Anyone pulling money out of MF Global?

PocketChange · Nov 15, 2011

Nice post:

May also want to review Illinois Trust and Trustees Act.
http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2117&ChapterID=61

Quote from benwm:

More MF Global: Be Cautious Folks
http://market-ticker.org/akcs-www?post=197377

The saga deepens....

âThis isnât just a lost and found inquiry; itâs a full-on effort to get to the bottom of what appears to be a massive hide-and-seek ploy,â Chilton, a Democrat, said in an e-mail.

âItâs a distinct possibility, some would say probability, that somebody has done something with the money, and that itâs not going to be âall of a sudden discoveredâ with an innocent explanation,â Chilton said. âIf thatâs the case, itâs patently illegal. I donât know yet. Our investigation will uncover that, and weâre aggressively pursuing this.â

Yuck.

Now look folks, I don't want to instill panic, but I'm going to relate to you what I was told years ago by someone I paid for advice when I got concerned about a broker I was doing business with back in the late 1990s. As with all such matters of a legal tenor, you either pay for advice or you have a fool as your advisor, so take this for what you think it's worth, and if you have real money on the line then seek your own counsel with someone who you pay and thus who can and will stand behind what they tell you.

But you should know this if you're a trader or investor -- and I'm willing to bet that not one trader in a hundred has an appreciation for the danger, however remote the odds may be.

My question at the time revolved around where the SIPC limits were and were not, and what was and was not actually protected. Most people know that the SIPC limit is $500,000 of which $100,000 is for cash. Most people also know that SIPC coverage only covers missing securities or money -- that is, if you manage to get wound up in something like this and during the time it takes to transfer your account somewhere the price of your stocks crater, you're exposed 100% to that loss. In other words your inability to trade due to be caught in such a trap is your problem, not their problem. Allegedly SIPC protection is there to cover active fraud -- that is, securities that are supposed to be in your account (and you were told were in your account) but actually are not.

This is part of the risks in the game. But what most people don't understand is how this works in practice and where some of the corner cases can land you as a trader or investor.

First, $500,000 sounds like a lot and it is. If you have a few million you can spread it around and get under the limit at various brokerages. If you have tens, hundreds of millions or more, not so much. But there are problems, the largest one being the $100,000 limit for cash. If you go to cash during a market downturn and the brokerage steals the funds you will lose all but $100,000 of it, not all but $500,000! Keep that in mind, because spreading a few million around sufficiently (indeed, even if the number is one million) to get under $100k is difficult or even impossible.

The second problem is more-severe: Commodity and futures brokerages may offer no protection for cash at all. You have to be very careful in relying on that coverage in such instances because it may not be there. There are additional problems and risks with trading futures in particular, which MF Global has exposed to people who didn't formerly understand them, with one of the larger ones being collateral disassociation risk.

This is not talked about at all in the risk documents you get when you open an account but it damn well should be. It bit people hard with MF Global and happens like this: When you trade futures you post margin against your trades. So if you want to trade one /ES contract (S&P futures) you currently have to post $4,000 in cash to do so. You control roughly $60,000 stock with that, so you have 15:1 leverage trading these things, and everyone who does this knows the problem leverage can cause if you're imprudent.

Now here's what happened: If you had contracts open your positions were transferred to a new firm when MF Global failed but the money you posted as margin has "disappeared" and thus was not transferred! As a consequence you got an immediate margin call from the new firm! If you couldn't meet that call your positions were immediately liquidated and if it moved against you from the time of transfer to liquidation could result in a huge debit balance in your account. Normally that debit would come off your margin deposit but in this case the margin has disappeared which means now the new broker comes after you for the money and he wants it in cash - right now!

Note that the effective impact of this event is that you had to have cash somewhere other than MF Global you could immediately tap to make that margin deposit or you were instantly dead and buried. There are many clients in this position right now.

That's bad, and most people don't understand this risk.

Now let's talk about the ugly: The potential for clawbacks. This possibility entirely eviscerates SIPC protection and renders it worthless, and it's real.

Let's assume you detected the problem at MF Global by your own analysis and moved your money somewhere else. If fraud is later discovered -- that is, you were right -- it is possible for the bankruptcy trustee to file a clawback action and attempt to force your money back into the firm to pay the creditors of the estate!

If that didn't send a shiver up your spine you're not very bright.

It appears that there's exactly one place you can stick money where this risk doesn't exist: US Treasuries via a Treasury Direct account. Yeah, if you're in short-term instruments they earn zero, so you might as well buy a 4 week bill and let it roll to a "CofI" (which earns no interest and is basically a cash park at Treasury); if the Treasury is unable to pay you then your concerns are of a more-immediate nature than money.

I don't want to overstate this case, because the risk of a clawback action (especially a successful one) is not very high. But it does exist, and those who claim it doesn't are wrong. It happened in the Madoff case and it can happen here. Remember that in the Madoff case people had statements claiming investments were bought that turned out to be frauds. You'd think the SIPC would cover this case, at least up to $500,000 in securities, since they were "missing" due to fraudulent activity. But the potential for a clawback action means you're wrong about this alleged "protection" -- there may in fact be NO protection at all in the event of fraud.

The success of such an action is by no means certain but what this ultimately means is that detecting fraud and attempting to protect yourself from it by running away from the fraudulent entity may be futile as the trustee can try to forcibly return your money back to him so he can pay creditors with it.

I understand the legal theories behind such actions but they appear to be profoundly unfair from my perspective -- a person who discerns that someone may be doing something fraudulent and pulls their business as a consequence and is then punished for doing the right thing (along with saving their own skin) appears to be ridiculously unfair. It also makes a mockery of the SIPC claims of "protection" for missing securities. But it is what it is, and it's a risk that is entirely unappreciated by most traders and investors.

The CFTC also began a review of futures brokers to determine if client funds are properly segregated. The initial review will include between 10 and 12 futures brokers and the CFTC hasnât set a deadline for the review, a person familiar with the review said.

Yeah, well, they're a little late on this. From the narrative that's been put forward it is claimed that a routine audit of these matters at MF Global was done just a couple of weeks before they blew up and failed to detect the problem. This implies that either the event took place entirely after the audit or that MF Global was craft enough to evade detection.

The root of the problem looks to be, once again, off-balance sheet financing and treating any form of debt deal as "riskless" when in fact it is not possible to have a riskless position that actually has a return associated with it.

In other words the root cause comes back to what it always seems to: Accounting games that, when analyzed dispassionately, lead someone to want to use the "F" word - the one you can use on TV but commentators and regulators basically never do.

This must change and until it does people will continue to be victimized.
More...

dangerkitty · Nov 15, 2011

Did I read the release of 60% of cash equity correctly on the trustees MFGI site?

http://dm.epiq11.com/MFG/document/GetDocument.aspx?DocumentId=1450384

cashcarewins · Nov 16, 2011

Quote from dangerkitty:

Did I read the release of 60% of cash equity correctly on the trustees MFGI site?

http://dm.epiq11.com/MFG/document/GetDocument.aspx?DocumentId=1450384
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Hope some of the folks that lawyered up can talk the judge into increasing that percentage. The hearing is tomorrow (Wednesday), so we should know more soon. I'm afraid the 'claims' process for the remainder is going to drag out.

apex82 · Nov 16, 2011

Quote from dangerkitty:

Did I read the release of 60% of cash equity correctly on the trustees MFGI site?

http://dm.epiq11.com/MFG/document/GetDocument.aspx?DocumentId=1450384
More...

This is total bullshit! What about customers that had only a few positions and the rest cash?? We get nothing!? I have my two lawyers on this already as this is ridiculous.

cashcarewins · Nov 16, 2011

Quote from apex82:

This is total bullshit! What about customers that had only a few positions and the rest cash?? We get nothing!? I have my two lawyers on this already as this is ridiculous.
More...

It is BS, but it looks like the Trustee is targeting everyone for 60% on the first shot. The cash only customers have an expedited process (don't need to file a claim for the initial distribution only). I'm hoping the Judge considers this negotiable as there will be plenty of lawyers there arguing for a higher initial percentage.

apex82 · Nov 16, 2011

Quote from cashcarewins:

It is BS, but it looks like the Trustee is targeting everyone for 60% on the first shot. The cash only customers have an expedited process (don't need to file a claim for the initial distribution only). I'm hoping the Judge considers this negotiable as there will be plenty of lawyers there arguing for a higher initial percentage.
More...

I had less than one percent of my equity from my MF Global acct transferred to the new FCM.... 99.6 % is cash sitting at MF. I should be part of that initial distribution!

jbennett · Nov 16, 2011

absolutley absurd- i have gotten back approx 4% of my account-is anybody hiring an atty to dispute this tomorrw-if so please let me know

FreeMarketRider · Nov 16, 2011

Looks like the POS trustee has begun to cave under the wave of complaints and lawyering rolling in. Reading the full motion through, this is contingent on CME's $250 million guarantee against over payment. The motion indicates more anticipated distributions to all. Of course there is no good perspective on this except that the trustee won't be able to milk this like another Lehman. Thanks to all who added weight here. Irregardless of how well the exchanges acted as self regulation entities it looks like they know which side of their bread has the butter. This is a big customer confidence issue. Damage control = 60% Confidence will take 100% + CFTC action to reign in some of these FCM's. Maybe JPM will lose one for a change.

number22 · Nov 16, 2011

Gerald Celente: MF Global âTook my Moneyâ http://www.beaconequity.com/gerald-celente-mf-global-“took-my-money”-2011-11-16/

GERALD CELENTE: My Gold Account Was Emptied By MF Global

Read more: http://www.businessinsider.com/the-...ot-screwed-by-mf-global-2011-11#ixzz1du0s3UFM

PocketChange · Nov 16, 2011

You guys keep forgetting the Trustee gets to charge 40% in fees to recover your $.