It's Official: Wall Street Firms May Legally Steal From Their Customers - Rationalizations to Follow

...and they may not have to pay them back, even when they are caught. The customers will be expected to 'take one for the team,' and for the good of the system. Confidence and all that.

“This means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”

Andy Abraham

If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be 'socialized' and haircuts received.

This is most likely a distortion of the principle known as 'rehypothecation' in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan.

The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them.

In a way it is just making the unbalanced relationship between Wall Street and its customers official.

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.  

It means that brokers can go beyond the mere provision of funding for loss, and use customer accounts to fund their own leveraged speculation under exemptions duly granted by their 'regulators.' 

This sort of systemic abuse is typically exposed when there is a market dislocation. It is what finally exposed Madoff, for example, despite the many years that the regulators were turning a blind eye to his scheme.

This sort of arbitrary distribution of gains and losses occurs more frequently than you might imagine on Wall Street, at least from what I have seen and heard, and not just with commodity brokers. I have even heard of specially privileged customers who can make $100,000 in a few trading days without even having any knowledge of the markets in which they have 'traded.'

I stopped trading on the futures exchanges a few years ago when I experienced enough one-sided 'rule changes' to persuade myself at least that it was becoming an insiders' game with slim odds of success for the 'outsider.' Or perhaps I was just becoming aware of it had already become, or had always been.

Unfortunately it is hard to escape inefficiency in markets, because despite all that has happened, these fellows still set the prices for much of the world's food, energy, and basic materials, at least on the official exchanges.

The CFTC has been disgracefully negligent, and given to cronyism, but in the spirit of modern American management practice it may just hide behind a claim of incompetence. They granted some exemptions to influential insiders, and the markets proved that the exceptions were loopholes for fraudulent abuse of the public trust.

The Justice Department is investigating the case of MF Global for any violation of the laws. I suggest they pay special attention to the laws regarding 'fraudulent conveyance' in the posting of the customer assets as collateral with MF's creditors, even as the firm was paying its employees bonuses, knowing that it was insolvent.

Actual fraud typically involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. Constructive fraud does not relate to fraudulent intent, but rather to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition.

For example, where the debtor has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to avoid giving certain business creditors an unfair preference (see generally, wrongful trading).

Obama should bring meaningful reforms to the regulatory agencies and the financial markets after the shocking abuses of the past twenty years. But I doubt he will bite the hand that feeds him. He will likely hide behind committees and a building of 'consensus' with the unabashed servants of the monied interests. It's in the nature of a credibility trap that reform will not come until the system finally seizes, and crashes, and there is an opportunity to hide their crimes in the rubble.

Forbes
MF Global May Have Used Customer Funds In The Losing $6.3 Billion Trade Without Informing Clients
By Robert Lenzner

After an intense day of investigation, I have just discovered that a CFTC rule (1.29) allowed Jon Corzine’s MF Global to use the margin and cash in customers heretofore segregated accounts to amass a risky $6.3 billion investment in European sovereign debt that backfired. Nor did Corzine have the obligation to inform any of these customers he was gambling with their money. Or that he was intending to keep all the profits for himself and his troubled firm. Nothing for the customers.

The language of Rule 1.29 allows “The investment of customer funds in instruments described in 1.29 shall not prevent the futures commission merchant (MF Global) or clearing organization so investing such funds and retaining as its own any increment or interest resulting therefrom.” Increment refers to any trading profits or gains.

The criminal division of the Justice Department in New York — as well as the SEC and the CFTC and members of Congress– are investigating whether any laws were violated and if so, whether any criminal charges can be brought. As of 3 pm today, there has been no sign of the missing $633 million. My sources believe it was probably grabbed by the institutions that made the margin calls on MF Global as the European bonds sank in value.

This shocking loophole, which is available to all commodity traders, whether giant ones like Goldman Sachs or members of commodity exchanges, means that huge risks are being taken with money that does not belong to the trading firms– without the customers having any idea of the danger they are in. As Andy Abraham, a futures trader in Israel put it to me today; “this means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”

This rule, which has been in effect since 1974, is shocking and highly irregular since it allows any futures dealer to use customers money for its own selfish purposes– and never inform its customers it is doing so. What’s even more unfair is that the dealer (MF Global) gets to keep all the income and the trading profits, if any from a transaction that uses other people’s money– not its own house capital. That is unless some prior arrangement about sharing profits was made privately beforehand with the client. None of the MF Global clients I’ve spoken to today had the foggiest notion about this arrangement– which at minimum is outrageously unfair to the rule that the customer comes first. All losses must be made up by the dealer, which in this case may be totally impossible..."

Read the rest here.


I wonder if they will even disclose the name of the firm that took the $600+ million in customer assets as collateral.

That will speak volumes in itself.

Here is some additional information from Lenzner at Forbes: Some MF Global Customers Want Corzine "Led Away In Cuffs"

My most well-informed source, who won’t identify himself tells me my original story was “partially correct in the usage of customer funds.” IE MF Global was allowed under Rule 1.29 of the CFTC, to use segregated customers accounts to invest in “high quality, liquid investments.”

He insists that , “The segregated funds rule prevents the firm from answering margin calls with Seg (segregated) funds for house bets. Lots of people in other trading firms are taking bets on when Corzine will be led away in cuffs.”My source also insists that Corzine was NOT allowed to use these funds for directional bets- and that “customer funds can only generate interest for MFG while they are held separately from house money.”

Lots of excuses will be made for what happened. The status quo has a huge vested interest in covering this up, for their personal benefit and 'the sake of the system.'

For example, the analogy in the above piece by Lenzner about customer banks deposits, and the actions of banks in lending them out to other people. Yes, and you are paid interest for that usage, and you know that they are doing it, and you know that their loan operations and deposits are (at least theoretically) regulated and insured by the government.

But overall Lenzner is one of the best financial reporters, and he shows remarkable journalistic integrity. Most mainstream reporters won't even touch this one because they are afraid to say something that might involve the sacrosanct monied interests and TBTF.
Wall Street has a wonderful way of rationalizing their slimier behaviour. After all, when the tech bubble of fraudulent representations crashed, the financial news anchor said that 'no one had MADE people buy those stocks.' Its not Wall Street's fault that people are uninformed and gullible, right?

"There will always be apologists for the powerful and politically connected who commit crimes."

Eliot Spitzer

My expectations for reform are remarkably low. I just hope that the customers get their money back, and more people become aware of what is going on. If anything is done about this except to make excuses for it, I will be pleasantly surprised to say the least. When Simon Johnson said that the US had suffered a "financial coup d'etat" he was not waxing poetic.

In the short term, I think the avoidance of the worst neighborhoods in the financial system is a likely reaction by investors. And those seem to be the forex, stock options, and futures markets, with a few of the slimier ETFs that are designed to lose as well. Such de facto boycotts have happened before and will happen again. What else can one do?

Wall Street is trying to organize a boycott of Mario Batali for remarks he made about #OWS and Wall Street.  I think they are showing what they fear the most - a boycott by their own retail customers.

A credibility trap is not a pretty thing. It smothers goodness and justice with a dark cloak of complicity.  This will not be resolved quickly or easily.

Gold Daily and Silver Weekly Charts - Psycho Killers Qu'est-ce Que C'est?

I came in to the market with a bias heavily short, on a bet that the resistance on the charts would hold, and the wisequys were doing a classic pump and dump. And so they seem to be.

Gold and silver took a hit that looked like a correction more than anything else, and it provided an opportunity to round up some of the bullion positions while trimming off the shorts.

It is hard to predict the timing here. It is now like trying to forecast the actions of roving bands of looters, and which stores they will smash and grab next. Obviously Europe is a target of opportunity, with CDS and assets on the cheap as the payoffs.

What is happening to the customers of MF Global is an absolute disgrace. More than anything else, it is informing us that the system is in danger of going rogue on a much broader scale. That most are not discussing it, and instead are repeating the propaganda that the banks are blameless is a sign of increasing desperation and a holding on to a corrupt system that has rewarded them.

Big changes are coming. They may not come in the next twelve months, but they will come.

SP 500 and NDX Futures Daily Charts - Wall Street Goes Bunga Bunga

"Why this resignation [by Berlusconi] without an heir apparent introduced 'certainty' eluded me somewhat.
I suspect that the Wall Street wiseguys are planning their own version of death by bunga bunga for the investing public."

Among the things that the US can no longer afford, at the very top of the list is a parasitic financial community setting up opportunities for looting the public trust and taking outsized chunks from the nations investment capital and income.

But the world is saved; Cisco beat after the bell.

MF Global's Customer Assets - STOLEN - And Nothing You Hold In This System Is Safe

As suspected, MF Global brazenly took liquid assets like Treasuries and warehouse receipts, but not cash which would have been more quickly missed, from customer accounts to post as illegal collateral for emergency funding with a lender who must have known that they were receiving stolen goods.

When things fell apart, the lender simply took the collateral and liquidated it, and kept the money.

And now they are refusing to even acknowledge this transaction, and apparently the management of MF Global is not yet talking. Why? Because it was an insider deal, and they don't want to give back the stolen money.

When 'non-consequential' customers were requesting their funds, they were issued checks instead of wire transfers. The checks of course were not honored and bounced. But days later, and just hours before the bankruptcy filing, MF Global was paying BONUSES to its UK traders. Remarkable in light of how much dirty business the NY firms have been outsourcing to London. Follow the hush money.

This is a scandal of the first order, and a severe test for the Obama Justice Department, the regulatory agencies, and the exchanges.  This is a great crime, undeniably premeditated, and possibly the tip of an iceberg that would shake the public confidence in a deeply corrupt financial system. 

If a registered broker can simply take Treasuries and receipts for physical assets like gold and silver from customer accounts and give them to a complicit crony lender, and then look at the public with a straight face and say the money is missing and they do not know where it is, then no one's accounts are safe, anywhere, at any bank or broker, in the US financial system. 

This has every appearance of a legally sanctioned theft, pure and simple.

Postscript:  Apparently it really is legally sanctioned according to CFTC Rule 1.29.  But it still may have been a violation of the laws of fraudulent conveyance.  Where is Eliot Spitzer when you need him?

Here is a synopsis of the likely events from Forbes:

When did MF Global exploit the customer segregated accounts and why? How were the proceeds used to stem the firm’s deepening insolvency?

Based on the sequence of events described above, I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “house” account sometime late Wednesday or early Thursday.

I’ve given those who executed the “nuclear option” to save MF Global the benefit of the doubt. I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines. When margin calls on the repurchase agreements and account closure demands from strategically important clients – not the bread and butter individual traders and smaller investors and money managers who got rubber checks – kept coming, they hit the wall.

Why do I believe MF Global executives transferred customer assets not cash to “house” accounts? Because missing cash would be noticed immediately. Their clients were still trading and clearing and cash was required to settle. Securities such as U.S. Treasury Bills, blue-chip equities such as CME Group stock held by many exchange members, and physical assets such as gold, warehouse receipts, and other certificates of title are less active. They would not be missed Thursday through Monday...

Any firm willing to lend $300-400 million for a week or so against approximately $700 million of customer assets was certainly wise enough to require recourse to those assets in the event of a bankruptcy. Some of the assets, like CME stock, were sure to drop in value if the bankruptcy occurred.

When MF Global filed for bankruptcy midday on Monday October 31, 2011, the lender owned the customer assets.

My guess is the pledged assets were immediately liquidated.

No one is raising their hand to admit they’re the firm who lent MF Global several hundred million dollars, enough to get them through the weekend, based on collateral MF Global had no right to pledge. It’s not clear what the responsibility of a firm is in that situation to ask questions and confirm title. What is clear is that the arrangement, most likely a favor called in based on very strong relationships, must have been planned in advance. When all else failed to generate enough cash on Wednesday afternoon, someone at MF Global pressed the button and set the wheels in motion.

The lender must have had the capacity to make such a loan and the ability to execute a strategy intended to leave few traces. But there are always trails to follow. (Like the traces of the enormous number of put options that were placed prior to 911.)

Regulators can look for records at MF Global and at the DTC of transfers of assets between customer accounts and MF Global house accounts and, then, of those same assets between MF Global and a third party. I suspect there is only one lender, since there was not enough time to arrange for more than one and the potential for exposure would be greater with more counterparties.

I don’t think the last inning lender is one of the banks with existing MF Global accounts. Everyone knew those organizations would be under immediate and heavy scrutiny...."

Read the rest here.

I beg to differ with the author. I do think it is a big, very well-connected name, and I think they are a party to a greater ongoing fraud that will never see the light of day, even if the money is eventually returned. And I have to wonder if anyone of consequence will ever be prosecuted for this, because they simply know too much about this and other things.

This increasingly brazen theft is the consequence of moral hazard from a credibility trap.

I am amazed at how so many people cannot wrap their minds around what is happening in the financial system, as a late stage fraud turns increasingly to blatant looting.

Is this a classic case of cognitive dissonance? No one really wants to hear about it. They look at other things, trivialities. They simply will not see it, until it comes for them. What is it going to take, how far can this go?

If this continues, then nothing you hold in this system is safe.