Banks Hold a Billion In Overseas Customer Money

If the financial crisis were more widespread how much worse do you think these customers would be faring?

Banks Hold $1 Billion in MF Global U.K. Cash, KPMG Says
By Kit Chellel
March 28, 2012

About $1 billion of MF Global Holding Ltd. U.K. clients’ money remains locked away in other financial institutions five months after the brokerage’s collapse, administrators KPMG LLP said.

KPMG has collected more than $500 million from those accounts to date, the firm said in an update published on its website. The figures relate to unsegregated client accounts, which MF Global was allowed to mix with its own funds and which have proved difficult for the administrators to recover.

KPMG said it was taking action to obtain the $1 billion of unsegregated assets from a “small number of financial institutions” that it didn’t identify. The firm threatened to sue banks that don’t hand over funds, it said at a London creditors meeting in January.

KPMG, appointed to wind up the London-based unit when the New York-based parent filed for bankruptcy in October, plans to produce statements setting out the account positions of 75 percent of customers by March 30. MF Global was the fifth- largest financial company to file for bankruptcy when it sought protection on Oct. 31 after getting margin calls on its bets on European sovereign debt.

MF Global customers that traded on the London Metal Exchange are unlikely to receive statements until April because of the complexity of their positions, KPMG said...

Read the rest here.

Little Known Rule Gives Wall Street Ability To Misuse Overseas Customer Money

The wall of spin shifts and ebbs with every day, retreated and advancing, always to hide the truth.

Professionals in the industry read these things and either laugh themselves silly, or continue to make moves to safeguard their own funds. And I have told you that is what I have done for myself.

I did forecast about four or five years ago that when things started to fall apart, the foreign funds in the US would be the most vulnerable.

And that includes assets held on deposit, even with receipts, including gold and silver. If the Constitution is 'just a goddam piece of paper' what is a receipt?

On a related topic the FASB Acts To Reform 'MF Global Accounting.' The US accounting industry is a disgraced profession right along with economics, perhaps moreso.

As another story from Reuters makes more clear, when word leaked out that the customer funds had been tapped, and that the proposed acquisition of MF Global had fallen apart, the banks started freezing its funds.

This story is spin, but it can be made to stick. If justice is done, I will be astonished. I would just like to see the customers get their money back.

Warning Flags Were Raised in MF Global Transfers
By BEN PROTESS and AZAM AHMED
March 27, 2012

...The misuse of customer money is expected to be a focus of the hearing before the oversight panel of the House Financial Services Committee. It will feature testimony from central figures at MF Global, including Laurie Ferber, its general counsel, and Ms. Serwinski, the chief financial officer for North America...

While using customer funds was a serious red flag at MF Global, it was not necessarily illegal.

A little known loophole in futures regulations permits firms to spend some money belonging to customers who traded abroad, an exemption that contradicts a cornerstone of the industry to always protect client funds. It also differs from the law policing trading in the United States.

Other employees in the firm’s back office have also told lawyers that they knew of a potential deficit in customer accounts on Oct. 27, according to the people involved in the case. One employee on Oct. 30 told an outside firm that was reviewing MF Global’s books that the brokerage firm was worried about a shortfall earlier in the week, according to one of the people involved in the conversation. Federal authorities are also investigating whether MF Global was improperly using customer money as early as August, one of the people involved in the case said.

It is unclear whether the firm’s top executives were aware of a potential shortfall...

The document showed “a substantial deficit” in the amount of firm money used to protect customer accounts, according to the prepared testimony by Ms. Serwinski, who was planning to leave MF Global. Futures firms typically keep a cushion of cash in customer accounts as a buffer to cover losses in case of volatile market swings.

The deficit did not in and of itself violate federal laws, because of the loophole for extra cash in foreign trading accounts. The loophole dates to 1987, when few American traders kept money overseas, and was intended to add controls to a market that was essentially unregulated...

Read the rest here.

Warren Pollock: Overall Derivative Market Contracts - Warning Signs

I have spoken before about the fallacy of netting and the danger of instability in the derivatives market.

Critical Mass: The Mispricing of Derivatives Risk and How the Financial World Ends

Here is Warren Pollock's take on this and on the recent contraction in nominal value of the global derivatives market.

"Ponzi schemes can go on for a long time under the mask of expansion; these frauds blow up during a contraction of new money being input into them.

Such may be the story of credit derivatives as we see a working contraction in the notional value of these instruments as reported by the comptroller of the currency. In simple terms the number of these instruments has gone down to a mere 240 Trillion!

The premise for this ponzi is the concept of netting whereby risks off offset on paper under the false justification that positions can become risk neutral. In this ponzi scheme the efficacy of the netting process has magically risen from 50% or so to an astounding 92.2%.. This means that the reported risk of 240 Trillion is only 8% of the notional amount.

In less insane times the notional risk was reduced to a mere 50% through the netting process. Even with 8% risk not covered by netting the liabilities of JPM and others are far greater than their assets under management. The problem being that JPM's assets are secured by its liabilities and the liabilities of banks tend to be YOUR Savings.

With changes to Safe Harbor rules the government is not only facilitating fraud with these netting assumptions but they are also putting your savings at risk by giving the coverage of derivatives priority should there be a dispute. This very issue is being worked out presently with MF Global."

Gold Daily and Silver Weekly Charts

"We have entered the most favourable era for gold prices in our lifetime, and the share prices of the great mining companies will eventually outperform bullion prices. Central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid goldbugs a year ago."

Don Coxe, Bank of Montreal

Updates are early this evening because of a prior commitment.