18 June 2012

MF Global: Follow the Customer Money - The Economics of Demagogues

One of the key facts, which ought to have been apparent in the first week or so after its collapse given the tracking mechanism of wire transfers, is 'who got the customer money' and 'who received a preferential return of funds in the last weeks when the brokerage was failing?'

That we still do not know who 'got the money,' although recent admissions show that JPM did in fact receive about $768 million or so which they have recently and quietly returned, claiming that they were just waiting for someone in authority to ask for it back. MF Global's Banker Returns $600 Million - WSJ 6/1/12

It raises serious questions about what the Trustees are not disclosing and why. But since JPM has voluntarily returned the 600 million at this late date, after having earlier returned $168 million, shows that these disclosures may be forthcoming. MF Global is the poster child for asymmetry of information and insider dealing, that flies in the face of any claims and fantasies about the natural efficiency and honesty of self-regulation of the markets.

I get it. I understand why people who are well paid to say these things and promote these public policies, or who directly benefit from this kind of unequal insider privilege, might oppose and seek to dilute and weaken effective regulation and push for more and larger free style fraud.  It is a transaction and their integrity is for sale.

And this becomes a particular problem in times and places where there are no real penalities for deceit.  That is the definition of 'moral hazard.'

What I don't fully understand is how some of the victims of this type of predatory arrangement can get carried away in supporting their own oppression and the ruin of their families, and are so easily led to parrot slogans specifically designed to lead them to destruction and despair.  

I have read about it in history, and have seen it in my own life, but I still do not understand it except to say that sometimes when faced with problems that are confusing and troubling it is easier to think what someone tells you to think, particularly something that touches a deep and dark nerve in your nature, rather than carry the burden and ambiguity of struggling with the facts and thinking for yourself.  Repeating a party line is a shorthand way of avoiding real thought.  And the predators are always there to take advantage of it.  They welcome trouble and often foment crisis in order to advance their agendas.
"The undeserving maintain power by promoting hysteria."

Frank Herbert
Anyone can be misled by a clever person, and no one likes to readily admit that they have been had.  It is a sign of character and maturity to realize this, and admit your were deceived, and to demand change and reform. But some people cannot do this, even when the facts of the deception are revealed.  It seems as though the more incorrect that the truth shows them to be, the louder and more strident they become in shouting down and denying the reality of the situation.   And anyone who denies their perspective becomes 'the other,' someone to be feared and hated, shunned and eliminated, one way or the other.

Although competition and even tribalism are a natural and sometimes surprising force in many aspects of society, as anyone who has attended grammar school atheletics can attest, they become difficult and conter-productive in their excess.  The more extremely held the views, left or right, the more ardent the self-deception and loss of individual identity.  Because at the extremes, it is no longer about justice, but about the objectification and irrelevance of the individual, and the dehumanisation and demonisation of 'the other.' 
"He who makes a beast of himself, gets rid of the pain of being a man."

Samuel Johnson
For whatever reason, extremists cannot easily let go of the lie, because it seems to give them a substance which they fear they cannot provide for themselves, because they cannot bear the uncertainty and loss of purpose.  Their very identity becomes intermingled with the lie.  This is the essence of the cult, and the stuff of demagogues, and the phenomenon of mass suicides and self-destruction when the lies come to an end: the bunker mentality.

I would hope that these disclosures shed some light on this aspect of the MF Global collapse that raises serious questions about the integrity of the regulators, the CME, and any pretensions to fairness on Wall Street.

"But perhaps the most stunning piece of news we're getting in the wake of the MF Global collapse is in the clients of the firm who managed to get away scot-free, with no freezing of accounts or capital -- particularly the accounts of the mega-cap independent oil company Koch Industries, run by the politically active Koch brothers.

A recent report in Reuters has described the billions of dollars of client accounts that were withdrawn from MF Global in the last few weeks before their collapse, including 8 accounts from Koch industries engaged in oil trade that were transferred to Mizuho Securities after years of a steady and profitable relationship with MF. The Reuters piece concentrates on the possibilities of legal "clawback" of client money if the bankruptcy does not allow remaining client accounts to be made whole.

The Reuters piece misses the point.

Both the Commodity Futures Trading Commission and the Chicago Mercantile Exchange were charged with overseeing MF Global, their clearing member. If we are to believe them, they had no idea of any difficulties within the firm before customer accounts went missing just a few days before the collapse. But someone clearly knew of the cratering positions and imminent collapse of MF Global, as billions of dollars of accounts were "coincidentally" withdrawn. And what do the Koch brothers say was the reason for these withdrawals? There's been no comment."

Daniel Dicker, MF Global and the Koch Brothers: Friends to the End, Huffington Post, Nov. 11, 2011
Francine McKenna raises this issue in this interview, and in particular, the large amount of money that were wired at the same time that customers were being denied wire transfer access to their funds.