MF Global: The Awkward Construct of a Dual Bankruptcy and the Two Trustees

I outlined the somewhat adversarial relationship between the two trustees due to the odd and awkward construct of the bankruptcy a few days ago. Louis Freeh Asks for $25 Million From MF Global Estate to Pay the Defense Costs of Corzine and Execs.

"I am not an attorney and have never been personally involved in a bankruptcy so I am not particularly knowledgeable in the finer points of US corporate bankruptcy practices. It almost appears more like a divorce than a bankruptcy. The duality of it with the two trustees is fascinating. And the primacy of Mr. Freeh over federal investigators was a bit surprising.

It seems odd to have dual trustees, one for the Chapter 7 brokerage, and another in the Chapter 11 representing the interests of MF Global Holdings management and the banking creditors. Every time a headline says 'the Trustee' I have to look to see if it is Mr. Giddens or Mr. Freeh. I understand the rationale for the two forms of bankruptcy, but the structure of having two trustees answering to competing interests is awkward. Were there two trustees for Lehman and Bear Stearns?

As you may recall, Mr. Freeh had recommended paying bonuses to the executives earlier this year. He also had refused to turn over MF Global emails and documents regarding the accounts and transfers of money to federal investigators, claiming attorney client privilege between himself and MF Global, until his own people had a chance to look them all over.

Is this perhaps why it is so hard to obtain indictments in financial cases? The firms do not have to hand over any evidence until they and their attorneys have had a chance to go through everything first, and then decide what they wish to hand over to investigators?

...Just as this case may provoke some activity in the regulatory area, so one might think that in addition to making an interesting case study for law schools, it could involve some changes and streamlining in the bankruptcy practices in which companies like banks and brokers are holding customer money in trust, in addition to the standard classes of creditors. Certainly there is plenty of room for clarification."

Even under the best of circumstances there is a natural tendency for confusion to occur when there is an apparent cover up by the company's management. After all, everyone claims complete ignorance of what happened to a huge amount of customer money, except for the assistant Treasurer, who at this point is pre-occupied with making a deal for immunity from prosecution in return for her testimony.

If the money 'simply vaporized' what is she seeking immunity from? Practicing magic without a license?

And perhaps in the future, in addition to streamlining the bankruptcy process, there might be some consideration to giving the appropriate law enforcement the primary control over the company records from day one when customer money has been stolen, and not leaving it up to the management of the company and their attorneys to decide how they wish to manage the dispostion of critical information, otherwise known as 'evidence.'

I understand that this may not have become an issue in the past, when brokerages went bankrupt, and the primacy of customer claims was upheld. And I admit to being a touch Socratic here. If these things were not a problem in the past, why are they such a heartache and stumbling block now?

Sometimes TBTF banks and TCTP (Too Connected To Prosecute) financiers flout the law and use their influence to twist the existing laws and the compliant legal system to suit their purposes. And that is a symptom of a much greater problem.

Gold Daily and Silver Weekly Charts - Even the Orchestra Is Beautiful

Each and every market maker a virgin. If you don't believe me, don't take my word for it, go ahead, ask Helga.

Betty and Helga

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Oh Say Does That Star Spangled Banner Yet Wave...

Chinese Premier Wen Jiabao Says They Must 'Break Up Their Big Bank Monopolies'

What a world, when the premier of China sounds like Andrew Jackson and Teddy Roosevelt.  His observations of the problems they face with the biggest banks in China must surely resonate with people in the developed nations.

I do not know how to translate this into Chinese, but the Premier is free to use it in his speeches:

"The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery."

I found the rather dismissive reaction from some of the 'Big Four' Chinese banks to be very interesting.

"Wen has one year left (in his term)," said a Chinese state banker who asked not to be identified because of the sensitivity of the topic. "This is a task for the next generation of leaders. It cannot be accomplished within one year."

Perhaps they feel that they have bought this reformer and made him their puppet, a faux reformer, in the manner of their Western counterparts.

As forecast more than seven years ago, before the financial collapse which was also in the same forecast, the monied interests will keep pressing their advantage around the world, blinded by greed and emboldened by their apparent victories, until they go too far and destroy themselves.

AP
China's premier calls for breaking bank monopolies
By JOE McDONALD
4 April 2012

BEIJING (AP) — Premier Wen Jiabao, China's top economic official, says its state-owned banks are monopolies that must be broken up, acknowledging mounting economic and political pressure to reform an industry whose vast profits are fueling public anger.

Wen's comments Tuesday suggest Beijing sees a growing political danger from its failure to carry out long-promised reforms of state banks, which pay minimal interest on deposits and made tens of billions of dollars in profit last year. Public resentment has risen as China's rapid economic growth slows and fears of job losses rise.

Speaking Tuesday to businesspeople, Wen said Beijing has launched reforms aimed at serving entrepreneurs better by opening up banking to private investors, China National Radio reported. It gave no indication of a possible timeline for further reforms.

"Our banks make money too easily. Why? Because a small number of big banks have monopoly status," Wen said, according to a transcript on the CNR website. "To allow private capital to flow into finance, basically, we need to break the monopoly."

Wen spoke during a visit to Fujian province in the southeast, a center for export-driven private enterprise. The government announced last week it will launch a pilot project to expand private lending in Wenzhou in neighboring Zhejiang province after a wave of defaults on underground lending that supported businesses there.

"I think those elements in Wenzhou that succeed need to be expanded nationwide and can immediately be introduced nationwide," Wen said, according to the transcript.

Communist leaders have long used Chinese banks to subsidize state industry, shifting wealth from savers to politically favored companies. Entrepreneurs produce most of China's new jobs and wealth but get only a small percentage of bank loans.

That has fueled resentment, especially as the "big four" major state-owned commercial banks, which account for about half of deposits, report record profits...

Read the rest here.

Reuters
What does China's Wen mean when he says break bank monopoly?
By Benjamin Lim, Terril Yue Jones and Langi Chiang
Apr 4, 2012

(Reuters) - When Chinese Premier Wen Jiabao talks about busting a bank monopoly, he may be thinking of modest financial reforms, not a dismantling of the Big Four state-owned banks.

His comments on Tuesday were blunt: the big banks reap profits "far too easily" and operate like a monopoly that needs to be broken in order to speed the flow of money to loan-hungry smaller businesses.

Reuters contacted five of China's largest banks to see how Wen's remarks were received. There was little concern that a major policy shift was imminent, especially when the Communist Party is only months away from a once-a-decade power handover, which includes replacing Wen.

"Wen has one year left (in his term)," said a Chinese state banker who asked not to be identified because of the sensitivity of the topic. "This is a task for the next generation of leaders. It cannot be accomplished within one year."

The Big Four banks, Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank, account for about 40 percent of China's total loans.

They have come under criticism for earning fat profits while small businesses scramble for financing.

Last year, the top four banks earned net profits totaling $99 billion, more than double at their U.S. equivalent - Citibank, J.P. Morgan Chase, Bank of America Merrill Lynch and Wells Fargo.

The large banks tend to direct most of their lending toward fellow state-owned enterprises, but China increasingly relies on smaller private firms for job creation and economic growth.

The big banks wield formidable political power. Top executives are appointed by the Communist Party's Organization Department and hold a rank equivalent to a cabinet vice-minister..."

Read the rest here.