TMO article, just like Ann Barnhardt's missive before, is attempting to blame "the system" (CFTC and, particularly CME, implying "systemic failure" just like Sen. Debbie Stebanow tried to do in hearings, to create more regulations and deflect the blame from Corzine, Abelow et al.) for actions that MF undertook.
As the article points out, much bigger outfits, like Lehman, Bear Stearns and Barings went bankrupt without any problems with their segregated trading customers' accounts (whether they held physical or paper assets and trading positions); same goes for smaller entities like Refco, which MFGH (then part of UK based Man Group) acquired from bankruptcy in late 2005.
FTA: Obviously holding unallocated gold and silver in a fractional reserve scheme is subject to much more counterparty risk than many might have previously admitted. If a major bullion bank were to declare bankruptcy or a major exchange a default, how would it affect you? Do you think your property claims would be protected based on what you have seen this year? You always have counter-party risk if you hold gold and silver through another party, even if they are a Primary Dealer of the Federal Reserve. As Ben said, the Fed offers no seal of approval. Although the details and the individual perpetrators are yet to be disclosed, what is now painfully clear is that the CFTC and CME regulated futures system is defaulting on its obligations. This did not even happen in the big failures like Lehman and Bear Sterns in which the customer accounts were kept whole and transferred before the liquidation process.
What in the world does any of this have to do with a banking "fractional reserve system"? And, BTW, so much for the supposed superiority of holding illiquid "physical" assets (gold and silver) instead of "paper" assets!
In real world, this is just about the customers' assets (physical or "paper") that are supposed to be and have always been "untouchable" accounts that were "touched" / misused by the likes of one "Master of the Universe" Jon Corzine, ostensibly to be used as a collateral for margin, for a short period of time, to enable highly leveraged MFGH to be sold to financially stronger entity. J.C. Flowers and Corzine were shopping the company and IBG had agreement "in principle" to acquire MFGH the day after the news of "money missing from customers' accounts" broke.
FTA: If a Bankruptcy Trustee can pool your bullion into the rest of the paper assets and then liquidate it at prices that are being front run by the Street, you will have to accept whatever paper settlement that they give you.
Assets are assets. Where did the confused notion that a "physical" bullion asset should be in any way "safer" than the "paper" asset come from? If the "cash" or gold / silver bullion or antique furniture can be put up as collateral, then it can be "pooled with the rest of the assets" for any purpose.
The answer to the question "If a major bullion bank were to declare bankruptcy or a major exchange a default, how would it affect you?" is simple: you are screwed, unless there is account insurance (which there usually is, provided to the brokerage by companies like Aon, Society of Lloyd's/Lloyd's of London, Marsh & McLennan, Munich Re, Willis Group, etc.) and the insurance companies are solvent.
In fact, there are now proposals under consideration of making insurance fee mandatory for commodity brokerages (similar to SIPC insurance) which will be passed on to the customers and make trading / hedging more expensive - thanks, Mr. Corzine!
72% payout is guaranteed by CME and will be distributed by the trustee for now, until they know how much money they can "recover" and claw back for the customers.
It's explained here:
Corzine: MF Staff Said Fund Transfer Legal - BL, by Silla Brush and Clea Benson, 2011 December 15
..... Investigators are attempting to determine which transactions involving customer funds were illegitimate, Jill E. Sommers, the senior CFTC commissioner overseeing the investigation said in a telephone interview yesterday. "We're far enough along the trail to see the transactions going out" of segregated accounts, Sommers said. Investigators are searching e-mails and other documents to trace the transactions. "Following a trail is not as easy as it sounds because money isn't just transferred from point A to point B and stopping," she said. Sommers said she expects regulators will eventually be able to determine where all the money went. There may still be a shortfall because some money may not be available to be clawed back for customers, she said. < snip > ..... Corzine suggested Terrence Duffy, CME Group executive chairman, may have been referring to some funds transfers that occurred as MF Global was selling billions of dollars in securities. JPMorgan Chase & Co. (JPM), which was involved in the transactions, told MF Global the sale could not be completed until overdrafts in some accounts in London were corrected. ..... < snip >
Basically, it takes time to sort out the Corzine's mess, and allocate the funds appropriately.
FTA: And so in the great Wall Street tradition they are trying to force the customers and the public to take the loss. The regulators and the exchange are aghast, and are trying to imagine how to resolve and spin this to preserve investor confidence and prevent a run on the system.
Actually, quite the opposite, as from the above, they are trying to find where the money is and claw back for the customers. In the hearings, everybody confirmed that customers' accounts were first in line to receive the "recovered" money. And there is no run on the "system." Thankfully, only a few are calling for it and not everybody is talking like they 99% losers of OWS.
FTA:The US financial system as it now stands cannot be trusted to observe even the most basic property rights as it continues to unravel from a long standing culture of fraud. Get your money as far away from Wall Street as is possible.
That's the kind of lunacy and idiocy we should expect from ZeroHedge, TheBusinessInsider, TheMarketInsider, TheMarketOracle and other pseudo-financial liberal "Wall Street conspiracy" blogs. Apparently, they have "Jim Cramer envy" (of TheStreet.com and CNBC) and try to outdo him with the scariest phony scenarios they can conjure up.
For some reasons, the richest people on the planet (whether we like them or not) like Buffett, Bill Gates, Soros, Carlos Slim et al. have most of their money "on Wall Street" and mostly in the form of liquid "paper" assets.
From the original Barron's article, that somehow didn't make it into TMO excerpt:
< snip > ..... Investor Gerald Celente says he was hit with a big margin call when the gold contracts in his MF Global account were transferred to another brokerage. "I refused to put up more money," he explains, "so they closed out a number of my open positions at the current market price." ..... < snip >
What did Celente expect would happen when he refused the margin call? Something different from what happens to any "other" customer? Didn't like it - could move the account to another brokerage which will allow a smaller margin collateral... if he could find it. And what difference does it make if the margin call is on "physical" gold or "paper" gold, except that it's a lot more difficult to move gold bars than do electronic "paper" transfer?
CME's stock, which had been as high as $327 over the past year, has slid to a recent $242 as a result of low trading volumes and uncertainty about the MF Global scandal. The Customer Coalition may eventually press its case with the exchange operator. "If it turns out the only way we get customer money back is [to] go after the CME, then we'll go after the CME," says Koutoulas. A substantial portion of MF Global's commodity clients cleared their transactions through the Chicago Mercantile Exchange and Comex, owned by CME Group (ticker: CME). The question now looming over CME's stock is whether the company will be liable for customer losses. CME, which also owns the Chicago Board of Trade and Chicago Board Options Exchange, runs markets for futures contracts and options on futures, interest rates, stock indexes, foreign exchange and actual commodities.
That's it in a nutshell. This is what Erin Arvedlund's article is really all about - whether the self-described Customers Coalition will file a "deep pocket" lawsuit against CME and how it's affecting and may affect in the future its price (for what it's worth, it will be a futile lawsuit, CME has no liability here; in fact CME and Duffy have been a standout). It's not about "run on the system" or "long-standing culture of fraud" that was just now discovered by customers of MFGH and other brokerages.
Speaking of CME, Duffy just got a waiver from increased Illinois business taxes.
From Quinn signs Sears-CME tax breaks into law - CT, by Kathy Bergen, 2011 December 16
Terry Duffy, executive chairman of CME Group, lauded the action, as did William Brodsky, chairman and CEO of the smaller CBOE Holdings Inc., parent of the Chicago Board Options Exchange, which also plans to remain in town now. The new law "addressed the inequitable distribution of corporate taxes currently levied on CME Group," said Duffy, whose company employs about 2,000 people here. "This necessary adjustment to the Illinois corporate tax laws will put CME Group on more equal footing with other Illinois companies and other global exchanges." CME Group, parent of the Chicago Mercantile Exchange and the Chicago Board of Trade, had held its cards close the vest until Friday's signing. Sears Holdings, which indicated earlier this week that it would remain here if the legislation became law, confirmed that stance Friday. ..... < snip > Moments after Gov. Pat Quinn signed tax-break legislation Friday aimed at keeping CME Group Inc. and Sears Holdings Corp. from leaving the state, those two major employers announced they would stay put.
Now that should drive OWS crowd batty.
From Corzine and the Missing Money - WSJ, by Holman W. Jenkins, Jr., 2011 December 17
The money probably did not walk out the door in a brown paper bag. If not, it either doesn't exist — a distinct possibility if account liquidations by customers were not properly recorded in MF's hectic final days — or it's still in the hands of trading partners, who smelled MF's impending bankruptcy and sat on money owed to the struggling firm. A third scenario is sketched by Sen. Pat Roberts, in which MF misused customer funds to cover its own obligations. As he put it in a question to ex-CEO Jon Corzine in hearings this week: "By all accounts, on the Friday before bankruptcy, MF Global thought it had found a buyer to save you. It seems well within the realm of possibility . . . to use your customers' segregated funds to cover the firm's liquidity crunch, thinking that, by Monday morning, everything would be fine, the company would be bought out, an infusion of money from a new owner could replace the missing customer funds. Is this plausible, governor?" Gov. Corzine declined to "speculate." The bombshell, of course, was Terrence Duffy's claim later at the same hearing that somebody at his Chicago Mercantile Exchange was told by somebody at MF that Mr. Corzine had known about a particular transfer of customer money to MF's own account. But this is not the same thing as stealing it. MF was authorized to borrow cash from customer accounts as long as it was replaced with bulletproof collateral like U.S. Treasury bills. ..... < snip > ..... Nor is it unusual for customers to find themselves among the claimants in a bankruptcy. Customers of regulated brokerage firms that go bust, however, are luckier than most. By law, they get first priority ..... < snip > ..... Alas, in a bankruptcy everything must be litigated, since money given to customers is not money to make other creditors whole. But MF appears to have plenty of assets. It also follows that the bankruptcy trustee has every incentive to identify funds in the hands of other parties as possible "customer" monies to facilitate clawbacks. This may explain why, among various estimates of the customer shortfall, the bankruptcy trustee, James Giddens, has pushed the highest at $1.2 billion. In fact, Ms. Sommers of the CFTC told Reuters this week that all MF funds have been accounted for; it's a question now of sorting through each transaction to make sure it was "legitimate." Likewise, Richard Heis, working with the administrator of MF's British branch, says, "We know exactly where the money is." When Lehman, Refco or Drexel went belly-up, customer funds were safe. Customer funds are surely safe at Fidelity, Vanguard and other top-quality firms. So don't shoot yourself just yet. ..... < snip > ..... In the end, MF appears to have blown itself up, as it had every right to do, through old-fashioned miscalculation. Mr. Corzine's leveraged bet on European bonds, however profitable it might eventually prove, spooked the clients, regulators and rating agencies whose backing MF needed to remain a going concern. ..... < snip > ..... At Goldman Sachs, Mr. Corzine was a risktaker, one whose coolness was not always comforting. But at Goldman he operated under the watchful eye of his fellow Goldman partners. At MF, he was monitored only by distant shareholders and the part-timers who made up MF's board. ..... < snip > Where, oh where, did the MF Global customer funds go?
At this point we can be fairly confident that authorities know where the customers' money is. Most likely they are working with JPMorgan, in the U.K. and the U.S. to track the transfers, sales, authorizations and "legitimacy".
They may not know yet exactly how much of it is available for distribution - because there is a discrepancy even within different regulators and trustee as to how much was really "missing" and how much of the transferred money was "legitimate" and how much was "bastardo". Duffy was a little skeptical, but was not going to argue with trustee during the hearing; he already limited his guarantee "liability" so the higher amount of clawback could benefit CME to "recover" its own guarantee in the end, too.
Most people will eventually get most of their money back. Some problems will be with those who had open positions that were liquidated at the then-prevailing price (to satisfy collateral requirements).
Celente, who wouldn't put more collateral for margin call - probably because he was already leveraged to the gills, and/or just decided it was the best way to exit out of losing gold position (smart, as it turns out, considering where the gold is now) and now is making noise and a virtue out of necessity. Maybe he hopes to get the "full value" of his gold position at the time of MF bankruptcy.
In contrast, other people who had open leveraged contracts that were liquidated, simply had no choice in the matter.