Monday, November 7, 2011

MF Global: A Portender of Doom? A Lesson In Greed.

MF Global is a sad case of human greed and corruption. A lesson on the 'dark side' of human endeavour.

This is why. Customer trading accounts are sacrosanct in an organisation such as MF Global. When customers deposit money to cover the minimum amount they need to trade with (stocks, bonds, commodities etc), then this money cannot be touched. It cannot be used for any other purpose.

But sometimes companies get desperate and can see a large stash of cash and convince themselves that it's probably OK to borrow this juicing looking pile, if only for a little while. It's a bit like a gambler with an addiction just borrowing the housekeeping money until he wins big time. But it never happens.

And it never happened for MFG. They seemed to have 'borrowed' up to $600 million of 'no go' customer funds. It seems the 'bets' they made on Greek debt turned to custard. Now the money they used to bet with has disappeared. The customers have lost. Someone needs to go to jail.

Jail? Well, perhaps a $12 million bonus and a new boat or car and a house upgrade? Sounds better than jail and it looks like crooks such as Jon Corzine, CEO of MFG, may just get that sort of 'punishment'. After all, how many Wall Street bankers have been prosecuted since September 2008? Zip.

And it gets worse. When some customers got wind of trouble at MFG, they began to request their money back. But instead of using an electronic bank transfer for those funds,  MFG sent them each a cheque. Now we all know how long it takes to write, send, deposit and clear a cheque. And yes, you guessed it, the cheques bounced. Deceit only gets worse once it is in motion.

There are also quite a number of large Asset Management companies that have funds with MFG. The likes of Blackrock and Sheffield Asset Management. Depending on how their investments are structured, these big funds managers also stand to lose. The question is, how long can they stand the stress?

So there may well be a contagion effect with MFG going down. Companies that are already on the margins because of the European debt crisis will be under severe stress. For example, Jefferies Group has had to release information about its European debt holdings to try an settle the nerves of its cutomers.

The regulatory agencies such as the SEC and the CFTC seem to be asleep at the wheel or plain dragging their regulatory feet. CFTC Commissioner, Bart Chilton, admitted this week that the CFTC investigation into silver manipulation, which he thinks probably occured, has been ongoing since 2008 and will continue. I know these things are complex, but the longer they go on, the more room they leave for talk of these agencies being in the pockets of Wall Street bankers. I don't think they are though.

People can get really self-serving when their pride is at stake. Greed can make them justify any action, even stealing funds from widows and orphans. MFG is just another sad spoke in the wheel of greed that has intoxicated Wall Street for years now. It must be cleaned up before any trust can come back into markets.

This all reminds me of a saying that things hidden in darkness will eventually be brought to the light of truth. This is in the process of happening, but we also need justice to be done as well.

If you are willing to trade in this environment, then good luck, otherwise the only protection I see right now is owning physical gold and silver.

Gold in New Zealand dollars: $2201.86 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $42.84 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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