STOCK MARKET WATCH - Friday, 17 February 2012

[Demeter]

2. Barry Ritholtz Has the Main Theme Right, But Gets a Few Specifics Wrong About MF Global

http://jessescrossroadscafe.blogspot.com/2012/02/ritholz-has-main-theme-right-but-gets.html

...In a recent piece titled MF Global Reveals You Are a Bank Counter-Party he makes a very strong case that financial institutions that trade for their own accounts place everyone who has money with their firm at counter-party risk. He uses this to reinforce his opinion, with which I heartily agree, that when private speculation becomes mingled with public funds and government guarantees, a moral hazard results that quite often leads, some might say almost inevitably, to fraud, the mispricing of risk, and bailouts...

But in making his case, that the MF Global situation proves this rule even though they were not a bank, he characterizes some of the things regarding the MF Global scandal in a way that could be misconstrued, and has been misconstrued in that way by some of the main stream financial media...

MORE..JPMORGAN AND JAMIE DIMON SHOULD BE GOING DOWN, AS SHOULD CORZINE

Here is what Barry said:

"Recall the basic facts of MFG: Management engaged in leveraged speculations with monies — whether it was their own or clients became irrelevant as the losses were so great as to wipe out much more capital than the bank actually had. Billions in losses meant MFG was insolvent and was wound down. On the winning sides of those trades were folks like JPM and George Soros. It is neither their duty nor obligation to verify whose money is on the other side of the trade — the clearing firms make sure the trade settles.

Those trade settlements are the only possible outcome. Why? Imagine a burglar robs a house of cash, goes to a casino and loses the money playing Roulette. The Casino settles that bet, it clears — and the burgled homeowner can never recover the money. Exchanges work the same way. They simply cannot validate the capital sources of every transaction. In the case of MFG, the money wasn’t even burgled — it was simply entrusted (sic) to an entity that became so insolvent thru excess speculation that even money in “Segregated accounts” was highly compromised."

There are at least three things that are wrong with that version of the story. I had to struggle a bit to understand what Barry was really saying...First, it was NOT irrelevant whether MF Global was using customer money or their own to finance their trades. That is a matter of regulatory law as recently expressed in Rule 190, and the CFTC has made it very clear that brokerage firms cannot use customer funds in whatever manner they please despite the presumption of regulatory creep that is a favorite ploy amongst the Wall Street wiseguys. What Barry implies is that this is a nicety, and I would say it most certainly is not. To use customer funds in this manner is a violation of fiduciary trust, known in lesser circles as stealing. MF Global thought they could take the money and put it back with no one being the wiser, but they were caught up in the discovery of events. This is not much different than taking company money to pay your private debts, and then failing to return them before the loss is discovered....There is a difference between a creditor and shareholder in a financial institution like a brokerage and a customer, who has their own private assets on deposit, with specific protections outlined by the exchange and government regulators. Just because someone is not indicted does not make a thing legal or morally acceptable.