...and they may not have to pay them back....
Wall Street Firms May Legally Steal From Their Customers....as usual....!
“This means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”
If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be 'socialized.'
In a way it is just making the general relationship between Wall Street and its customers official.
It means that customers are bearing counterparty risk on assets to which they thought they had clear title, such as Treasuries and foreign currencies and warehouse receipts.
This sort of arbitrary distribution of gains and losses occurs more frequently than you might imagine on Wall Street from what I have seen and heard, and not just with commodity brokers. I have even heard of specially privileged customers who can make $100,000 in a few trading days without even having any knowledge of the markets in which they have 'traded.'
I stopped trading on the commodity exchanges a few years ago when I personally experienced enough 'rule changes' to convince me that it was becoming an insiders' con game with slim odds of success for the 'outsider.' Or perhaps I was just becoming aware of it had already become, or had always been.
Unfortunately it is hard to escape this, because despite all that has happened, these fellows still set the prices for much of the world's food, energy, and basic materials, at least on the official exchanges.
The CFTC has been disgracefully negligent, and given to cronyism, but in the spirit of modern American management practice it may just claim incompetence. They granted some exceptions to influential men, and the markets proved that the exceptions were just loopholes for fraudulent abuse of trust.
The Justice Department is investigating for any violation of the laws. I suggest they pay special attention to the laws regarding 'fraudulent conveyance' in the posting of the assets as collateral with MF's creditors.
Obama should bring in meaningful reforms to the regulatory agencies after the shocking abuses of the past twenty years. But I doubt he will bite the hand that feeds him.
MF Global May Have Used Customer Funds In The Losing $6.3 Billion Trade Without Informing Clients
By Robert Lenzner
After an intense day of investigation, I have just discovered that a CFTC rule (1.29) allowed Jon Corzine’s MF Global to use the margin and cash in customers heretofore segregated accounts to amass a risky $6.3 billion investment in European sovereign debt that backfired. Nor did Corzine have the obligation to inform any of these customers he was gambling with their money. Or that he was intending to keep all the profits for himself and his troubled firm. Nothing for the customers.
The language of Rule 1.29 allows “The investment of customer funds in instruments described in 1.29 shall not prevent the futures commission merchant (MF Global) or clearing organization so investing such funds and retaining as its own any increment or interest resulting therefrom.” Increment refers to any trading profits or gains.
The criminal division of the Justice Department in New York — as well as the SEC and the CFTC and members of Congress– are investigating whether any laws were violated and if so, whether any criminal charges can be brought. As of 3 pm today, there has been no sign of the missing $633 million. My sources believe it was probably grabbed by the institutions that made the margin calls on MF Global as the European bonds sank in value.
This shocking loophole, which is available to all commodity traders, whether giant ones like Goldman Sachs or members of commodity exchanges, means that huge risks are being taken with money that does not belong to the trading firms– without the customers having any idea of the danger they are in. As Andy Abraham, a futures trader in Israel put it to me today; “this means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”
This rule, which has been in effect since 1974, is shocking and highly irregular since it allows any futures dealer to use customers money for its own selfish purposes– and never inform its customers it is doing so. What’s even more unfair is that the dealer (MF Global) gets to keep all the income and the trading profits, if any from a transaction that uses other people’s money– not its own house capital. That is unless some prior arrangement about sharing profits was made privately beforehand with the client. None of the MF Global clients I’ve spoken to today had the foggiest notion about this arrangement– which at minimum is outrageously unfair to the rule that the customer comes first. All losses must be made up by the dealer, which in this case may be totally impossible..."
Read the rest here.