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Why MF Global matters.

MF Global has gone into bankruptcy because of the criminal acts of John Corzine.  As a result the entire options industry is in turmoil and could fall apart.  This is not a too big to fail scenario, this is just another example of croney capitalism.  Croney capitalism doesn’t just take place when the govenment lends money to business at low rates that will never be paid back, it also occurs when those who are influential within the political elite get favorable treatment. 

Corzine ran Goldman Saks into near financial ruin and was rewarded for it when the govenment bailed them out.  After helping to promote terrible deriviative products that nearly ruined the home mortgage industry he jumped ship, at a tidy profit.  After finding out that Jersey didn’t want him back in govenment, he somehow got into MF Global.

Understand this, MF Global was the largest most successful commodity brokerage firm in the world and had been in existance for nearly 300 years.  In two years under Corzine that all changed.  Corzine was not even qualified to run a company of this magnitude.  To qualify, or quite fankly, to even speak to customers about commodity trading you must first take a test and get a license to trade.  There are several regualtory bodies that could have stopped his appointment including the NFA and CFTC.  Instead, he was given a waiver and allowed to destroy this business and maybe the entire industry.

It is improtant to understand what happened at MF Global.  As a requirement for trading in commodities and futures options, clients must open accounts and hold capital to cover the risk of trades they may enter.  These accounts are called seg (segregated) accounts because the monies that are placed into the accounts remain the property of the client and are not the property of the clearing house (MF Global).  The clearing house can keep the interest made on those accounts as a cost of doing business.  Corzine’s bunch was not happy with the low interest rates that they were getting in the down markets so they got approval to go for riskier investments that would provide a higher yield.  Sovereign debt such as Greek and Italian bonds were purchased.  When the bonds were called in MF Global didn’t have the funds to cover and they lost about 11% of their clients’ segregated funds that wasn’t even MF Globals money in the first place.

Here’s where it gets interesting.  MF Global files for bankruptcy and instead of the court appointing someone from the regulatory bodies that are familiar with commodities, they appoint James Giddens, a securities specialist from SIPC who was the trustee in the Lehman Brothers bankruptcy.  He has no experience in the commodities markets and apparently doesn’t know that the seg funds belong to the clients and are not the property of the clearing house.   At $900 per hour he is now making decisions on how to pay the creditors of MF Global for the mismanagement of the securities industry darling John Corzine not to mention his criminal activity of raiding seg funds.

The result — people who have accounts in any brokerage firm that deals in commodities futures and options are scrambling to get out of the industry because accounts that were supposed to be safe from the corporate criminals are now mearly just creditors waiting to get paid.  Trustee Giddens seems to be favoring Bank of America and J P Morgan in putting them ahead of the the clients whose money it is in the first place.  He should have immediatley released the seg funds minus the 11% to the customers (since it is their money) because that money was lost due to misdeeds of the company.  Then the lost money becomes a debt that the customers can make a claim for in the bankruptcy process.  Instead, the customers have been robbed once and are about to get robbed again by a trustee whose bill will surely will hit the 2 to 3 million before they see a dime and by banks that backed the risky sovereign debt bonds that Corzine never should have purchased in the first place.

This result is no different than what Fidel Castro did when he took over Cuba, he stole others’ property to finance his own regime.  This is more than disgracful this is the United States Federal Courts version of croney capitalism and the condoning of criminal activity and as a nation have finally gone over the edge.

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