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The last few times these symmetrical triangles at rally tops have broken decisively to the downside.
We are in such a formation now. I have marked levels that might be good indicators of a breakout or breakdown and some short term targets.
I think the greater risk is to the downside while the European financial and political situation remains unresolved, but I do not wish to get ahead of this.
A lot of guys are expecting this to move up to a high around 1275 which is only about 15 points away. They might get the rug pulled out from under them. Some pundits are also talking book to 1310. That is possible. But first they need to take out the triangle, and then they have a clearer shot, but with a lot of overhanging headline risk. I'd rather stay out than risk it, and have to sleep with one eye on Italian and Spanish bonds.
Volumes in today's rally are laughably light. The adults in the bond market have taken the day off.
This is a story about the first, albeit selective, potential default in the US by a major clearing exchange in the postwar period. And the cause of it remains a mystery, possibly by intent.
In the essay excerpted below, analyst Ted Butler brings out a key aspect of the failure of MF Global that has received far too little attention.
The self funding by the players of their industry's insurance seems to be one of the main sticking points in this impasse.
Why should the CME members pay back the MF Global customers, when they know full well what large institution took the collateral, probably illegally, sold it, and is refusing to give the money back and take the loss?
"Once you have their money, you never give it back,"
Ferengi - First Rule of Acquisition
And in their greed, they are risking the entire US exchange system in order to get their way with the government. Why not, it has worked before.
The failure of self-regulation, the rabbit hole of other scandals yet to be disclosed, and the political bickering are all matters that complicate the resolution. If MF Global had been a major bank, the FDIC would have immediately stepped in and made the depositors whole, and taken an active hand in the disposition of assets.
Is SIPC little more than a fig leaf, a false protection that fails when it is called upon to act as the insurance it purports to be?
This is a truly shocking scandal. And what may be even more shocking is the scant coverage it is receiving in the corporate media. They don't want to touch it because it brings the rottenness of the financial system out into the light of day. This is not some rogue trader, this is not even Bernie Madoff. This is the heart of the beast.
And that is why we may never hear the actual truth of it, which will be hidden under a smokescreen of 'accounting errors' and 'misunderstanding of risk' and a cloud of legal jargon.
It brings out in sharp relief the flaw in the ideological fairy tale that markets do not require outside regulation, that they are naturally efficient, and that people if left to their own judgement are all virtuous and objectively rational. But anyone who has ever driven on a modern freeway during rush hour knows the ridiculousness of those assumptions.
“It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled seas of thought.”
John Kenneth Galbraith
If this is not resolved, customers might be correct in assuming that nothing in the US financial system is safe. Someone needs to pass a note to Turbo Tim that this could be a big one, Elizabeth, if it is allowed to continue to fester. And maybe a copy of The Panic of 1907 by Robert F. Bruner.
Silverseek
An Unmitigated Disaster
By Theodore Butler
11 November, 2011
"Let me cut to the chase here and pinpoint the real problem – the CME Group. I know I have continuously criticized the CME, even calling it a criminal enterprise on many occasions, but in truth I may have understated the case. Yes, I would agree that the immediate cause of the MF Global bankruptcy was MF Global itself; but what turned it into a disaster of unprecedented proportions was the CME Group.
The CME Group was the front line regulator for MFG, responsible for auditing and insuring the safety of customer funds and for guaranteeing those funds in a worst case scenario. The CME failed at every turn. Not only did its auditing fail miserably, the CME failed to step up to the plate to safeguard customer funds after it was discovered that $600 million was missing. This is like a case of paying premiums for years on an insurance policy only to be denied coverage when presenting a claim for the first time. I know that the federal commodity regulator, the CFTC, has been negligent in the case of MF Global as well, but that does not mitigate the CME’s failures.
Of the twin failures by the CME in the MF Global bankruptcy, clearly of more significance is its failure to stand up and guarantee that all MFG customers would be immediately made whole by the clearinghouse system run by the CME.
The clearinghouse system, a consortium of financial firms whose collective finances stand behind every trade, has been the main backstop to all futures trading for many decades. It was widely understood by all market participants that if a clearing member failed, all the other clearing members and the exchange itself would step in to guarantee customer funds and prevent contract default.
The CME boasts on its web site that anywhere from $8 billion to $100 billion in protection is available in the event of a clearing member failure. If it was telling the truth, it would seem $600 million should be no problem.
Instead, we all have a very big problem, thanks to the CME Group. Our financial and credit systems are based upon trust and belief. The word credit itself comes from the Latin word “credere” or to believe.
What the CME Group has done by not immediately guaranteeing all MF Global customers and positions is to undermine belief in the futures market clearing system. So important is this issue that I am at a loss to explain how the CFTC hasn’t yet mandated that the CME do the right thing. And I have been somewhat dumbfounded that the analytical community and media haven’t been all over this, but there was an article in today’s NY Times that discusses the CME’s failures for the first time. In addition, there was a well-written article on the Internet that did describe the problem and the CME’s role. Please pay particular attention to the comments submitted on both articles.
Worst of all, even MF Global customers who held no open futures positions and only cash and unencumbered assets, like registered warehouse receipts for silver, gold and other commodities, have found those assets under the control of the bankruptcy trustee. If you do own warehouse receipts on silver or other commodities that are tied up in the MF Global bankruptcy, you must run, not walk, to a securities attorney to secure your legal rights to your property. This is not a matter of what is right or wrong, as the unauthorized appropriation of private property is never correct. This is a matter of law, which sometimes is not the same as what seems right or wrong. Please don’t delay. The CME is to blame for all of this, but blame must be saved for later...
One other small bonus that has emerged from this disaster is that the event has revealed as a lie all the nonsense that CME leaders have publicly proclaimed about the integrity of their markets. For the past few years, the smug and arrogant leaders of the CME have testified publicly before congress and the media about how the exchange’s clearinghouse system withstood and avoided the failures of the non-clearinghouse financial system as typified by AIG.
CME officials trumpeted the advantages of it being a Self-Regulatory Organization (SRO), quite capable of handling regulatory matters without the need for further government regulation. Unfortunately, even high officials of the CFTC were apparently sucked in by the appearance of financial strength and integrity portrayed by the CME’s clearinghouse system of guarantees and the wisdom of letting it continue to regulate itself. That has now all been shown to be a lie. What good are guarantees if they are not honored when need be? What good is self-regulation if it leads to the wholesale abandonment of the customers’ financial interest?"
Read the entire piece here.
Based on this shocking lapse in insurance and stewardship, it appears that some people whom I have spoken to and read about plan to shift the focus of their US dollar funds out of certain non-banking Wall Street institutions, and instead to place them in more conventional banking accounts and other assets held by safer hands.
The average person cannot tolerate such a precipitous loss of capital and freezing of funds. This is unacceptable. I was stunned at the trial balloons floated in the financial media that customers might have to accept haircuts and years of delay and litigation in receiving back their money.
MF Global Customers Have Few Options to Access Frozen Cash
Here is what I think and what I hear based on news and information from a variety of sources.
Obviously I cannot know the exact details or all the facts. And this becomes a little more speculative than normal, but that is the consequence of the lack of information and the cover up.
The facts are what the official investigation should uncover. Whether we find out what actually happened is another matter altogether.
We still cannot find out who had the customer assets, which is shocking. People know who it is, but they will not say. And here is the reason why.
There is a determined smokescreen that has been thrown up around this by MF Global and the financial industry.
The regulators and Justice Department are trying to discover the facts and then figure out how to deal with it. There is a public relations spin machine that is attempting to shape the perception of this event, with a variety of objectives and concerns, some at odds with each other.
First the good news, the customers will probably be paid. There may be a delay and it may involve some loss.
The Wall Street pros are trying to settle this behind the scenes in a way that masks the outrageous abuse of stewardship and systemic weaknesses. They are terrified of triggering a loss of confidence and a run on the system if people think that ownership of even Treasuries on account with Wall Street is a thin facade of security and not safe.
It is all about loss of confidence and disposition of responsibility.
The government and the financial system do not wish to expose their failure to properly protect customer money. Those who are lobbying against further financial regulation and investigations are concerned that a major scandal and lapse in 'self-regulation' would provoke a public reaction and a demand for greater transparency and safeguards.
And although this is more vague and speculative, the scandal is only the tip, a whiff of a much greater problem that no one wishes to even discuss, involving a broader misappropriation of assets and gaming of customer accounts.
They plan to blame it on 'accounting errors,' and sweep it under the tarp, as it were. But the sticking point is this: who pays, and how do you explain it?
There is no chance of finding a single rogue trader, so the effort will involve painting MF Global as a 'rogue broker.' By the way, the scandal involves their London trading operation as far as the transactions gone badly, but the details are not clear. They appear to have been 'set up' by another entity.
The regulators led by Jill Sommers and Bart Chilton are trying to understand what happened, but a smokescreen has been thrown up around this while the monied interests squabble about who will make good for the money.
A large institution took the customer funds as a loan collateral, but does not wish to disgorge the proceeds of the liquidated assets, because the loss would be theirs. And the details are politically sensitive.
A cover story is under construction but the major impediment is the argument about how the loss will be apportioned and the extent to which the public's demand for accountability will be satisfied.
The similarity of this to the 'settlement phase' of LTCM is striking, except of course that the Fed has not called the players together and forced a resolution and allocation of the losses amongst the players. This is why there is a delay.
The scandal involves public 'outsider' money, and has political implications, so the reluctance to accept the losses is greater, and at the same time 'touchier.'
This is why there is so much delay and confusion.
By the way, I hear that attorneys had to file an emergency motion in court this morning to prevent JP Morgan from jumping ahead of MF Globals segregated account owners in the disposition of assets.
As you may recall JPM is a major holder of MF Global unsecured debt, somewhere in excess of 1.2 billion. People obviously have wondered if they were the recipient of the segregated customer funds that were posted as last minute loan collateral, or whether that was done to secure an additional loan from another party.
Perhaps this indicates that JPM is not the holder of collateral, because to liquidate it, and then try to jump in front of customers when they attempt to collect as well, would be a monumental act of sheer piggery.
Many are interested in the identity of who may have provided last minute funds. Its a real financial detective story. Maybe some of the usual suspects are already queuing up for the book rights.
And it appears that investor outrage is prompting a reaction amongst the regulators, as well it should. It is good to see that the CFTC is taking this seriously, and it is always good to hear from the 'can-do commissioner' Bart Chilton of the CFTC.
And it probably doesn't hurt to have SIPC on the hook for the funds as well.
Jon Corzine is a prominent Democrat who was said to be a candidate to replace Tim Geithner as Treasury Secretary.
Massive hide and seek ploy. This is getting interesting.
Bloomberg
MF Global’s Missing Funds May Be ‘Massive’ Ploy: CFTC’s Chilton
By Silla Brush
Nov 10, 2011 5:31 PM ET
The $593 million shortfall in client money at MF Global Holdings Ltd., the broker that filed for bankruptcy on Oct. 31, appears to result from a “massive hide- and-seek ploy,” Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, said today.
The agency took the rare step of publicly announcing its investigation, which began on Oct. 31, saying it was in the public interest to confirm the enforcement action. Jill E. Sommers was named as the senior commissioner during the probe, after Gary Gensler, the agency’s chairman, recused himself.
“This isn’t just a lost and found inquiry; it’s a full-on effort to get to the bottom of what appears to be a massive hide-and-seek ploy,” Chilton, a Democrat, said in an e-mail.
“It’s a distinct possibility, some would say probability, that somebody has done something with the money, and that it’s not going to be ‘all of a sudden discovered’ with an innocent explanation,” Chilton said. “If that’s the case, it’s patently illegal. I don’t know yet. Our investigation will uncover that, and we’re aggressively pursuing this.”
Gensler recused himself from the investigation because of his history with Jon S. Corzine, the former head of MF Global. Gensler worked with Corzine at Goldman Sachs Group Inc. and during his time as a Senate aide, while Corzine represented New Jersey as a U.S. senator.
‘Get to the Bottom’
“I have complete confidence in the dedicated men and women in enforcement to carry out the necessary investigation to get to the bottom of what happened,” Sommers, a Republican, said in a statement.
The probe of MF Global’s cash movements is being conducted by the U.S. Justice Department, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the bankruptcy trustee’s staff in cooperation with the Securities Investor Protection Corp., James W. Giddens, the trustee, said on his website.
The CFTC also began a review of futures brokers to determine if client funds are properly segregated. The initial review will include between 10 and 12 futures brokers and the CFTC hasn’t set a deadline for the review, a person familiar with the review said.
Diana DeSocio, a spokeswoman for MF Global, didn’t respond to requests for comment. Steven Goldberg, a spokesman for Corzine in New York, said he had no immediate comment."
