Financial Stability News

News about financial stability, central banking and theory of money

Category Archives: MF Global

MF Global – Why has there not been more prosecution of fraud?

This interesting but somewhat technical post discusses an important issue: Why has there not been more prosecution of financial fraud in this crisis? This is i large part due to the tradition of appointing trustees for the failed institution, instead of appointing receivers. This again is related to the US Bankruptcy law and legal tradition, which mistakenly has avoided appointing receivers when there are clear signs of fraud against unsecured creditors. As the post notes …

There are a number of examples where a receiver function plays an important role in fighting fraud. In case of The Stanford Group, an Article III receiver was appointed by a federal District Court without any bankruptcy to pursue a wide ranging investigation, which included efforts to conserve customer funds and pursue third parties via criminal and civil means.

He goes on to note that the FDIC is a good example of who such receiver powers could be used …

The FDIC is another excellent example of how receivership powers enable that bank agency to limit losses to the mutual insurance fund supported by insured banks and also pursue claims against bank officers, directors and other parties. Unlike a trustee in a bankruptcy, the FDIC acting as receiver has broad authority to seize assets, sue officers and directors, reject contracts and even make criminal referrals related to a failed bank.

More frequent appointments of receivers whenever fraud is suspected should restore some of the balance for unsecured creditors and lead to more prosecution in obvious fraud cases.

MF Global Customer Funds Were Not “Vaporized”

Todays hearing in the Senate Banking committee on the MF Global bankruptcy were supposed to deal with how we can avoid a similar debacle in the future. Much of the action was still on where the money went and how this could happen. Not so much new information during a short two hour session, but obvious that the relevant rules (1.25 &30) could be used in a quite flexible way as a result of previous strong lobbying by Goldman Sachs (for rule making proposal to straighten up this loophole, see here, and for the objections from MF global, see here). Unbelievable that CFTC let them continue with investing client money in European debt and in-house repos! Gensler, chairman of CFTC and former colleague of Corzine at GS obviously has a problem with this case (he has left it to his commissioner Sommers to handle the case on the Hil)

This post from January capture the angry (and probably correct) mood among the MF Global clients, when it comes to lack of fair treatment. And nobody should believe that the money just “vaporized”. They were stolen twice!

Where is the client money after MF Global? – Part II

As a followup on my post on the client funds after MF global on Tuesday, this new post from Zero Hedge today gives more detail. Somewhat tedious, but also very important, and of much relevant to the ongoing redesign of bankruptcy law and resolution regimes for financial institutions in general.

Until the Congress rectifies the current bankruptcy laws and allows trustees to claw back payments made to secured lenders and other counterparties, there is no reason for any rational personal to allow a broker dealer to hold securities in custody.  All of this business will go to the big banks, who will be just as happy to see the smaller dealers thrown into the meat grinder.

The uber-privileged position of derivatives in the 2005 Bankruptcy law was supposed to secure the payment system and therefor financial stability. In fact the crisis and this MF Global bankruptcy has shown that customers and markets are worse off as a result, and pressure are building for change:

Now why, you may be wondering, did the lobbyists from the big banks push Congress to expand the safe harbor for secured parties in the bankruptcy code?  As one former Bush II Treasury official told me last night: “The canard the banks used to get 546 amended was that overriding the trustee’s normal avoidance powers was said to be necessary to limit systemic risk and ensure access to credit.  God forbid the banks be required to do some due diligence.  As the bailouts showed, the systemic risk was in fact enhanced by the changes to the bankruptcy code and the illusion of superior claims to collateral, thus increasing leverage.”

Where is MF Global’s client money?

The most recent estimate for the missing client money of MF Global is now 1.6 billion dollars (up from first estimate of 1.2). You should think that someone by now had figured out where the money is, but not so. They are still missing.Former head of MF Global, Jon Corzine (also former GS, former Governor of NJ and former Senator) restated this when he was questioned in the Senate some weeks ago.

But according to this post, “everybody” knows where the money is, but are afraid of telling.

In fact, MF Global executives knew exactly what happened to the money, as do the regulators who oversaw the firm’s bankruptcy. The so-called segregated customer funds were repeatedly, and legally (through re-hypothication), used as collateral for MF Global loans for 100:1 leveraged bets on European sovereign debt.  

Rather than being treated as a bankruptcy of a commodities brokerage firm under sub-chapter IV of the Chapter 7 bankruptcy law, MF Global was treated as an equities firm (sub-chapter III) for the purposes of its bankruptcy, and this is why the MF Global customer money in so-called segregated accounts “disappeared”. In a brokerage firm bankruptcy, the customers get their money first, while in an equities firm bankruptcy, the customers are at the end of the line, meaning MF Global’s creditors, namely J.P. Morgan and other trading counterparties, got their money first.

To add further insult to injury for MF Global clients, the firm reportedly unloaded hundreds of millions of dollars’ worth of securities to Goldman Sachs, and others, who then reportedly flipped these securities within a day to George Soros funds.

The big question is why it takes so long to get this message out to the public. According to this post the reason is …

… that the political powers that be in Washington are protecting JPM CEO Jaime Dimon from a possible career ending kind of stumble with respect to MF Global. By stuffing the commodity customers of the broker dealer via an equity bankruptcy resolution supervised dutifully by SIPIC, JPM and Soros apparently get to benefit at the expense of the commodity customers of MF Global. This situation stinks to high heaven and everyone on the Street we’ve spoken to about the matter knows it.

Who is Latour Trading?

As the hearing goes on over here, another story has reemerged. Zero Hedge is again the source of this, when they back in October noted that a “secret” firm had upset Goldman Sachs as the biggest program trader on NYSE. Strange, you would think, that this could be the case.

What strategies they run, how much capital they actually need etc is almost impossible to gain knowledge of. One thing is sure though. The Trading space is rapidly changing, attracting many smart and creative people, but there remains many questions to ask with what these firms contribute with in terms of volume, liquidity, volatility and most importantly the “morality” of the strategies conducted.

Rough traders stealing program code from their banks, jumping over the Atlantic, and then setting up a backroom operation in high frequency trading that is overtaking GS. Serious? How can this be the case?  A must read article courtesy of,Douglas Faneuil, Dis magazine.

And, interestingly enough, the story also ended up in this Swedish newspaper. They note that

I de efterföljande läsarkommentarerna spåras företagets domännamn till Tower Research Capital, i sin tur en del av Lime Group, grundat av amerikanen Mark Gorton. Koncernen ligger också bakom Spire Europe, som i år blivit en av Stockholmsbörsens största aktörer.

Spire Europe is probably also one of the big actors on the Oslo Bors as well, I would imagine. Perhaps a case for Finanstilsynet?