solidifying their power in the oil rich Middle East, since like gold and silver, oil is a powerful piece in this global chess game. But I do not think they can just 'take it' for themselves. And so the Mideast will remain a very important piece on the board. Perhaps it will be carved up, and perhaps it will be fought over, in the valley of Megiddo.

To paraphrase von Clausewitz, 'Currency war is the continuation of politics by other means,' especially when global military war has been rendered economically unviable in the post-atomic age.

Those who believe that China and Russia will oppose this to the bitter end believe in the purity of those regimes, and their ability to resist the temptation to participate in a deal that gives them rule over their portion of the globe. Since for the most part they are already oligarchies, this does not seem likely. The apparent disagreement and contention now may be more of a discussion of terms and territories than principles.

It may devolve into a number of popular revolutions, or even the rise of a worldly power unlike anything seen before, a new Rome. Or something else might occur. What that is, obviously no one can say with certainty for now.

A daunting set of prospects one might say, as Woody Allen once noted in his Speech to Graduates:  "More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly."  

We can take great comfort that we are not the first generation to face difficulties, and what appear to be fearsome odds.  So often when they appeared to be at the very height of their power, great empires have tumbled, and the spirit has endured and risen once again.  As Dostoevsky noted, "If they drive God from the earth, we shall shelter Him underground."

But for now, if you at least understand the objective of the game and the roles of the players, what is happening on the field can begin to make more sense. 

Even if we cannot yet see it, the greatest probability remains that the monied interests will fail in their overreach and pride, but many ordinary people will be harmed in the process.  And our goal is to do what we can to limit the damage inflicted upon ourselves and our families, and our neighbors, and associate with like-minded individuals, to try to restore some semblance of civility and justice for our grandchildren.

This currency war is happening now, and it is something new in the history of warfare, because I do not believe that a fiat currency regime has ever existed before to this extent on a global scale, with a mutually destructive threat like nuclear power dampening the impulse to wide scale military conflict.

But as in all war, some things never change.

"When the rich wage war, it is the poor who die."

Jean-Paul Sartre

At some point the dawn will come, but first the darkest hour. Our business is not to surrender to discouragement, and cooperate with evil,  but to carry on in our missions, whatever they may be, as God gives us light.

"When I despair, I remember that all through history the way of truth and love has always won. There have been tyrants and murderers and for a time they seem invincible, but in the end, they always fall — think of it, always."

Mohandas K. Gandhi

The ascendancy of evil in the world is a shameful episode in history; the triumph of dark powers in claiming our souls for all time, without end, is a tragedy.

In the meantime, here is an exposition of 'Nominal GDP targeting' so you can become familiar with it, in case it does make an appearance.

28 November 2011

Gold Daily and Silver Weekly Charts

After the bell, Fitch reiterated the US AAA credit rating but changed the outlook from stable to negative.

"The Maastricht treaty set a limit of 60% for Government debt as a Percentage of GDP. As of May, 2011 only 4 of the 17 countries in the Euro-zone are below this requirement. The worst violators of the debt limit requirements are probably obvious: Greece at 157.7%, Italy at 120.3%, Ireland at 112%, Portugal at 101.7%, and Belgium at 97%. (By the way, Belgium debt was downgraded on Friday following downgrades of Portugal and Hungary.)

But readers will probably be surprised by the next two countries which are currently above the Maastricht limit: France currently has 84.7% debt to GDP and Germany is close behind with 82.4%. Both of the two 'fiscal leaders' of Europe have a worse debt to GDP than Spain which is three places better than Germany at 68.1%!

The only countries which currently adhere to the Maastrict treaty limit for debt to GDP are Finland, Slovakia, Slovenia, and Luxembourg, certainly not what most investors would consider the leaders in Europe! The average Euro-zone debt limit as of last May is 87.7%, over 25 percentage points above the required limit. I have gone on a bit too long about this, but the slide really brings home the fact that the treaties of the EU don't need to be tightened, but instead the adherence to these treaties need to be strengthened. Leaders can talk about new requirements all they want, but what good is this talk if no-one is going to adhere to these new requirements anyway?"

Chris Gaffney, The Daily Pfennig, 28 Nov 2011

Gold and silver enjoyed a post-option expiration bounce back to trend.

Markets overall remain headline driven.

"Every nation ridicules other nations, and all are right."

Arthur Schopenhauer

SP 500 and NDX Futures Daily Charts

A reversal, with a big gap open, that so far has retraced the first Fibonacci level. It needs to do better in order to be counted more than a dead cat bounce given the oversold condition stocks had been in.

The market remains headline driven, and 'skittish' to say the least.

25 November 2011

Gold Daily and Silver Weekly Charts

Still running short stocks and long bullion.

No real trading today in this thin holiday market.

SP 500 and NDX Futures Daily Charts

Will stocks really fall all the way to the bottom of the channel?

The big support may be a big test. It is obvious on the charts.

24 November 2011

Warren Pollock: Open Letter to the CME

Wednesday, November 23, 2011

Open Letter to the CME
To: Terrence A Duffy, Chairman CME Group

As illustrated by the failure of MF Global, I am of the opinion that, the CME has not met its basic obligations to the marketplace as a “public fiduciary.”

Our society depends on “basic finance” to provide “utility functions” such as banking, hedging, insurance, and/or capital formation. Presently, we have an “innovative system” that degrades the integrity needed for “basic finance” to perform as required in a well-structured economy.

Worse yet, our “innovative” financial system impedes the effectiveness of the greater “physical economy.” The physical economy is all those individuals and entities tasked with meeting actual need. The physical economy consists of many of your customers including farmers, manufacturers and electric companies.

Our society needs people working in the physical world to create jobs more desperately than it needs the continuity of the CME. Must we endure another market catastrophe to figure this out?

The 2008 bailouts defined “moral hazard,” as the socialization of losses due to over-leverage. MF Global consumers are currently subsidizing losses attributable to over-leverage and “innovation.” Perhaps small percentage moves in speculation rationalized an internal choice between corporate survival and the sanctity of customer funds. Complexity has been specifically designed by “modern finance” to intentionally allow over-leverage leading to out sized profits and reactively-subsidized losses.

The word, “theft,” comes to mind.

I believe that, the products traded by your member firms, at the CME exchange and elsewhere, well exceed the capacity of the monetary system to cover relatively small percentage losses or speculative miscalculations. Clearing OTC derivatives on an exchange does not, and will not, correct the problem.

With repeal of Glass Steagall, and the conversion of mutual companies to publicly traded entities, meaningful regulation has proved to be politically impossible to recapture. The solution therefore resides in simplification from “innovative” towards “basic” finance.

Presently, I would urge you to make MF Global customers whole as a perquisite to market reform towards a “utility function.” More than just the continuity of the CME may be at stake.

Warren E. Pollock

23 November 2011

Franklin D. Roosevelt's 1942 Thanksgiving Proclamation - Kipling's Caution to the Empire

"It is a good thing to give thanks unto the Lord."

Across the uncertain ways of space and time our hearts echo those words, for the days are with us again when, at the gathering of the harvest, we solemnly express our dependence upon Almighty God.

The final months of this year, now almost spent, find our Republic and the nations joined with it waging a battle on many fronts for the preservation of liberty.

In giving thanks for the greatest harvest in the history of our nation, we who plant and reap can well resolve that in the year to come we will do all in our power to pass that milestone; for by our labors in the fields we can share some part of the sacrifice with our brothers and sons who wear the uniform of the United States.

It is fitting that we recall now the reverent words of George Washington, "Almighty God, we make our earnest prayer that Thou wilt keep the United States in Thy holy protection," and that every American in his own way lift his voice to Heaven.

I recommend that all of us bear in mind this great Psalm:
The Lord is my shepherd; I shall not want.
He maketh me to lie down in green pastures; he leadeth me beside the still waters.
He restoreth my soul; he leadeth me I the paths of righteousness for his name’s sake.
Yea, though I walk through the valley of the shadow of death, I will fear no evil; for thou art with me; thy rod and thy staff they comfort me.
Thou preparest a table before me in the presence of mine enemies; thou annointest my head with oil; my cup runneth over.
Surely goodness and mercy shall follow me all the days of my life; and I will dwell in the house of the Lord for ever.
Inspired with faith and courage by these words, let us turn again to the work that confronts us in this time of national emergency : in the armed services and the merchant marine; in factories and offices; on farms and in the mines; on highways, railways and airways; in other places of public service to the Nation; and in our homes.

NOW, THEREFORE, I, FRANKLIN D. ROOSEVELT, President of the United States of America, do hereby invite the attention of the people to the joint resolution of Congress approved December 26, 1941, which designates the fourth Thursday in November of each year as thanksgiving Day’ and I request that both Thanksgiving Day, November 26, 1942, and New Year’s Day, January 1, 1943, be observed in prayer, publicly and privately.

IN WITNESS WHEREOF, I have hereunto set my hand and caused the seal of the United States of America to be affixed.

DONE at the City of Washington this eleventh day of November, in the year of our Lord nineteen hundred and forty-two, and of the Independence of the United States of America the one hundred and sixty-seventh.


God of our fathers, known of old—
Lord of our far-flung battle line—
Beneath whose awful hand we hold
Dominion over palm and pine—
Lord God of Hosts, be with us yet,
Lest we forget—lest we forget!

The tumult and the shouting dies—
The Captains and the Kings depart—
Still stands Thine ancient sacrifice,
An humble and a contrite heart.
Lord God of Hosts, be with us yet,
Lest we forget—lest we forget!

Far-called our navies melt away—
On dune and headland sinks the fire—
Lo, all our pomp of yesterday
Is one with Nineveh and Tyre!
Judge of the Nations, spare us yet,
Lest we forget—lest we forget!

Rudyard Kipling, 1897

Gold Daily and Silver Weekly Charts - Post Option Expiration Gut Check Doesn't Stick

US stock markets went out on their laws, roiled by a failed bond auction in Germany.

Gold and silver received their traditional post option expiration smackdown, designed to pry any new futures position out of the hands of any specs who happened to have held in-the-money calls after yesterday.

The US will be closed tomorrow, and staffed by junior employees on Friday. So eyes will be on the overseas markets.

Pleasant holiday to the Yanks.

SP 500 and NDX Futures Daily Charts - Out on the Lows

A failed bond auction in Germany cast a pall over the holiday markets in the US.

Stocks went out on their lows in thin trading.

Pigs 'R' Us - The Wall Street Groupon IPO

And it is...

When I play cards with the little girls, they make up new rules on the fly and sometimes cheat outrageously, palming cards and sneaking money from my pile of coins, so that we all laugh about it. They know that I know, and that I am being tolerant. They enjoy sneaking up on me, and jumping out of cupboards and behind doors. And I always act surprised, but never am.

After all, it is a duty and the joy of a father to occasionally indulge his children, and especially the little ones, to show them the tender side of his love.

But what is amusing in 10 year olds is not becoming in grown men acting like spoiled little boys, abusing other people's money, betraying trusts,  and taking personal and selfish gains from the livelihood of the public and the nation's future, stealing from their clients.

And Wall Street is even worse than the Congress.

While I never had the heart or even the need for it with any of the children, a stern look being enough, perhaps a spanking is in order for such miscreants as these. Where's the wooden spoon? I am counting to three. lol.

From Le Cafe on 3 November:

"The wolf thought to himself: 'What a tender young creature! what a nice plump mouthful.-- she will be better to eat than the old woman. I must act craftily, so as to catch both."

The Brothers Grimm, Little Red Cap

The Wall Street wiseguys are shoving the Groupon IPO out the door tonight I hear.

It *could* do well, but it strikes a kind of a chord for a high water mark in the post 2008 equity echo bubble.

From Le Cafe on 4 November:
GroupOn = LinkedIn?

La la la, whatever. La la la, doesn't matter. As cynical an IPO as seen since 1999 they said today.

22 November 2011

CME Boosts MF Global Guarantee - Corzine & Gensler Called to Testify At House Hearing

It is good to hear of the increasing likelihood that the customers will be repaid. It may take some time for full repayment.

It is also good that Corzine, Gensler et al. are being asked to appear before the Congress. The article does not mention subpoenas, or whether the testimony will be sworn.

The facts of the case will most likely be buried under a smokescreen of 'accounting errors' and misunderstanding.

But the Congressmen will have their chance to express their 'outrage' as they did with the bank bailouts, and put on a good show for the folks at home.

I wonder if they will ever reveal who had taken the customer funds from MF Global as last minute collateral before the bankruptcy filing?    I notice no one from JP Morgan has been called.  Although I doubt it, it would be interesting if Corzine pleads the fifth.

Like resistance becomes support, so the glass ceiling becomes a glass floor once you pass through it and join the club.

Even with the money returned, without stronger guarantees it is hard to understand why anyone would put money into a US futures account.

Corzine Called to Testify at House Hearing
By Zeke Faux and Phil Mattingly
Nov 22, 2011 6:45 PM ET

Jon S. Corzine, the former U.S. senator and New Jersey governor who ran MF Global Holdings Ltd. (MF) until the firm filed bankruptcy last month, has been called to testify at a House hearing on the failure next month.

Corzine, who was chairman and chief executive officer of the New York-based firm, will face questions “on the decisions and events leading to the collapse of MF Global” at a Dec. 15 hearing before the House Financial Services Oversight and Investigations panel, according to a statement released today...

Gary Gensler, chairman of the Commodity Futures Trading Commission; Robert Cook, director of trading and markets at the Securities and Exchange Commission; William C. Dudley, the president of the Federal Reserve Bank of New York; and Bradley Abelow, MF Global’s president and chief operating officer, have also been asked to appear at the hearing, according to a person with direct knowledge of the panel’s plans...

Press Release
CME Group Increases Guarantee to $550M to Accelerate Return of 75 Percent of MF Global Inc. Segregated Funds to All Customers

- CME Group confident reports of significantly larger shortfalls are incorrect
- Distribution would result in return of roughly $4 billion total cash returned

CHICAGO, Nov. 22, 2011 /PRNewswire/ -- To accelerate the return of additional securely held funds to MF Global Inc. customers, CME Group today announced it has increased its financial guarantee to the SIPC Trustee from $250 million to $550 million. CME Group's proposal to the Trustee is designed to increase the payout percentage from 60 percent to 75 percent in early December. This distribution would include customers holding cash balances and warehouse receipts, as well as customers who received non-sufficient funds checks from MF Global. As a result of this proposal, roughly $4 billion of the $5.5 billion that was supposed to be held by MF Global in segregation will be returned to customers. With this offer, the entire $2.5 billion securely held at CME Clearing will have been distributed.

While the final accounting of customer segregated assets and claims will occur in the bankruptcy process, CME Group is confident that recent reports of significantly larger customer segregated shortfalls are incorrect. CME Group continues to work with the Trustee and the CFTC to finalize this accounting....

Gold Daily and Silver Weekly Charts - Bounce Back from the Smackdown

Silver would not be denied.

Keep an eye now on the December delivery process in the metals at the Comex.

All eyes on Europe and the US financials.

SP 500 and NDX Futures Daily Charts

Light volumes. Some recovery from the daily low on the Fed minutes.

This gave a little cheer to a market that was digesting a weaker than expected GDP number.

The adults have left the building for the holiday.

All eyes on Europe.

Bank of America was warned by its regulators to stiffen up its assets.

The futures finally closed at 1180.75 which is important support.

JPM to Buy MF Global's Stake in the London Metals Exchange

JP Morgan to buy MF Global stake in LME
By Douwe Miedema
LONDON Tue Nov 22, 2011 9:55am EST

(Reuters) - U.S. investment bank J.P. Morgan (JPM.N) is set to announce it has bought a 4.7 percent stake in the London Metal Exchange for 25 million pounds ($39.1) from defunct U.S. brokerage MF Global, a person familiar with the situation said.

An announcement could come as early as this week, the source said.

J.P. Morgan and the LME declined comment.

KPMG, the administrators for MF Global's UK unit, could not immediately be reached for comment.

The Right of the People Peaceably to Assemble and Petition the Government

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

First they came for the Socialists, and I did not speak out --
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out --
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out --
Because I was not a Jew.

Then they came for me -- and there was no one left to speak for me.

Martin Niemöller

21 November 2011

Tavakoli: MF Global Revelations Keep Getting Worse

“The moment the idea is admitted into society that property is not as sacred as the laws of God, and there is not a force of law and public justice to protect it, anarchy and tyranny commence.”

John Adams

MF Global is one of the most outrageous and brazen abuses of customers by Wall Street insiders that I have ever seen.

That it has been receiving so little attention by the mass media shows the extreme moral hazard in which the average American unsuspectingly operates.

MF Global is worse than Madoff. It was not a Ponzi scheme. The customers were not betrayed by a fraud.

Rather, within an officially sanctioned system overseen by the government and the guarantees of a major global exchange and the regulators of the markets of the nation, their property was confiscated, stolen, and sold, and then stolen again by the creditors and criminals who conceal it and attempt to claim it as their own.

And yet as bad as it is,  the cover up, which is still under way, may be worse in its eventual effects, and bring down careers, some market organizations,  and perhaps even members of the government.

To read the original pdf by Janet Tavakoli with links click here.

MF Global Revelations Keep Getting Worse
By Janet Tavakoli
November 21, 2011

When MF Global collapsed on October 21, it was the biggest financial firm to collapse since Lehman in September 2008. Then Chairman and CEO Jon Corzine is connected to the head of one of his key regulators, the Commodity Futures Trading Commission (CFTC), through his former protégé at Goldman Sachs, Gary Gensler. He also knows the Fed’s William Dudley, a key member of the Fed’s Open Market Committee, from their days at Goldman Sachs. The Fed approved MF Global’s status as a primary dealer, a participant in the Fed’s Open Market Operations, just before Jon Corzine took its helm and beached it on a reef called leveraged credit risk.

MF Global’s officers admitted to federal regulators that before the collapse, the firm diverted cash from customers’ accounts that were supposed to be segregated:
MF Global Holdings LTD. “violated requirements that it keep clients’ collateral separate from its own accounts…Craig Donohue, CME Group’s chief executive officer, said on a conference call with analysts today that MF Global isn’t in compliance with the rules of the exchange and the Commodity Futures Trading Commission.”

“MF Global Probe May Involve Hundreds of Millions in Funds,” Bloomberg News – November 1, 2001 by Silia Brush and Matthew Leising
Cash in customers’ accounts may be invested in allowable transactions, and MF was allowed to make extra revenue from the income. But what isn’t allowed, and what MF Global apparently admitted to doing, is to commingle customers’ money with its own and take money from customers’ accounts to meet margin calls on MF Global’s own allowable transactions. Even if all of the money is eventually clawed back and recovered, this remains an impermissible act. Moreover, full recovery—even if it is possible—is not the same as restitution. People have been denied access to their money, and businesses and reputations have been tarnished.

In layman’s terms, you may buy a Rolls Royce with customers’ excess cash, sell it at a profit, and pocket part of the profits. You may buy a Rolls Royce and try to resell it at a profit with your firm’s cash. But you aren’t allowed to take customers’ money to make the car payments on your firm’s Rolls Royce. If one engages in this impermissible activity, it becomes almost impossible to cover up if you have an accident driving your Rolls Royce.

Implausible Denial and an Ugly Surprise

On November 1, Kenneth Ziman, a lawyer for MF Global, relayed information from MF Global to U.S. Bankruptcy judge Martin Glenn in Manhattan: ”To the best knowledge of management, there is no shortfall.” If that sounded like a cover-up, it was, unless of course you prefer to believe that the “best knowledge” of management is actually no knowledge at all.

How long does it take to find more than $600 million to $1.2 billion of customers’ money? MF Global’s books seem so messed up that one person couldn’t have created this chaos alone. A lot of people had to agree to throw away controls, standards, and procedures. I doubt this happened just in the final week or two before MF Global blew itself up.
“According to a U.S. official, MF Global admitted to federal regulators early Monday [October 31, 2011] that money was missing from customer accounts. MF Global acknowledged a shortfall in a phone call amid mounting questions from regulators as they went through the firm's books.”

“MF Global’s Collapse Draws FBI Interest,” by Devlin Barrett, Scott Patterson, and Mike Spector, WSJ, November 2, 2011
The initial bankruptcy estimate was a shortfall of around $600 million. As of Monday November 21, MF Global’s liquidating trustee believes the shortfall may be as much as $1.2 billion and possibly even more.

“Repo-to-Maturity” is a “Total Return Swap-to-Maturity,” A Type of Credit Derivative

If you call a total return swap-to-maturity a “repo-to-maturity,” you are much less likely to freak out regulators. Many regulators still remember that Long Term Capital Management (LTCM) used total return swaps (among other things). Jon Corzine should remember, too, since he was closely involved with LTCM when he headed Goldman Sachs. In September of 2011, FINRA seemed to catch on that MF Global’s transactions were riskier than it previously thought and asked for more capital against these trades.

Part of AIG's acute distress in 2008 was due to credit default swaps, another type of credit derivative, linked to the risk of shady overrated collateralized debt obligations. The basic problem was risk on fixed income assets that could only go down in value combined with lots of leverage.

I’d like to interject a side note. I understand that some pundits tried to say that the New York Times’s Gretchen Morgenson was incorrect when she wrote MF Global was felled by derivative bets. She is correct. The pundits leaped to the conclusion that when she referred to credit derivatives and “swaps” that she meant credit default swaps, but she was referring to total return swaps, a type of credit derivative. (Later in the article she discussed a different topic, lack of transparency in credit default swaps, another type of credit derivative.)

MF Global’s problematic trades were different from AIG’s, but they were also derivatives, in fact, they were a form of credit derivative. The "repo-to-maturity" transaction was just a form over substance gimmick to disguise this fact. Specifically the transactions are total return swaps, a type of credit derivative, and the chief purpose of these transactions is leverage.

A total return swap-to-maturity includes a type of credit derivative. It allows you to sell a bond you own and get off-balance sheet financing in the form of a total return swap. Alternatively, you can get off-balance sheet financing on a bond with risk you want (but do not currently own so there is no need to sell anything) and take the risk of the default and price risk. (Price risk can be due both to credit risk and/or interest rate risk.) This is an off-balance sheet transaction in which the total return receiver (MF Global) has both the price risk and the default risk of the reference bonds. In this case, MF Global had the price risk and the default risk of $6.3 billion of the sovereign debt of Belgium, Italy, Spain, Portugal, and Ireland. As it happened, the price fluctuations of this debt in 2011 weren’t due to a general rise in interest rates, they were due to a general increase in the perceived credit risk of this debt.

Repo transactions are on balance sheet transactions, but they don’t draw as much scrutiny from regulators. There was just one little problem. MF Global wanted the off-balance sheet treatment of a derivative, a total return swap, but it didn’t want to call it a total return swap, so it used smoke and mirrors. Even if MF Global engaged in a wash trade at the end (if there is no default in the meantime) to buy back the bonds, MF Global would receive par on the bonds from the maturing bonds. The repurchase trade at maturity is a formality with no real (or material) economic consequence.

In other words, the “repo-to-maturity” exploits a form-over-substance trick to avoid calling this transaction a total return swap. Accountants paid by the form-over-substance seekers and asleep-at-the-switch regulators will sometimes, at least temporarily, go along with this sort of relabeling.

The fact that MF Global was exposed in a leveraged way to default risk and liquidity risk because of these transactions and that the risk was- linked to European sovereign debt was disclosed in MF Global’s 10K for the year ending March 31, 2011, a required financial statement filed with the SEC. The CFTC and other regulators had the information right under their noses, but it appears they didn’t understand that they were looking at a leveraged credit derivative transaction that could lead to margin calls that MF Global would be unable to meet.

The result is that yet another large financial institution has been felled when it couldn’t meet margin calls due to the credit risk of fixed income assets combined with high leverage in an off-balance sheet transaction. The ugliest part of this story, however, isn’t that MF Global got in over its head, it’s that the bankruptcy trustee estimates customers’ money to the tune of $1.2 billion or more is still missing.

Probable Shortfalls Throughout 2011

MF Global reportedly employed 35:1 leverage—some reports are 40:1—against a portfolio comprised around 20% of European Sovereign risks including Belgium, Italy, Spain, Portugal, and Ireland. MF Global would have had several trading days in 2011 with moves of 5% to 10% on this sovereign risk. MF Global was so thinly capitalized that this trade alone could eat up half of its capital. Any of MF Global’s other asset positions moving the same way in 2011’s highly correlated markets would have put MF Global in a position of negative equity. From a risk management point of view, examiners have to consider the very strong possibility that MF Global had several negative equity days throughout 2011.

How did MF Global meet margin calls throughout 2011? It seems an investigation into money flows throughout 2011 is in order.

By the end of October, the combination of a $90 million August legal settlement against MF Global coming due, increased capital calls by FINRA, and margin hikes from counterparties worried about MF Global’s credit made it impossible for MF Global to cover up its shortfall.

Regulators Waive Required Tests for Jon Corzine

Jon Corzine resigned as Chairman and CEO of MF Global on November 4, just days after the October 31 bankruptcy announcement. As a matter of corporate governance, holding the position of Chairman nad CEO meant that Corzine had a lot of concentrated power with little oversight. Many question the wisdom of a corporate structure that allows officers to hold this dual position. (Ken Lewis, the Chairman and CEO that merged Bank of America into the poorhouse held this dual role, too. Lewis defended this practice at the Federal Reserve Bank of Chicago’s Bank Structure Conference in 2003.) Corzine was the former governor of New Jersey and had been out of the active markets for twelve years. Prior to that, until 1999 he had been the CEO of Goldman Sachs.

The Financial Industry Regulatory Authority Inc. (FINRA) gave Jon Corzine a waiver from his Series 7 and Series 24 exams when he took the helm of MF Global in March 2010. The former is required for anyone involved in the investment banking or securities business including supervision, solicitation, or training of persons associated with MF Global, and that included Corzine. As an officer of MF Global the latter was required for Corzine, since he had been out of the business for around 12 years or more than six times the 2 year expiration date for reactivating these qualifications.

Jon Corzine to Credit Derivatives Head: Next Time “Double Up” (See note below)

The test waiver by regulators seems to be blatant cronyism, because Corzine not only hadn’t been involved in the day-to-day markets for more than a decade, his responsibilities at MF Global included active decision making. The waiver wasn’t justified. Corzine reportedly authored the strategy for the MF Global killing trades, and he also had authority on the trading floor.

Jon Corzine pushed traders to increase their risk. According to an MF Global employee, Corzine knelt down beside Jim Parascandola, head of credit derivatives trading, and told him that next time he should “double up” on his winning protection bets on brokerages. Traders loved Corzine, because he pushed them to increase risk. Now the traders aren’t lifting offers, they’re pounding the pavement.
JT Note: Subsequent to this report Jim Parascandola told me that he was never told to increase the size of any position, albeit his trades were profitable.

MF Global Becomes a Primary Dealer Unregulated by the Fed: How Did That Happen?

MF Global’s financials were shaky ever since Man Group spun it off in 2005 and saddled it with a lot of debt. Yet MF Global was added to the Fed’s list of 22 primary dealers in February 2011, just before former Goldman CEO Jon Corzine officially came on board. Primary dealers buy and sell U.S. treasuries at auction and are a counterparty to the Fed’s Open Market operations.

William C. Dudley is the president and chief executive officer of the FRBNY. He is also vice chairman of the Federal Open Market Committee (FOMC) and VP of the Markets Group, which oversees open market and foreign exchange trading operations and provisions of account services to foreign central banks and manages the System Open Market Account. Dudley is a former partner at Goldman Sachs (1986-2007), and he was Goldman’s chief economist.

David Kotok of Cumberland Advisors has raised important questions about the fact that the Fed has dropped its role of surveillance of primary dealers, and his commentaries are available here.

Besides trading treasuries, the big benefit to primary dealers is the perception that the Fed will provide funding to primary dealers during a systemic liquidity crunch. Just before Bear Stearns imploded, the Fed changed the rules so that non-U.S. banks, along with brokers that were primary dealers (as MF Global later became), were allowed to borrow through a program called a Term Securities Lending Facility (TSLF) to finance mortgage backed securities, asset backed securities, and more. TSLF’s start date was too late to help Bear Stearns, and the program has now been discontinued, but the perception of a Fed safety net has precedence.

Why did the Fed award prestigious primary dealer status to a shaky operation like MF Global, an entity it does not regulate?

MF Global Stalled and Wrote Rubber Checks: Did Some Customers Get Better Treatment?

The week before the bankruptcy, when customers asked for excess cash from their accounts, MF Global stalled. According to a commodity fund manager I spoke with, MF Global’s first stall tactic was to claim it lost wire transfer instructions. Instead of issuing an electronic check or sending an overnight check, MF Global sent paper checks via snail mail, including checks for hundreds of thousands of dollars. The checks bounced. After the checks bounced, the amounts were still debited from customer accounts, and no one at MF Global could or would reverse the check entries. The manager has had to intervene to get MF Global to correct this, and still hasn’t gotten the entries corrected. Reuters’s Matthew Goldstein reported more in “MF Global and the Rubber Check.”

I thought that was bad enough, but on November 10 I was a guest on Stocks & Jocks, a Chicago radio show, when Jon Najarian said that a large broker he knows got a $400,000 electronic check from MF Global the Friday before that bankruptcy, and the check cleared. If that’s accurate, MF Global treated some customers differently than others.

Tip-Offs for Some Customers?

In August, customers started pulling billions of dollars out of their segregated accounts with MF Global. It was the biggest outflow of funds since January 2009. The bankruptcy trustee may clawback transfers of funds from MF Global as it was teetering, because it is likely that employees within MF Global were well aware of the problems and tipped off key customers.

Yet Gary Gensler, head of the CFTC, did not investigate or begin transferring accounts out of MF Global before the bankruptcy, and that is unprecedented for the CFTC. Given that Gary Gensler was a protégé of Jon Corzine at Goldman Sachs, one should question why Gary Gensler didn’t act and why he should be allowed to remain head of the CFTC.

CFTC’s Gary Gensler Didn’t Act

Gary Gensler, Jon Corzine’s former Goldman Sachs colleague and current head of the Commodities Futures Trading Commission (CFTC), had reason to be concerned about MF Global’s risk management. In early 2008, a rogue trader racked up $141.5 million in losses in unauthorized trades that exceeded his trading limits. It seems he accomplished this in under seven hours. In August of this year, MF Global and the underwriters of its 2007 initial public stock offering (IPO) paid around $90 million to settle claims by investors that they were misled about MF Global’s risk management prior to the rogue trader’s actions. Since 2008, MF Global’s financial condition has been nothing to brag about. Now the settlement is in jeopardy due to the bankruptcy. [Michael Stockman, the chief risk officer of MF Global as of January 2011 (after the previous mentioned incident) was in my Liar’s Poker training class lampooned by another classmate, Michael Lewis.]

In the past, the exchanges and CFTC “always” moved customer positions before a Futures Commission Merchant (FCM) declared bankruptcy. The CFTC had ample reason to have contingency plans for MF Global based on publicly available information. Yet the Gensler-led CFTC hasn’t followed this historical precedent when an FCM led by his former Goldman colleague teetered on the edge of bankruptcy. Gensler has recused himself from the CFTC’s probe of MF Global.

The exchange-traded futures markets have been shaken to the core. The Bankruptcy Code apparently conflicts with the Commodity Exchange Act, so customers of MF Global have less protection than one might expect. The Securities Investor Protection Corporation (SIPC) is not the FDIC. Account holders have no idea how long it will take to get back all of their money, if it is there to be recovered, and right now, it appears a lot of it cannot be found. This is why many traders sweep all of the excess cash out of their accounts each day, and only put in cash when required.

MF Global Debacle Damages a Key Global Market

The “risk wizards” of Goldman Sachs once again look like market wrecking balls. The futures market is a globally connected market and it is a key mechanism for farmers, metals miners, and metals fabricators (among others) to hedge their risk. Confidence in the futures market has been shaken. No one knows if their money is safe, but what is more disturbing is the appearance of crony capitalism once again giving favored treatment, lax regulation, and absent oversight to a crony capitalist that abused all of these perks to blow up a large financial firm and damage a key global market.
Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).