You know, it’s about the $1 billion + (exact amount still unknown) that Corzine stole from client funds at MF Global.  The scandal that Republicans prefer to ignore…

1.  The Agriculture Committee in the House has called Corzine to testify.  Meanwhile any committees with anything to do with finance are doing nothing.

2.  The CFTC yesterday finally passed rules regarding brokerage company use of funds, two years after Dodd-Frank passed.  Why the delays?  Well, we learned yesterday that Bill Clinton was a lobbyist for MF Global.

3.  We also learned a bit more about Gary Gensler, the head of the CFTC who delayed dealing with the matter of misuse of client funds:

Gensler served as senior economic adviser to the Hillary Clinton in the 2008 campaign.  When her campaign closed shop, he jumped into the Obama camp as a fundraiser and adviser.  Once elected, the Obama transition team then charged him with charge of the reviewing the SEC.

Prior to this Gensler was active in Democratic party politics, appointed treasurer of the Maryland Democratic Party in 2003. He emerged as a major donor contributing more than $220,000 to Democratic party candidates and committees from 2002.  This figure includes the more than $72,000 in 2008 shortly before his appointment.

So to summarize, if you steal $100 from a 7-11 you get locked up right away.  Steal $1 billion from your customers at a brokerage firm (and hire the right help) and nothing at all happens. Will Republicans make an issue of this?

Meanwhile, the far bigger crime waiting to happen is that the Federal Reserve allowed Bank of America to transfer more than $70 trillion of derivatives contracts over to its banking subsidiary.  This means that BOA is subordinating $4 trillion of taxpayer-guaranteed deposits to its casino gambling.  That’s because in the event of bankruptcy under US law, derivatives holders go to the front of the line, they are senior to all other creditors (this in itself is ridiculous).  So if BOA goes under, American taxpayers could effectively guarantee up to $4 trillion of derivatives losses.  This isn’t news, it happened a couple of months ago.  What IS news is that no Republicans seem to be upset.  Democrats want answers.

One explanation for where the missing $600 million of customer funds held by MF Global went is that MF needed the money to collateralize its bad bets on European sovereign debt.

There is another, bigger, example of similar misuse of customer funds, perpetrated with the knowledge and consent of the Obama administration.  The Federal Reserve recently allowed Bank of America to transfer $75 TRILLION of derivatives obligations over to its bank holding company.  BOA wanted to move the derivatives exposure over to the bank holding company because the counterparties to their-

derivatives investments, or, rather,

gambling debts, or, maybe

as Warren Buffett used to call it, financial “time bombs” (before Buffett became part of the problem)…

wanted BOA to put up its customer deposits as collateral.

Hold it, isn’t that what MF Global did?

By the way, when a company goes bankrupt, under current law for some really bizarre reasons, derivatives debts are senior to other debts of that company.

You would think that Dodd-Frank in its 2,000 pages of glory, would have prevented banks from transferring gambling debts (sorry, derivatives obligations, I keep getting these things confused) over to their bank holding companies.  Even if Dodd-Frank had required that derivatives bets should be subordinated in the event of bankruptcy, that would have brought some sanity to the $600 trillion derivatives market.  But, sadly, no, it’s cronyism as usual for Dodd, Frank, Obama, and the other Democrats who passed Dodd-Frank without a single Republican vote.

Time for my weekly rant about Corzine, Obama and MF Global.  Reminder- MF Global, led by Obama best bud John Corzine, not only went bankrupt, but it took with it $600 million of client funds which were not its property.  In the real world we’d call that theft, but Washington Democrats ignore it and Washington Republicans…. ignore it too.

This could be the issue that Republicans use to point out that the massive Democrat financial reset (“so that we’ll never again have another financial crisis”), in the form of 2000+ page Dodd-Frank, really didn’t stop business as usual, but it instead just kept Obama’s buddies in business.  It could be the issue that Republicans use to tie Obama specifically and Democrats in general to Wall Street crony capitalism, but… no, that would be too useful.  In the last week, as news breaks daily about MF-Obamagate, there have been a grand total of 2,840 news articles for the search heading “MF Global Corzine”.  There have been 149 articles mentioning “MF Global Corzine Obama”.  For comparison, there have been 1,130 articles about Newt Gingrich and Freddie Mac in the last 24 hours alone.  There have been 15,200 articles in the last week about “Herman Cain sexual harrasment”.

Well, here’s some of the latest:

1. MF Global admits it doesn’t know what happened to all that client money.  (By the way, note that the head of the CFTC, Gary Genzler, has recused himself from the investigation because of his close ties to Corzine.  Note further that said head of the CFTC was appointed by Obama.)
2. More than 1,000 MF Global employees have been laid off.
3. Another commodities firm has shut its doors because- well, read this:

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

Republicans, WHEN are you going to treat the MF Global fraud like an important issue which sheds a most useful light on the incompetence (or rather, corruption) of Obama administration financial regulation?  Democrats are positioning this and all other financial crimes as failures of capitalism, and you’re doing nothing.  Regulatory capture and theft are NOT failures of capitalism.

I wrote last week about how Republicans have a golden issue to (properly) tie the Obama administration to the Wall Street shenanigans, and to demonstrate that our financial problems are not problems of capitalism, but rather are problems of enforcement and Democrat corruption.

It’s been in the news that MF Global may have “borrowed” (better words are “fraudulently misappropriated” or just “stolen”) about $600 million of money that belonged to its clients, not it.  That is horrible enough.  But now this week, it’s coming out that Corzine lobbied the Democrat-controlled CFTC board (3 Democrats, 2 Republicans) to block regulation which would have prevented it from borrowing as much as it did, and specifically borrowing from customer accounts.  It looks like Corzine personally called Gary Genzler to lobby about this issue the day the CFTC was supposed to vote on it.  The CFTC ended up not passing the regulation.  Here is a good summary.  Here is another good article.

Republicans in the House ought to call Corzine to testify.  They could ask-

• Did Corzine discuss the pending regulation with any other members of the Obama administration?
• By the way, what DID happen to all that client money?
• Corzine criticized Lehman for its 35:1 leverage.  How does he feel about MF’s 45:1 leverage?
• What other contacts on other issues did Corzine have with the Obama administration regarding financial regulation?
• What does Corzine feel now should be done to regulate financial companies?

To highlight the differences between nice-guy Republicans and tough-guy Democrats, take a look at Exhibit A, the differing treatments by the press and pols of Ken Lay versus John Corzine.

Ken Lay, you may recall, was the CEO of Enron, originally a Texas pipeline company and later principally a producer of arcane financial products whose function was to hide the stupid investments of Enron management.  Enron at one point had  assets of $64 billion, and was praised by politicians and the press alike for rapid growth.  The bankruptcy of Enron led to convictions of Lay and other members of Enron upper management; the passage of Sarbanes-Oxley; and the bankruptcy of the Arthur Andersen accounting firm.  Lay eventually committed suicide.

Since Lay was a significant campaign contributor to George Bush, Democrats gleefully tried to link the two, insinuating that somehow President Bush must have been aware of, or facilitated, the crimes of Enron management.  Check google- there’s over 1.7 million links when you google “Enron Bush”.

Never mind that Enron also had close ties to Democrats, particularly the Clinton administration.  For instance, Robert Rubin tried to get the Clinton Treasury Department to intervene when Enron’s credit rating was threatened, in exchange for which he was offered a position on Enron’s board.  The Clinton administration guaranteed over $1 billion of loans to Enron in return for which Enron raised more than $2 million for Democrat causes.  For a summary, see, for instance, this.

Fast forward to today.  Enron and MF had comparable assets- $45 billion for MF, versus $64 billion for Enron.  Both were taken down partly because of dubious off-balance-sheet transactions.  But MF has the additional distinction of having commingled customer funds with its own, which seems to have resulted in $600 million in losses by people who never should have been impacted by MF’s financial misadventures.  The stench from this is just awful, and is simple to understand- MF basically stole money from innocent third parties.

Look also at the political situation of MF versus Enron.  Whereas Enron had ties to both Republicans and Democrats, MF’s CEO is a Democrat through and through, with very close ties to Obama.

BUT- in 2001, the press and Democrats worked hard to make Enron exclusively a Republican scandal.  They are still reaping benefits from this when they portray Republicans as being responsible for the 2008 meltdown and hence not to be trusted with financial stewardship of the US economy.

What will the Republicans do with the MF scandal?  What they should do is to link MF and Democrats whenever possible, especially in the context of Dodd-Frank, which was apparently not at all adequate to prevent this sort of mess.  They also should express some of the outrage which people like me and many, many others feel about what John Corzine has done.  This is a great opportunity for Republicans to recast themselves as the grown-ups when it comes to financial regulation.  It’s part of a pattern which also recently includes the lack of action by Obama to block the transfer of $53 trillion of toxic derivatives of BOA onto taxpayers; and on and on.

Wake up, Republicans!

It’s understandable that there’s a tough, high stakes race for the Presidential nomination right now.  But to both the candidates and bloggers, I suggest that you simply press Cain to get the facts out, and spend most of your time focusing on the really big issues/opportunities in front of you now.

First of all, this internecine warfare is  going to harm whoever is the candidate next year.

But more important, some really significant events have occurred and there’s been no outcry.

This week we learned that MF Global confessed to comingling an as-yet indeterminate amount of client funds (but most likely north of $600 million) with its own.  Then, poof, MF went bankrupt and all of its money, along with the $600 million+ of money that wasn’t even theirs, went with it!  Now, do you really think that it was an accident that they tapped into customer accounts?  Well, for perspective, the net worth of MF was only $1.5 billion at the time.  So $600 million was what you’d call a more than material amount.  No they weren’t stupid, they were criminals.  This is just like somebody taking YOUR money and investing it so that if they win, you get nothing and if they lose, you lose too.  You had no idea that your brokerage firm could steal your money like that with impunity, did you?   If you wonder why many people are sympathetic with OWS, it’s because a guy who robs $100 from a 7-11 goes to jail for it, while John Corzine steals $600 million and- as far as I can tell- it isn’t even illegal.  WHERE IS THE OUTRAGE?

A second point- wasn’t Dodd-Frank supposed to prevent this kind of meltdown?  Do you mean that in their 2,000 page bill (and in the grand history of American financial regulation) nobody thought to make it a crime to comingle funds!????

A third point- the CEO of MF was John Corzine, does the name ring a bell?

So WHY are Republicans not focused like a laser on this issue?  Guys, there’s a very high likelihood of a major financial system meltdown before the 2012 elections.  This is the one and only key issue for next year.  Do you want to cede the issue to the Democrat’s mantra of “This is the fault of capitalism; this is the fault of Republican deregulation; this is another example of the 1% fleecing us all.”??  The Democrats are really good at taking a theme, true or not, and pounding it into peoples’ heads until it becomes conventional wisdom.  For instance, the whole “Bush lied” nonsense.  I was around before the Iraq invasion and read newspapers, it was the conventional wisdom under both Bush and Clinton that Iraq had an WMD program.  Bush didn’t lie, it’s just that apparently the CIA was incompetent.  But the Democrats pounded and pounded on a lie until it became the truth.

Well, the next lie is “Capitalism has failed.”  Are you going to let this become the conventional wisdom, and roll over for socialism or worse?  Or are you going to point out that it is the failure to enforce existing laws or to pass truly sensible legislation to address financial regulatory problems rather than the monstrosity the Democrat Congress passed?  Are you going to put the blame squarely on Obama, and inquire about his relationship with Corzine?  Where’s the investigation of Corzine?  Where’s the investigation about why this sort of action is not criminal?  Where’s the hearings about the abject failure of Dodd-Frank?    Why aren’t you blaming these problems on the DEMOCRATS?  Instead, you’re obsessing over Herman Cain.

Republicans, do you not think that Joe Six-Pack can “get” this issue?  Let’s see… well-connected Democrat steals $600 million of client money and nothing happens… No, that’s too complex.  Let’s just obsess over Herman Cain.

This isn’t the only absolutely horrible financial misdeed in this last month.  It’s been reasonably well-documented that Bank of America just transferred $53 TRILLION of derivatives contracts over to its bank holding company, so that CUSTOMER DEPOSITS WILL SECURE THOSE  DERIVATIVES.  And you know what- it’s legal!  Why didn’t Dodd-Frank prevent this sort of problem?  Warren Buffet once famously called financial derivatives “financial weapons of mass destruction”.  So why do derivatives contracts always have first priority in the event of a bankruptcy?

But just for the record- BOA did in fact dump $53 trillion of derivatives onto taxpayers.  The Federal Reserve allowed it.  And Republicans did… nothing.

My advice to all the Republican candidates is first, to take the high road about Herman Cain and America in general, as Eric Ericsson has suggested many times.  Our problems can be solved!  Second, put yourselves on the right side of the financial issues.  Convince people that you understand finance, and that you’ll be able to get us out of the financial mess that is only getting worse.

Obama has staked his campaign on impugning the “1%”.  And now we see that one of his best buddies and major contributors is ready to skate after defrauding his customers of $600 million.   We see that Obama says nothing when BOA slops $53 trillion of derivatives onto taxpayers’ heads.  Obama, I guess, can’t say anything because he’s part of the problem.  So- how about Republicans?  Is this an opportunity for you, or are you part of the problem, too?

The Federal Reserve Bank of New York is soliciting bids to build a system to monitor not only blogs and newspaper articles about it, but also even conversations on Facebook and Twitter.  The Fed wants to “identify and reach out” to bloggers and influencers.  And what?  Send us to the Gulag??  Where’s the ACLU when we really need it?  For that matter, where’s Congress?

Here is the RFP:

Here is an article about the Fed initiative.

There is a very interesting op-ed about Social Security in today’s Wall Street .  It is written by Thomas Saving, who served two terms as a public trustee of the Social Security and Medicare Trust Funds.  Saving states that making Social Security payments will not have any impact on the legal value of the total public debt.  Here is the money quote:

By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration.  And when the Treasury does, total government debt subject to the debt limit falls by the amount of the redemption- thus freeing up the Treasury’s ability to issue new bonds equal in amount to the redeemed Trust Fund bonds…  Therefore, meeting Social Security obligations in August, September and all future months in this fashion would add nothing to the gross government debt subject to the debt limit.

So then, the budget gap is really as follows.  Total scheduled expenditures are about $307 billion, while receipts are estimated to be $172 billion.  But the expenditures include roughly $50 billion for Social Security.  Therefore the REAL accounting gap is $85 billion, NOT $135 billion as most people have stated.  See here, for example.

Note also how disingenuous Obama’s statement about not being able to send out Social Security checks is.

One might assume that Moody’s action yesterday to put the US credit rating on watch for downgrade was a perfectly reasonable response to the budget impasse.

But if that were the case, then why, for instance, hasn’t Moody’s changed its outlook on Belgium, which has not even had a government for the last 13 months??

Or why hasn’t Moody’s downgraded ALL euro country sovereign debt ratings (ie including France and Germany), when these countries have to bear the burden of the entire eurozone, 18% of which now has sovereign debt which is officially “junk”.  You might say that the European peripheral countries are too small to matter.  Maybe Greece or Portugal alone could be. But is Italy?  Is Ireland?  Yet, there’s no change, despite financial conditions in Europe which deteriorate daily.

But because Republicans and Democrats reach a negotiating impasse, not unheard of in democracies by the way, the US credit rating is put on a negative credit watch.  The downgrade by Moody’s was important, and outrageous.  The timing of the move is such that it appears to be primarily focused on the debt ceiling negotiations.  The real focus should be on the budget problems.  Putting the US on negative credit watch could have had the positive effect of encouraging Republicans and Democrats to close the budget gap.  Instead, Moody’s is just positioning itself as another political rent-seeker, a la Fannie Mae.

I have three thoughts-

1.  I would really love to see a debt deal, but if it’s not possible, then I would not feel that the Republicans “lost” if we went with something short term.  Obama does not want a deal at all.  So there most likely won’t be one.  Obama’s only hope in 2012 is to blame the economy on the Republicans because of a debt ceiling negotiation failure.  It doesn’t matter at all what is real or true, he’ll say it and the media will pound it into our heads for the next 16 months.  It’s exactly like the WMD mantra of the Left after the second Iraq invasion. All of a sudden “Bush lied”, never mind that there was a broad consensus before the invasion that Saddam had WMD and that we had to go in.  They rewrote history and it worked for them.  Compared to that whopper, selling the idea that the fiscal crisis is all because of Republicans is easy.

2.  To me, the only way for the Republicans to come out of these negotiations with any chance not to be blamed for any possible subsequent financial problems is to make the negotiations public.  For instance, pass a no-strings $200-300 billion cap increase in the House, then immediately pressure the Senate to PASS A BUDGET, and tie the debt ceiling to the budget.  There are any number of ways to achieve this.  Yes, public debate isn’t conducive to making deals, but that’s not what this is about.  The Democrats don’t want a deal.  They want to be able to say that they proposed major entitlement cuts, but then behind closed doors do nothing like that.  Let the American people understand where the parties really stand.  By the way, this isn’t just about appearances.  I also think that if the process is more visible, then the public pressure for the Republicans will also be greater.  Remember what happened during the town halls during the health care debate?  It would be just as intense this time around.

3.  I agree that a tax increase is not what this economy needs.  But this really is a crisis, and the US really will be bankrupt if we don’t raise some taxes, and in my opinion the argument against any and all tax hikes isn’t a political winner, that’s just life.  Read this in the National Review Online, for instance.  So instead, the Republicans should start talking about the RATIO between tax hikes and spending cuts, citing empirical data such as this.  Even left-leaning economists generally agree that spending cuts are better than tax hikes.  Read this, for instance.

Anyway, many of you won’t agree with me on #3, and my heart is with you though my head has concerns.  The main thought I want to share is that the Republicans need to make the process more transparent and public, it is the only way to overcome the Obama/MSM edge.