CFTC Issues A Clear Statement: MF Global Customers Have Priority In This Bankruptcy

"A good parson once said that where mystery begins, religion ends. Cannot I say, as truly at least,
of human laws, that where mystery begins, justice ends?"

Edmund Burke

Jill Sommers, the CFTC Commissioner who is leading the investigation into the MF Global bankruptcy gave some important testimony to the House today that has been overshadowed by the expected appearance of Jon Corzine.

If you have been following the case, you know that JP Morgan has taken the lead in attempting to file motions to subordinate the customer accounts to their own debts. There is also a motion being heard that the Trustee has a conflict of interest with their fiduciary responsibilities as Trustee and a long standing relationship with JPM.

There are also some confusing arguments being made that because some of the activity was conducted in a subsidiary in London, the UK rules apply to the customer funds. Some of them sound like they are being crafted by the Wall Street attorneys who will be defending and justifying the theft of customer funds. Be careful of some of the 'news' that you get from the corporate media.

As Sommers later made clear, and as Janet Tavakoli encapsulates so well,

"Jill Sommers did a great job with her testimony leaving no room for doubt that 1) the cases in which investment in foreign sovereign debt for customers’ own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts) and 2) it is never allowable to transfer money out of the customer accounts to commingle with MF’s investments."

Here is Jill Sommers testimony before the House today.

"When a broker-dealer is also a registered FCM, as MF Global was, there is one dually-registered entity and the entire entity gets placed into liquidation. Because there is one entity, it is not possible to initiate a SIPA liquidation of the broker-dealer, and a separate bankruptcy proceeding for the FCM. It is important to note, however, that when a dually-registered BD/FCM is placed into a SIPA liquidation proceeding, the relevant provisions and protections of the Bankruptcy Code, the Commodity Exchange Act (“CEA”), and the Commission’s regulations apply to customer commodity accounts just as they would if the entity were solely an FCM and in a non-SIPA bankruptcy proceeding.

An obvious point to make is that if a firm is involved in a bankruptcy proceeding, something must have gone very wrong. Bankruptcy proceedings can be very complicated and at times, messy. This can be magnified when the bankruptcy is among the largest in history and there are serious questions about the location of customer funds. The Commission is no stranger to FCM bankruptcies. Lehman Brothers and Refco are the two most recent FCM bankruptcies. While the Lehman Brothers bankruptcy was monumental in scale, and the Refco bankruptcy involved serious fraud at the parent company, commodity customers did not lose their money at either firm. In both instances, commodity customer accounts were wholly intact, that is, they contained all open positions and all associated segregated collateral. That being the case, customer accounts were promptly transferred to healthy FCMs, with the commodity customers having no further involvement in the bankruptcy proceeding. Unfortunately that is not what happened at MF Global because customer accounts were not intact.

In FCM bankruptcies, commodity customers have, pursuant to Section 766(h) of the Bankruptcy Code, priority in customer property. This includes, without limitation, segregated property, property that was illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed from segregation and is no longer within in the debtor’s estate, but is clawed-back into the debtor’s estate by the Trustee. If the customer property as I just described is insufficient to satisfy in full all the claims of customers, Part 190 of the Commission’s regulations allow other property of the debtor’s estate to be classified as customer property to make up any shortfall. A parent or affiliated entity, however, generally would not be a “debtor” unless customer funds could be traced to that entity.

Within the first weeks of the MF Global bankruptcy, the Trustee for the BD/FCM had, with the encouragement and assistance of the CFTC, transferred nearly all positions of customers trading on U.S. commodity futures markets, and transferred approximately $2 billion of customer property. On November 29th, the Trustee moved to transfer an additional $2.1 billion back to customers, to be used to “top up” all commodity customers to at least two-thirds of their account values as reflected on the books and records of MF Global, Inc. The Bankruptcy Court will hear the motion on December 9th. If the Court grants the motion we expect the transfer may be complete in two to four weeks, given the Trustee’s estimate of the timeframe within which he can complete the administrative functions necessary to effectuate the transfer. These transfers demonstrate that commodity customers are indeed receiving the highest priority in claims to customer property. We understand that more must be done...

While an FCM is permitted to invest customer funds, it is important to note that if an FCM does so, the value of the customer segregated account must remain intact at all times. In other words, when an FCM invests customer funds, that actual investment, or collateral equal in value to the investment, must remain in the customer segregated account at all times. If customer funds are transferred out of the segregated account to be invested by the FCM, the FCM must make a simultaneous transfer of assets into the segregated account. An FCM cannot take money out of a segregated account, invest it, and then return the money to the segregated account at some later time."

I expect that at some point the CFTC will file civil charges and will settle.

What the Obama Justice Department does about any criminal charges will be a significant indication of its character. I think the character of the opposition party is abundantly clear.

I believe that the US based customers will be made whole. I cannot speak for any customers who may have been served by MF's overseas subsidiaries, particularly the UK. I just do not know enough about jurisdictions and the scope of the bankruptcy in the US court.

But I think I can spot disinformation, propaganda, bold injustice, and brazen theft when I see it, given enough time and effort.

Corzine To Take the 'CEO Defense' - The Re-Hypothecation Scheme - Customers Have Priority

"I will be as harsh as truth, and as uncompromising as justice. On this subject, I do not wish to think, or speak, or write, with moderation. Tell a man whose house is on fire, to give a moderate alarm; tell him to moderately rescue his wife from the hand of the ravisher; tell the mother to gradually extricate her babe from the fire into which it has fallen; but urge me not to use moderation in a cause like the present. I am in earnest - I will not equivocate - I will not excuse - I will not retreat a single inch - and I will be heard."

William Lloyd Garrison

Yes I was highly paid.

Yes I signed a statement saying I had reviewed all the financials in keeping with my fiduciary responsibilities.

Yes I am a former Chairman of the investment bank Goldman Sachs and understand the financial industry intimately.

But...

I Know Nothing!

Jon Corzine's Opening Statement

And I am sorry something happened that I did not know about.

"Recognizing the enormous impact on many peoples’ lives resulting from the events surrounding the MF Global bankruptcy, I appear at today’s hearing with great sadness. My sadness, of course, pales in comparison to the losses and hardships that customers, employees and investors have suffered as a result of MF Global’s bankruptcy. Their plight weighs on my mind every day – every hour. And, as the chief executive officer of MF Global at the time of its bankruptcy, I apologize to all those affected."

I am a former US Senator and am therefore untouchable.  So, after the Congressmen are done uselessly yelling at me for the benefit of their constituents, can I go home with my money?

Commingling of customer funds and accounts a sacred trust?  Hah! In the age of globalization, you just take your activity to a favorable jurisdiction and try to hide in the ambiguities of the law.

Look for the Senate Republicans to block the nominee for the Consumer Protection Agency today. They don't want Consumer Protection from the Banks. Better to leave it with the Fed, a private institution.

Read this: MF Global and the great Wall St re-hypothecation scandal

"With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

Nor is lending confined to between banks. Intra-bank re-hypothecation is also possible as evidenced by filings from Wells Fargo. According to disclosures from Wachovia Preferred Funding Corp, its parent, Wells Fargo, acts as collateral custodian and has the right to re-hypothecate and use around $170 million of assets posted as collateral.

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening."

I was slow to use this Thomson Reuters piece because some of the things it seems to suggest in the beginning do not quite ring true.  As Jill Sommers, the head investigator from the CFTC into MF Global made very clear yesterday,  and as Janet Tavakoli encapsulates so well, 

"Jill Sommers did a great job with her testimony leaving no room for doubt that 1) the cases in which investment in foreign sovereign debt for customers’ own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts) and 2) it is never allowable to transfer money out of the customer accounts to commingle with MF’s investments."

And as Commissioner Sommers said in her testimony today,

"In FCM bankruptcies, commodity customers have, pursuant to Section 766(h) of the Bankruptcy Code, priority in customer property. This includes, without limitation, segregated property, property that was illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed from segregation and is no longer within in the debtor’s estate, but is clawed-back into the debtor’s estate by the Trustee. If the customer property as I just described is insufficient to satisfy in full all the claims of customers, Part 190 of the Commission’s regulations allow other property of the debtor’s estate to be classified as customer property to make up any shortfall. A parent or affiliated entity, however, generally would not be a “debtor” unless customer funds could be traced to that entity."

Perhaps this explains some of the legal maneuvering that was undertaken by the debtors, specifically JPM, and the rush to subordinate the customer claims.

So let's see where the truth of this falls out.  I suspect that the truth and justice will be thoroughly swallowed by the credibility trap.

Speaking of lack of credibility, Under Hank Paulson The Fix Was In - Crudele

As I said at the time, when firms turn in 'perfect trading records' you know that they are gaming the system somewhere, exploiting some advantage.

If you think that your Wall Street funds are safe, you are kidding yourself. If you think you are safe in bullion, but do not own it and know exactly where it is, you don't have it. You may own a claim to something, and will stand in line and take what you are given like the MF Global customers when your time comes.

What will it take for people to realize that what is happening to 'the other guy' will happen to them too?

Former SEC Chairman Harvey Pitt was just commenting that the rules do not matter if the people running the financial firms do not have basic character and integrity and honesty. Of course it does not work voluntarily. Self-regulation is a joke to sociopaths and psychopaths.

And, Harvey, it does matter that they are rarely prosecuted for their crimes, and agree to settlements hardly more than a slap on the wrist. Of course the law does not matter if it is not enforced. As a former SEC Chairman under the last Republican Administration in which the Treasury Secretary was leaking insider information on a regular basis you should know this, and most likely do.

Hey I know how to fix government corruption. Let's just get rid of the government! Then the stealing can really flourish.

Nothing can change while people remain complicit fools in their own destruction.

Gold Daily and Silver Weekly Charts - Flight to Safety Lifts Gold

Just about everything is coiling for a move.

SP 500 and NDX Futures Daily Charts

A light volume, headline-driven market.

There is a lot of desire on the Street to rally stocks into the year end.

Europe is a stumbling block.

What Is the Primary Trend In Gold?

The market maven Richard Russell often speaks about 'the primary trend' in certain assets and markets.

I speak of it as the fundamentals, and also the primary trend.

Someone asked, "What is the primary trend in gold?"

Here is the big picture chart with the trend marked in green.

The primary trend in gold is being driven by two major fundamentals:

1. The Central Banks were net sellers of gold for over twenty years. One can debate their motivations, but it did appear to be a coordinated effort to suppress the price, exemplified perhaps by the clumsy sale of the Bank of England's gold at what has become known as Brown's Bottom. The Banks have now become net buyers of gold, led by the BRICs and popular movements by individuals to safeguard their wealth from the changes in the fiat money systems.

2. The US Dollar Reserve currency regime, also known as 'Bretton Woods II,' is changing. What exactly it is changing into cannot yet be seen with certainty, but it does appear likely that it will be a basket of currencies and gold, and perhaps silver. The Anglo-American banking cartel is fighting this change, as it affects the basis of their power. They are seeking to control it and the evolving nature of the global money supply.

Change is coming slowly, but surely.

"All things flow, nothing abides. You cannot step into the same river twice, for the waters are continually flowing on. Nothing is permanent except change."

Heraclitus

If you wish to find the unchanging, the perfectly complete and sufficient in itself, do not seek it in this world, but in something much greater than yourself, your money, and your diversions from the face of the eternal.

Gold Daily and Silver Weekly Charts - Another Bear Raid Down to Support That Fails

There are a lot of 'fingerprints' on the tape these days.

The bear raid in bullion diverged significantly from the miners this morning, as the wiseguys were playing the old fake 'em and take 'em on the public.

Intraday commentary on that topic here.

What next? The markets are looking for a BIG move on Friday based on European headlines. They may not get it, whatever it turns out to be, but if they do, go with it.

There is no better way to divert an abused public than with bread, circuses, and a rising stock market, IF you can afford them.

SP 500 and NDX Futures Daily Charts - Pop and Flop

Another wide ranging day that accomplished very little, and on light volumes.

The option purchasing is showing a lot of convexity. People are looking for a big move on Friday tied to the European summit meeting. They just don't agree on which way it will move.

The Gold Bull Market Back to the Cup and Handle in 2010

I am probably going to truncate the existing daily gold chart again because it is becoming a bit unwieldy. As you know I reduce its scope occasionally to facilitate showing it on the cafe blog.

But for those who asked for it, here is a copy of the 'big picture chart' showing the original breakout formation of the cup and handle going back to 2010.

You may not be able to view it here, but perhaps you can click and save it if you wish.

Intraday: Today's Gold/Silver Cross Trade Between Bullion and Miners Seemed Particularly Blatant

Here is a message to some trading friends this morning with gold around support at 1710.

They normally hit the miners hard before a smackdown in gold and silver. They did this on Friday. But today we saw the opposite happening, at least this morning. Earlier I had sent out a message saying, 'I think the bottom is in.'

Denver Dave and I had come to the same conclusion after some email exchanges and a search of the news.

See Hecla?
They are buying the miners while smacking down bullion.
And now it reverses.
I bought it pretty hard bullion and some miners.
I hedged the stocks with index shorts keyed on the SP.

They started buying some of the miners, especially some of the silver miners, in numbers and aggressively even while they were still smacking down gold and silver spot prices to the lows.

Those lows were an almost perfect hit on the accumulation-distribution trend on my chart.

I think this type of price action gives them the opportunity to buy some decent positions in the higher beta miners without trading against themselves in the market. The negative bullion price action keeps most of the public buyers on the sidelines.

It is not illegal to buy one thing and sell another.  I am running long bullion/miners and short the SP at the same time.

But it is not allowed to manipulate prices in commodities on the futures markets to game the stocks. And today's action in the precious metals futures was especially heavy handed in smacking price and running stops.  Is anyone trading the futures markets anymore except for insiders?  Probably not so many directly, but through things like ETFs and some funds, perhaps more than they realize.

I am not sure we are out of this nonsense yet because of so many guys standing for delivery this month, and the negotiations that are always going on in cash to buy out the longs w/o taking delivery.

But these sorts of moves tend to set up bigger moves higher. Barring the disintegration of Europe in the short term of course.

Speaking of heavy handed, is Standard and Poors working off some sort of community service sentence? Do they have to wear orange jumpsuits while issuing negative statements and downgrades on foreign sovereign debt in high coincidence with US policy measures?

The pressure they are putting on the Europeans to back up Timmy's policy advice (thinly veiled directives) to them is a bit much. I understand the advice is to cut their rate 50 bp or more tout de suite to stop making Ben look bad and smooth the way for the US QE3 without knocking the dollar off its pedestal. And of course they must act to bail out the TBTF banks.

Is Tim going to be appointed financial Viceroy of Europe by the Banks? Would that be an IMF or Treasury title?

One can only look on in wonder these days.

P.S. I have had no position in Hecla today at all. I watch it and a few others as bellwethers.

Categorizing Those Unemployed by the Recession Caused by the Financial Crisis

Words like 'shameful' and 'national disgrace' do come to mind.

Rutgers University Working Paper
Categorizing the Unemployed by the Impact of the Recession
By Dr. Cliff Zukin, Dr. Carl E. Van Horn, and Charley Stone

In August 2009, the John J. Heldrich Center for Workforce Development at Rutgers, The State University of New Jersey began following a nationally representative sample of American workers who lost a job during the height of the Great Recession.

The research began with a cross-sectional sample of 1,202 who had said they had lost a job at some point in the preceding 12 months (between August 2008 and 2009). They were resurveyed in March 2010, again in November 2010, and then in August 2011.

A total of 3,972 individual surveys were completed over the two years. Well over half of the original respondents participated in all four waves of the project, meaning they spent, on average, 50 minutes of their time responding to roughly 200 questionnaire items.

This resulting measure combines an assessment of the respondent/family’s current economic status with the magnitude of change in the quality of daily life, with an assessment of whether this change represents a new normal or is a temporary stay in limbo. Combining answers to these three questions result in a typology with five groups, defined as follows:

􀀁 Workers who have MADE IT BACK consider themselves in excellent, good, or fair financial shape and have experienced no change in their standard of living due to the recession.

􀀁 People ON THEIR WAY BACK have largely experienced a minor change to their
standard of living, but say the change is temporary. They also consider themselves in excellent, good, or fair financial shape.

􀀁 Workers who have been DOWNSIZED meet one of three conditions; they have
experienced: a minor change that is permanent; a minor change that is temporary, but they are in poor financial shape; or a major change in their standard of living that is temporary and they are in at least fair financial shape.

􀀁 Workers classified as DEVASTATED have experienced a major change to their
lifestyle due to the recession. They can be either in poor financial shape and think the change is temporary, or in fair financial shape but think this change is permanent.

􀀁 Workers that have been TOTALLY WRECKED by this recession have experienced a major change to their lifestyle that is permanent and are in poor financial shape.

Read the rest of this working paper here.

Gold Daily and Silver Weekly Charts - Light Volumes and Frivolous Day Trader Markets

“The world is short water, energy, & commodities. We’ve under-invested in our natural resources as a society and as a consequence, we’ll see higher prices around the globe.”

Mark Cutifani, CEO, AngloGold-Ashanti

Gold was hit early on, and silver shortly followed, despite the rally in stocks and the falling dollar.

This struck me as price manipulation tied to the settlement negotiations that are being done at the Comex as the December positions still standing get resolved for cash with a premium.

Later in the day all prices dropped, with stocks retaining some gains, on news that Standard & Poors would place all the Euro nations on ratings watch, with a pointed reference to the summit meeting later this week.

Speaking of debt, here is a chart showing the worst of the G10 nations in terms of total debt in their economy.  As you may recall, I hav said that before the US economy falters, the UK will go first. 

On Sunday I read The Hunger Games at the suggestion of she-who-must-be-obeyed in my role as the judge and chief taster of things that the household children might consume that could-be-of-a-questionable-nature.   This goes for books, movies, and food.   I am also in charge of spider and other unappealing creatures disposal. 

It was an easy story and diverting for those who like futuristic science fiction. While a bit dark it was not inappropriate for the 13+ set. I picked up books 2 and 3. I believe there is a film coming out on this book next year.