Wednesday, November 2, 2011

How MF Global kicked off a Global Bank/Financial System Run...

Apparently everyone is sleeping…and the MF Global event is not a big deal…right? The reality is that though Charlie Gasparino seems to HATE John Corizine…he seems to think that the MF blow up was not a systemic event. Charlie Gasparino, I have found, is not nearly as insightful or smart as I one thought he was…He however, is much more arrogant and misguided than I thought he was capable of being…I guess that happens when you sign up at Fox.

In any case, the theory goes that MF and its challenges are not a problem for the system…I believe that the MF and Bear Stearns parallels are too close for comfort. The cases are essentially identical. Both events occured for very similar reasons and both are trigger events for crisis intensification - and this while Ben Bernanke talks calmly about all the things the Fed has done right and with distinction…So, this is the subject of this post. MF, like Bear over leveraged its book and used desperate measures to try to prop the whole game up. MF assumed it could use credit and other people's assets to hold up their dealings…with at least 700 million (probably more…the numbers will likely keep getting bigger) that was not theirs.

However, there is one thing that is absolutely endemic on Wall Street…people at both firms could get paid a lot of money to taking outsized risks with money that was not their own - and those people did just that. The whole problem with the accounting control fraud on wall street and the financial systems stems from people feeling like they have a right to money and purchasing power that is not really theirs and that its their right to use it to drive their compensation schemes. This is why I do not believe that money managers should be paid for anything but making you money…why pay a management fee? Pay only performance…that approach is much more constructive and does not reward mediocrity…which clearly John Corizine and his kind are striving and succeeding to be.

However, people WANT to believe that things are ok…but they secretly know its not. When you tell people who have been trying to put their head in th sand that they can not have access to their money and at the same time asset prices are collapsing around them…they get very very anxious. The people putting their heads in the sand tend to be people who want the system to keep working the way that it has in the past. They want to make money believing in dollars weaken, credit is cheap, leverage is good and assets increase in value. They usually also get paid handsomely for their pursuits of making money in such a scheme and pass the risks to other participants. This generally follows the axiom of privatizing profits and socializing losses.

So, lets look at MF Global. The main issue here is that improper incentives and complicit plans created an issue where people can now be sure that for certain almost all financial firms are committing accounting fraud and their assets are not truly where people think they are. The reality is that if John Corizine wanted to get his big bonus…the whole deal was not his ambition alone - it was probably engineered by his private share holders cronies and board members incentivising for their own gain to generate new profits to move share prices up. I am quite sure their suggestion was that it would be easier accomplish this objective with prop trades than actually building their business. Why else would anyone risk a perfectly good business in exchange for a far less certain and manageable outcome. Clearly, the board and key shareholders had to create the proper incentive for such an agenda. The interesting thing here is that all of these key people are looking at attempting to benefit from access to the assets of others - a classic credit money technique.

The result at this point of all this compensation incentivized risk taking, however, is that the largest liquidity squeeze and bank run in history has likely begun. BAC clearly does not have your money safe, neither does JPM or Goldman Sachs or now many non-bank financial entities like MF Global are proven to be highly duplicitous and untrustworthy. As I said before there are a lot of roaches…and we will need the cans of DDT.

The NFA sent out the following email, requesting disclosures to be made to pool participants that clearly indicate they many not be receiving their anticipated capital in amount or time from MF Global…clearly there are no guarantees…and the key is to get safe.

If you are a Member operating a pool that has pool funds held at MF Global, you must make the following disclosures:
  • On October 31, 2011, MF Global reported to the SEC and CFTC possible deficiencies in customer segregated accounts held at the firm. As a result, the SEC and CFTC determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets, and SIPC initiated the liquidation of MF Global under the Securities Investor Protection Act.
  • As of (insert date) approximately $XXX of (Name of Pool)'s assets were on deposit in an account(s) at MF Global. These assets represent XX% of the (Name of Pool)'s net asset value of $XXX.
  • The General Partner does/does not believe that these actions will have a material impact upon the operations of (Name of Pool) and its ability to:
  • Satisfy redemptions requests;
  • Adequately value redemption requests and the manner in which they will be handled;
  • Accept new subscriptions in (Name of Pool) and properly value the net asset value for new subscribers; and
  • Provide for accurate valuation in the (Name of Pool)'s account statements provided to participants.
  • Participants are cautioned that there can be no assurances:
  • That (Name of Pool) will have immediate access to any or all of its assets in accounts held at MF Global; and
  • As to the amount or value of those assets in the context of the bankruptcy.
  • Participants should also be aware that future actions involving MF Global may impact (Name of Pool)'s ability to value the portion of its assets held at MF Global and/or delay the payment of a participant's pro-rata share of such assets upon redemption.
Read it as one may…this is not good and we must keep in mind that we may soon be getting these types of disclosures from the FDIC and other supposed government insurance schemes that encourage complacency that are endemic to a vast credit money ponzi scheme.

What we need to be prepared for is this HUGE margin call starting to playout emminently…and that means now, as in the next few weeks. This will mean, banks and financial institutions that even have a whiff of accounting fraud and undercapitlization are going down. Gettting money out of one of these firms is going to be a very frustrating process as it currently is for MF Global customers. As the run continues people will be forced to sell everything not glued down to get their cash needs met. And that my friends means GOLD and SILVER too.

The irony is that the source of the MF Global is the same source as our 2008 debacle and the various scams that have been perpetrated by politicians, wall street and regulators for the last years. Its a disease, a sickness that no one believes they have - especially Paul Krugman. Its a fraudulent currency that is source. Its the reason that there is no other process in our system other than involuntary wealth transfer…when people participate in the leeching behavior what we get are the symptoms of the disease. MF Global is just a symptom and not a cause. When you put raw meat in front of a wild animal expecting it not to eat is quite ridiculous. Our illustrious leaders have put the essence of valueless money creation and money amplification in front of wild financial provocateurs - we should expect them to eat at the trough we created. If we want to get rid of the symptoms we need to get rid of the disease. Often the end of a disease occurs with the capitulation of its host. That appears to be the path of this disease. We need to teach our children and culture what money is and how to respect it - until we do that we will continue down the same path and these disastrous symptoms will be all too prevalent.

On another note, becuase I view the MF Global breach as the trigger of the unwinding of a systemic liquidity problem in the financial system, I took quite a large withdrawal from my bank accounts today so I can be holding cash that I know I can get when I need it…it may seem extreme…but since when is being safe extreme. Currently, I look at having my money in a bank with less than 1% reserves and covered by FDIC insurance that can  pay me back anytime up to 99 years from now as much more extreme.
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