MF Global — 2011′s version of 1929

There are beginning to be some serious concerns that the futures market segregated account holders at MF Global may not be made whole.

If this becomes the case, then MF Global will be 2011′s version of 1929.

I have been in the futures business since the mid 1970s. The industry always spoke about how client money was protected by the independent clearing corporations of the exchanges and by the segregated account banking arrangements.

This apparently false assumption of protection was reaffirmed in 2005 with the collapse of Refco due to reputed fraudulent activity by its CEO. While general creditors of Refco recovered slightly more than 30 cents on the dollar with the dust settled, Refco’s segregated account holders had full recovery – after some time delay.

Fast forward to today. There is a strong hint that segregated account holders at MF Global will be left holding the bag. See Reuters article from yesterday.

Futures markets and futures commission merchants (FCMs) are supposed to be highly regulated by the Commodity Futures Trading Commission (CFTC). If MF Global’s seg customers are not fully protected, it would be the equivelant of, let’s say, depositors of Chase bank or customers of Fidelity not being protected.

The failure of MF Global”s segregated account to be made whole would be the biggest financial disaster since 1929 and would spell the end of the futures industry as we know it. Folks in the financial industry should take this matter seriously — very seriously. Do not underestimate the importance of this matter.

I am not into conspiracy theory. Never have been. But if the current administration in D.C. does not step up on this one, my only conclusion is that this administration would be taking a direct shot at market speculation. Just saying!

Let me get this straight. The current administration made good on AIG, Deutsche Bank, Fannie, Freddie and many other financial biggies (only to have their executives grant themselves millions in bonuses), but is unwilling to make account holders of federally regulated FCMs stand out in the cold.

This will be a telling story to follow — and could result in the end of futures trading in the U.S. And if so, members of the futures industry and all futures’ market segregated account holders need to become card carrying members of “Occupy Pennsylvania Avenue.”

If there is a shortfall for MF Global’s seg accounts, then at last we will have the BOGI gap (Bernanke, Obama, Geithner Incompetence). And, the fat lady will finally get her chance to sing — at the funeral of the CFTC.

For updates, follow the web site of MF Global’s trustee, James W. Giddens.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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