Warren Pollock: Open Letter to the CME

Wednesday, November 23, 2011

Open Letter to the CME
To: Terrence A Duffy, Chairman CME Group

As illustrated by the failure of MF Global, I am of the opinion that, the CME has not met its basic obligations to the marketplace as a “public fiduciary.”

Our society depends on “basic finance” to provide “utility functions” such as banking, hedging, insurance, and/or capital formation. Presently, we have an “innovative system” that degrades the integrity needed for “basic finance” to perform as required in a well-structured economy.

Worse yet, our “innovative” financial system impedes the effectiveness of the greater “physical economy.” The physical economy is all those individuals and entities tasked with meeting actual need. The physical economy consists of many of your customers including farmers, manufacturers and electric companies.

Our society needs people working in the physical world to create jobs more desperately than it needs the continuity of the CME. Must we endure another market catastrophe to figure this out?

The 2008 bailouts defined “moral hazard,” as the socialization of losses due to over-leverage. MF Global consumers are currently subsidizing losses attributable to over-leverage and “innovation.” Perhaps small percentage moves in speculation rationalized an internal choice between corporate survival and the sanctity of customer funds. Complexity has been specifically designed by “modern finance” to intentionally allow over-leverage leading to out sized profits and reactively-subsidized losses.

The word, “theft,” comes to mind.

I believe that, the products traded by your member firms, at the CME exchange and elsewhere, well exceed the capacity of the monetary system to cover relatively small percentage losses or speculative miscalculations. Clearing OTC derivatives on an exchange does not, and will not, correct the problem.

With repeal of Glass Steagall, and the conversion of mutual companies to publicly traded entities, meaningful regulation has proved to be politically impossible to recapture. The solution therefore resides in simplification from “innovative” towards “basic” finance.

Presently, I would urge you to make MF Global customers whole as a perquisite to market reform towards a “utility function.” More than just the continuity of the CME may be at stake.

Warren E. Pollock

Franklin D. Roosevelt's 1942 Thanksgiving Proclamation - Kipling's Caution to the Empire

"It is a good thing to give thanks unto the Lord."

Across the uncertain ways of space and time our hearts echo those words, for the days are with us again when, at the gathering of the harvest, we solemnly express our dependence upon Almighty God.

The final months of this year, now almost spent, find our Republic and the nations joined with it waging a battle on many fronts for the preservation of liberty.

In giving thanks for the greatest harvest in the history of our nation, we who plant and reap can well resolve that in the year to come we will do all in our power to pass that milestone; for by our labors in the fields we can share some part of the sacrifice with our brothers and sons who wear the uniform of the United States.

It is fitting that we recall now the reverent words of George Washington, "Almighty God, we make our earnest prayer that Thou wilt keep the United States in Thy holy protection," and that every American in his own way lift his voice to Heaven.

I recommend that all of us bear in mind this great Psalm:

The Lord is my shepherd; I shall not want.
He maketh me to lie down in green pastures; he leadeth me beside the still waters.
He restoreth my soul; he leadeth me I the paths of righteousness for his name’s sake.
Yea, though I walk through the valley of the shadow of death, I will fear no evil; for thou art with me; thy rod and thy staff they comfort me.
Thou preparest a table before me in the presence of mine enemies; thou annointest my head with oil; my cup runneth over.
Surely goodness and mercy shall follow me all the days of my life; and I will dwell in the house of the Lord for ever.

Inspired with faith and courage by these words, let us turn again to the work that confronts us in this time of national emergency : in the armed services and the merchant marine; in factories and offices; on farms and in the mines; on highways, railways and airways; in other places of public service to the Nation; and in our homes.

NOW, THEREFORE, I, FRANKLIN D. ROOSEVELT, President of the United States of America, do hereby invite the attention of the people to the joint resolution of Congress approved December 26, 1941, which designates the fourth Thursday in November of each year as thanksgiving Day’ and I request that both Thanksgiving Day, November 26, 1942, and New Year’s Day, January 1, 1943, be observed in prayer, publicly and privately.

IN WITNESS WHEREOF, I have hereunto set my hand and caused the seal of the United States of America to be affixed.

DONE at the City of Washington this eleventh day of November, in the year of our Lord nineteen hundred and forty-two, and of the Independence of the United States of America the one hundred and sixty-seventh.

FRANKLIN D. ROOSEVELT

God of our fathers, known of old—
Lord of our far-flung battle line—
Beneath whose awful hand we hold
Dominion over palm and pine—
Lord God of Hosts, be with us yet,
Lest we forget—lest we forget!

The tumult and the shouting dies—
The Captains and the Kings depart—
Still stands Thine ancient sacrifice,
An humble and a contrite heart.
Lord God of Hosts, be with us yet,
Lest we forget—lest we forget!

Far-called our navies melt away—
On dune and headland sinks the fire—
Lo, all our pomp of yesterday
Is one with Nineveh and Tyre!
Judge of the Nations, spare us yet,
Lest we forget—lest we forget!

Rudyard Kipling, 1897

Gold Daily and Silver Weekly Charts - Post Option Expiration Gut Check Doesn't Stick

US stock markets went out on their laws, roiled by a failed bond auction in Germany.

Gold and silver received their traditional post option expiration smackdown, designed to pry any new futures position out of the hands of any specs who happened to have held in-the-money calls after yesterday.

The US will be closed tomorrow, and staffed by junior employees on Friday. So eyes will be on the overseas markets.

Pleasant holiday to the Yanks.

SP 500 and NDX Futures Daily Charts - Out on the Lows

A failed bond auction in Germany cast a pall over the holiday markets in the US.

Stocks went out on their lows in thin trading.

Pigs 'R' Us - The Wall Street Groupon IPO

And it is...

When I play cards with the little girls, they make up new rules on the fly and sometimes cheat outrageously, palming cards and sneaking money from my pile of coins, so that we all laugh about it. They know that I know, and that I am being tolerant. They enjoy sneaking up on me, and jumping out of cupboards and behind doors. And I always act surprised, but never am.

After all, it is a duty and the joy of a father to occasionally indulge his children, and especially the little ones, to show them the tender side of his love.

But what is amusing in 10 year olds is not becoming in grown men acting like spoiled little boys, abusing other people's money, betraying trusts,  and taking personal and selfish gains from the livelihood of the public and the nation's future, stealing from their clients.

And Wall Street is even worse than the Congress.

While I never had the heart or even the need for it with any of the children, a stern look being enough, perhaps a spanking is in order for such miscreants as these. Where's the wooden spoon? I am counting to three. lol.


From Le Cafe on 3 November:

"The wolf thought to himself: 'What a tender young creature! what a nice plump mouthful.-- she will be better to eat than the old woman. I must act craftily, so as to catch both."

The Brothers Grimm, Little Red Cap

The Wall Street wiseguys are shoving the Groupon IPO out the door tonight I hear.

It *could* do well, but it strikes a kind of a chord for a high water mark in the post 2008 equity echo bubble.

From Le Cafe on 4 November:

GroupOn = LinkedIn?

La la la, whatever. La la la, doesn't matter. As cynical an IPO as seen since 1999 they said today.

CME Boosts MF Global Guarantee - Corzine & Gensler Called to Testify At House Hearing

It is good to hear of the increasing likelihood that the customers will be repaid. It may take some time for full repayment.

It is also good that Corzine, Gensler et al. are being asked to appear before the Congress. The article does not mention subpoenas, or whether the testimony will be sworn.

The facts of the case will most likely be buried under a smokescreen of 'accounting errors' and misunderstanding.

But the Congressmen will have their chance to express their 'outrage' as they did with the bank bailouts, and put on a good show for the folks at home.

I wonder if they will ever reveal who had taken the customer funds from MF Global as last minute collateral before the bankruptcy filing?    I notice no one from JP Morgan has been called.  Although I doubt it, it would be interesting if Corzine pleads the fifth.

Like resistance becomes support, so the glass ceiling becomes a glass floor once you pass through it and join the club.

Even with the money returned, without stronger guarantees it is hard to understand why anyone would put money into a US futures account.

Bloomberg
Corzine Called to Testify at House Hearing
By Zeke Faux and Phil Mattingly
Nov 22, 2011 6:45 PM ET

Jon S. Corzine, the former U.S. senator and New Jersey governor who ran MF Global Holdings Ltd. (MF) until the firm filed bankruptcy last month, has been called to testify at a House hearing on the failure next month.

Corzine, who was chairman and chief executive officer of the New York-based firm, will face questions “on the decisions and events leading to the collapse of MF Global” at a Dec. 15 hearing before the House Financial Services Oversight and Investigations panel, according to a statement released today...

Gary Gensler, chairman of the Commodity Futures Trading Commission; Robert Cook, director of trading and markets at the Securities and Exchange Commission; William C. Dudley, the president of the Federal Reserve Bank of New York; and Bradley Abelow, MF Global’s president and chief operating officer, have also been asked to appear at the hearing, according to a person with direct knowledge of the panel’s plans...

Press Release
CME Group Increases Guarantee to $550M to Accelerate Return of 75 Percent of MF Global Inc. Segregated Funds to All Customers

- CME Group confident reports of significantly larger shortfalls are incorrect
- Distribution would result in return of roughly $4 billion total cash returned

CHICAGO, Nov. 22, 2011 /PRNewswire/ -- To accelerate the return of additional securely held funds to MF Global Inc. customers, CME Group today announced it has increased its financial guarantee to the SIPC Trustee from $250 million to $550 million. CME Group's proposal to the Trustee is designed to increase the payout percentage from 60 percent to 75 percent in early December. This distribution would include customers holding cash balances and warehouse receipts, as well as customers who received non-sufficient funds checks from MF Global. As a result of this proposal, roughly $4 billion of the $5.5 billion that was supposed to be held by MF Global in segregation will be returned to customers. With this offer, the entire $2.5 billion securely held at CME Clearing will have been distributed.

While the final accounting of customer segregated assets and claims will occur in the bankruptcy process, CME Group is confident that recent reports of significantly larger customer segregated shortfalls are incorrect. CME Group continues to work with the Trustee and the CFTC to finalize this accounting....

Gold Daily and Silver Weekly Charts - Bounce Back from the Smackdown

Silver would not be denied.

Keep an eye now on the December delivery process in the metals at the Comex.

All eyes on Europe and the US financials.

SP 500 and NDX Futures Daily Charts

Light volumes. Some recovery from the daily low on the Fed minutes.

This gave a little cheer to a market that was digesting a weaker than expected GDP number.

The adults have left the building for the holiday.

All eyes on Europe.

Bank of America was warned by its regulators to stiffen up its assets.

The futures finally closed at 1180.75 which is important support.