Jesse's Café Américain

Janet Tavakoli does her usual great job of cutting to the heart of the matter. Below is an excerpt of her Huffington Post piece on MF Global today.

I keep thinking that nothing will shock me anymore in this US financial fraud fest. But the coverup of the MF Global stealing of customer money in a cloud of legal doubletalk, supposedly the one pristine and untouchable principle on Wall Street, is almost too much.

I suspect that this media and legal spin machine referenced in Tavakoli's analysis is as much a coverup of the recipients of the customer money at the banks, and similar brokerage and banking schemes operating out of the City of London, as it is the actual misdeeds of the Corzine crowd.

Fraus est celare fraudem

And as sacred as a former US Senator may be, if one of the TBTF Banks is involved as the circumstances seem to indicate, this is the holy of holies in the Pax Americana.

I have heard speculation that this practice of misusing and leveraging customer funds is so widespread that an immediate cessation would cause a sharp contraction in the 'shadow banking system.'

It is NEVER permissible to take customer money and use it for your own purposes and proprietary trading, exposing it to risk of loss. The idea behind this latest scheme evolved from the use of funds in margin accounts in order to generate a safe return for the loan risk taken by the broker. Give these jokers an inch and they will take your shirt.

This gambling with customer money is a distortion of the principle of hypothecation and the US regulators need to shut this rathole down immediately through enforcement of the law. Greed must be tempered by fear, if not by shame and the impulse to honesty.

And the regulators may wish to consider that when they continually turn a blind eye to glaring instances of market manipulation they foster a climate of lawlessness that opens the door for widespread fraud amongst normally law abiding participants. It becomes a competition in larceny and a moveable feast of fraud.

“Poverty wants, but greed wants everything, and more.”

Customers run for safety, from one place to another, not sure what or whom they can trust. One thing they may do is to stop trading on margin, and shut down their margin accounts, going to strictly cash investing wherever possible. And for your long term investments, you can take possession of the physical shares and keep them in a safer place than an account statement from any of the TBTF banks and hyper-hypothecating commodity brokers.

This will be a good test for the floundering Obama Administration, as he changes his tune to try and reverse his slide in the polls in an election year, and for the Republican opposition party, which cares nothing for the consumer and average investor with less than a million in yearly income. Let's see what they do, not what they say. Maybe it is time for a third party President.

The real risk here is that the greed and coverup of these fraud is going to scare the customers away from US markets, and bring them back to the days of the 1970s in which the small speculator, sick of being abused and cheated, stayed away from the financial markets in droves.

Perhaps they can start giving origami lessons in the pits, for those dull moments between the open and the close.

Jon Corzine Dodges the Fraud Question
By Janet Tavakoli
12/9/11 07:56 AM ET

It's as if Jon Corzine's PR machine is in top spin mode. You'll recall Jon Corzine is the former head of Goldman Sachs and former CEO of MF Global that appeared in front of Congress yesterday to answer questions about an estimated $600 million to $1.2 billion in missing money from the segregated accounts of customers of MF Global.

Yesterday and today, I heard confusion about whether or not MF Global's diverting customer funds was allowable and the possibility that customers will eventually get the money back.

Let me be clear. The diverting of customer funds from segregated accounts is not legal or allowable, and even if the money is later "found" it is fraud...

"Finding" Money Doesn't Excuse Fraud
Let me address the implication of the potential to "find" the money. The money may indeed be "found." If the bonds mature and pay off one hundred cents on the dollar, it may be possible to claw back money from MF Global's trading partners without much of a fight. Otherwise there may be a legal battle for money that as creditors of MF Global, they were never entitled to in the first place.

The rights of MF Global's customers are superior to the claims of these creditors. But eventually replacing the filched funds is not the same as restitution, since reputations and businesses have already been ruined. Damage has also been done to the trust in the global futures market and Futures Commission Merchants (FCMS).

Never Allowable to Filch Customers' Funds
The key issue is that it is never allowable to divert money from customers' segregated accounts. CFTC Commissioner Jill E. Sommers did a good job of stating that in her testimony yesterday. Moreover, if any trades mimicking Corzine's were done on behalf of the tiny minority of customer accounts that could engage in this trade, the trades would have to be segregated and credits or losses would show up in the relevant customers' accounts.

That still doesn't explain the missing funds in most customer accounts. Most customer accounts would not even be eligible for the "Corzine sovereign bond trade." Why is that? Here's an excerpt from Sommers' testimony: "Under Section 4d of the CEA, customer segregated funds may be invested in: general obligations of a sovereign nation (to the extent the FCM holds customer funds denominated in that sovereign nation's currency)." Most MF Global customers now missing money did not hold foreign currency accounts.

Pushing the idea that this trade was "allowable" for some customer is a distraction trick to avoid the question of whether MF Global impermissibly wired money from customers' accounts to satisfy margin calls for its own trades. Wire fraud is a federal crime.

At Issue is Massive Fraud
The issue under investigation is what appears to be a bold and massive fraud, and Jon Corzine offered no alternative explanation, in fact it seems he cannot explain anything about the firm he ran to anyone's satisfaction.

Jon Corzine may not know where the money is right now, but as head of MF Global, he knew or should have known his trades needed collateral and that customers' money went missing to satisfy part of that need. If it is proved that fraud occurred -- and money missing this long is a very suspicious sign -- it's not plausible to me that Jon Corzine was unaware it was happening at MF Global.

It seems Jon Corzine would have Congress believe he's hopelessly incompetent, because it is better to have them believe that than the business for which he was responsible was breathtakingly wrong.

Read the rest of Jon Corzine Dodges the Fraud Question.

Gold is cheap relative to the idea that you could have a life’s fortune on a statement from a clearing agent and then find out that you don’t have a penny left anywhere. Which should you have had, physical gold or that clearing house statement? Gold is cheap because of the condition of other things.

Jim Sinclair

There was a very obvious drop in gold today. It was coincident with a decline in the SP futures, but was much sharper and more severe. I include the intra-day chart. It has every indication of a major bear raid.

There was a quite a bit of disappointment today when the ECB cut rates 25 bp rather than 50 bp, and Mario Draghi did not pledge his central bank to endless quantitative easing and the buying of European bonds.

There was a report today at Zerohedge from Goldcore that the German business wire MNI reported that "MARKET SOURCES REPORT BIS, BOE & FEDERAL RESERVE WERE SELLING GOLD AFTER IT POPPED TO SESSION HIGH AT GMT 1335 -MNI NEWS via BLOOMBERG."

I get the daily report from Goldcore and I have a non-premium subscription at MNI. I have not been able to find the particulars of this, or any details, so I am unable to further comment. It is not that I doubt this, but I would like to know what causes them to say this with such specificity. How did they know who was selling, and what were their sources?

Tomorrow will be interesting. In the afternoon a report/rumour swept the markets that Germany would not be supporting the new EU Treaty to resolve the debt crisis, and the equity markets went out on the lows.

Jon Corzine was testifying today before the House, but the more enlightening testimony may have been by CFTC Commissioner Jill Sommers who made it quite clear that the customers of MF Global have a claim on its assets that is superior to the creditors including JP Morgan.

As John F. Kennedy once said, "My father always said that all businessmen were sons-of-bitches, but I never really believed it until now."

This affaire d'MF will give us some insight into the character of the American government. It might be advisable to have a bag nearby however, because the experience may be truly nauseating.

At the end of last year I promised you a 'year of revelations.' And it seems that they are well underway. But the greatest revelations are not about what those in charge have been doing, but rather about ourselves and how we react to them.

I am thinking about what next year will bring. But I think the time is already here in which to take steps to protect your assets.