Dec 12th: MF Global execs say don't know where the money is

[LH]

MF Global execs say don't know where the money is
http://finance.yahoo.com/news/mf-global ... 54579.html

This just really really really continues to astound me.

No idea where the money went, still......?

How much money these guys make, and supposedly have zero clue?

SEC, FBI, no clue either?

[Rob5TCP]

Corzine was so lawyered up - he basically said nothing.
He pleaded the fifth without pleading the fifth.
The man should spend a decade in jail.

[FafnerMorell]

Wasn't one of the major purposes of all the Sarbanes-Oxley legislation that Corzine passed was to prevent companies from these sort of accounting swindles? Maybe there's some more "insider trading" loopholes where laws which apply to regular citizens don't apply to politicians and ex-politicians.

[Alan S.]

If you let the forensic accountants work on this long enough, they ought to make some discoveries. There certainly is enough money to warrant the expense, and enough other interests who will suffer if the disposition is not unraveled.

Corzine will probably not spend any time in jail, but his life will be very miserable for the next 10 years if not longer. His lawyers will be the big winners.

[Beth]

http://www.calculatedriskblog.com/2011/ ... ation.html

http://dealbook.nytimes.com/2011/10/31/ ... -st-firms/

These two links shed more light on the story. It's not clear whether this is a story of illegality or not. It would appear that one quid pro quo of the "privilege" of using margin is the investor's agreement that the broker can pledge/re-pledge, hypothecate/re-hypothecate the investor's collateral, which, when done, ushers in the risk that the original investor could lose his/her collateral in the unfortunate event of the broker's insolvency. The first link has some general info about what is likely at issue. The second link suggests that this isn't a case of a bet gone bad; instead, it's a case of creditors and counterparties getting nervous and forcing a liquidity crisis for MF Global which in turn spurred a solvency crisis. This all sounds distressingly familiar. Some of the comments posted to the first link are interesting and link other articles. One commenter related he had contacted Vanguard to find out whether its brokerage agreement contained the right to re-hypothecate a margin investor's collateral and was awaiting a response.

Interesting times.

Regards, Beth

[CaliJim]

...One commenter related he had contacted Vanguard to find out whether its brokerage agreement contained the right to re-hypothecate a margin investor's collateral and was awaiting a response.

I'd be interested in what the answer to that question is.

[Beth]

CaliJim, For those who did not retain copies of their VG brokerage agreements, I imagine it's available online. The commenter said the CR rep said it's a 55-page agreement and would take some time to review and respond. I don't trade on margin and I buy only mutual funds and TIPs and sometimes brokered CDs in my account so I'm not motivated to search for the agreement. I seem to recall that VG does have the right to "trade" securities in its MF portfolios but I don't think this is the same thing. But certainly, caveat emptor is a good credo, no matter who're you're dealing with. While I don't lose sleep over VG's solvency, prudence it would appear that you can be undone by some other lesser party up/down the chain. What troubles me is that this is another story of leverage gone wild and when something turns brown it suddenly becomes a huge problem that there are not sufficient assets to settle everyone's account and then it becomes a matter of who ends up with the short end of the stick. And with the number of potential short-stick holders to be deemed "too big to fail," well, we've seen that movie before and the ending isn't pretty. Regards, Beth

[Sidney]

Wasn't one of the major purposes of all the Sarbanes-Oxley legislation that Corzine passed was to prevent companies from these sort of accounting swindles? Maybe there's some more "insider trading" loopholes where laws which apply to regular citizens don't apply to politicians and ex-politicians.

It will be interesting to learn when the accounts were last reconciled and who signed off on financial statements. With Sarbanes Oxley the auditors not only attest to the statements but they also certify the internal controls.

[DeGrief]

MF Global execs say don't know where the money is
http://finance.yahoo.com/news/mf-global ... 54579.html

This just really really really continues to astound me.

Perhaps you've all seen it, but I'm reminded of this New Yorker cartoon: http://www.condenaststore.com/-sp/Oh-th ... 44116_.htm

[Tuxx]

MF Global paid bonuses hours prior to filing for bankruptcy.

http://www.telegraph.co.uk/finance/news ... uptcy.html

[Grt2bOutdoors]

One more reason why I don't play with margin. Those who play with fire are bound sooner or later to be burned by it.

Great post - Beth.

[Geologist]

There is an inconsistency. If the customer money was part of re-hypothecation, then why don't MF Global executives know this. If they know it (and it is legal under the customer agreements), then why not say so. If, on the other hand, there was much chaos in the last week, then maybe they don't really know.

[trico]

Missing money in this amount sounds like a Brenie ponzi scheme. In a couple of months he will say the devil made be do it.

[Fallible]

MF Global execs say don't know where the money is
http://finance.yahoo.com/news/mf-global ... 54579.html

This just really really really continues to astound me.

Perhaps you've all seen it, but I'm reminded of this New Yorker cartoon: http://www.condenaststore.com/-sp/Oh-th ... 44116_.htm

I've seen the cartoon and it does seem perfect for the occasion - just change it to, "Oh, that $1.2 billion." :roll:

[rokidtoo]

According to the linked article: "MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation." The article also discusses the global implications of this regulatory loop-hole and how it was used by Lehman, and is currently used by financial firms, to create leverage. MF Global appears to be the tip of another iceberg.---Jim

http://newsandinsight.thomsonreuters.co ... n_scandal/

[mosu]

According to the linked article: "MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation." The article also discusses the global implications of this regulatory loop-hole and how it was used by Lehman, and is currently used by financial firms, to create leverage. MF Global appears to be the tip of another iceberg.---Jim

http://newsandinsight.thomsonreuters.co ... n_scandal/

So two days ago! See above. It seems likely, based on news reports today and yesterday, that these were in fact segregated funds and not re-hypothecated assets.

[Naikansha]

Thanks for these links - lots of very important information. NY Times also has some good ones. From what is being described, it seems like it's now not just MF Global but a more general Wall Street practice. The discussion of the legal differences between US and Brits that encouraged corrupt repo system helps explain Brits refusal to sign euro treaty. Can this be the end of hedge funds?

[rokidtoo]

So two days ago! See above. It seems likely, based on news reports today and yesterday, that these were in fact segregated funds and not re-hypothecated assets.

Not according to this 13 Dec ABC News article. "Pekarek said he suspects that U.S. and U.K. customer funds were "re-hypothecated," or pledged as collateral for a loan, through one of MF Global's British subsidiaries. Canadian customers were reportedly refunded their account proceeds within two weeks of the firm's collapse." The Calculated Risk blog article cited by Beth earlier in this thread speculates that the Canadian funds were quickly returned because re-hypothecation is not permitted in Canada.

http://abcnews.go.com/Business/mf-globa ... uiBulbNlaw

Do you have a citation that states that re-hypothication was not a factor in the MF Global scandal? For me, re-hypothication is a more satisfying explanation for the disappearance of $1.2B in customer money than Corzine's "I simply do not know where the money is, or why the accounts have not been reconciled to date," ----Jim

[mosu]

Do you have a citation that states that re-hypothication was not a factor in the MF Global scandal? For me, re-hypothication is a more satisfying explanation for the disappearance of $1.2B in customer money than Corzine's "I simply do not know where the money is, or why the accounts have not been reconciled to date," ----Jim

Sorry - thought I was in the other MF Global thread. Here's my post from the other thread:

From the testimony today by Terry Duff, Executive Director of CME:

Our auditors returned on Sunday, October 30th because we learned from the CFTC that the draft segregation report for Friday, October 28th, which had been provided to the CFTC that day, showed a $900 million dollar shortfall in segregation caused by an “accounting error.” Our auditors, working with the CFTC, devoted the rest of the day and night Sunday to find the so-called accounting error. No such error was ever found. Instead, at about 2 am Monday morning, MFG informed the CFTC and CME that customer money had been transferred out of segregation to firm accounts. After receiving this information CME remained at MF Global while MF Global attempted to identify funds that could be transferred into segregation to reduce or eliminate the discrepancy. A CME auditor also participated in a phone call with senior MF Global employees wherein one employee indicated that Mr. Corzine knew about the loans that had been made from the customer segregated accounts. CME Group has provided this information, the names of these individuals to the DOJ and CFTC who are investigating these matters. Transfers of customer funds for the benefit of the firm constitute serious violations of our rules and of the Commodity Exchange Act.... etc.

It's almost certainly not a re-hypothecation issue if it was segregated customer accounts that were affected.

[rokidtoo]

This article seems to imply that MF Global (what a name!) may have used the customer funds in segregated accounts for emergency re-hypothecation.

"When confidence in the firm dropped, the counterparties funding the complex repo-to-maturity trades likely demanded increased collateral from MF Global and perhaps, mistakenly or otherwise, MF Global posted segregated customer funds as collateral. When MF Global went under, the other banks seized the collateral and poof, there went the customer funds."

http://articles.businessinsider.com/201 ... l-customer

I'll be interested to see how this all plays out. -----Jim

[nisiprius]

So, when you apply for a margin account, not only do you sign a statement swearing that you're a big boy and understand the risks you're taking,and not only are you signing up to be allowed to do things in your account that ordinary clients can't do... but you are also signing off on a 55-page agreement about things the brokerage can do in your account that they can't do in an ordinary client account? Interesting if I'm understanding that correctly. Do people look at that agreement?

[Naikansha]

It seems there are different rules in the US and Britain regarding how much collateral the brokerages may need to make these bets, which is apparently why MF Global (and others) engaged in these practices in London offices.

[xerty24]

So, when you apply for a margin account, not only do you sign a statement swearing that you're a big boy and understand the risks you're taking,and not only are you signing up to be allowed to do things in your account that ordinary clients can't do... but you are also signing off on a 55-page agreement about things the brokerage can do in your account that they can't do in an ordinary client account? Interesting if I'm understanding that correctly.

Yes.

Do people look at that agreement?

I read it. I doubt most people do - they're in too much of a hurry to start day trading on margin.

[rokidtoo]

but you are also signing off on a 55-page agreement about things the brokerage can do in your account that they can't do in an ordinary client account? Interesting if I'm understanding that correctly. Do people look at that agreement?

Plus, they might do things that are prohibited by the agreement - like post the assets in your segregated account as collateral and then lose those assets when they go bankrupt. Actually, I'm surprised they didn't think to do this with mortgages, i.e. re-hypothecate your house as collateral to make leverage bets. If they lose, you lose your house. :lol -----Jim

[zotty]

So, when you apply for a margin account, not only do you sign a statement swearing that you're a big boy and understand the risks you're taking,and not only are you signing up to be allowed to do things in your account that ordinary clients can't do... but you are also signing off on a 55-page agreement about things the brokerage can do in your account that they can't do in an ordinary client account? Interesting if I'm understanding that correctly. Do people look at that agreement?

The vanilla VBS agreement has a rehypothecate "feature"

http://www.vanguard.com/pdf/v718.pdf?2210037180

VBS may rehypothecate any Securities or Other Property held, carried, maintained, or in the possession and control of VBS.

YIKES!

[zotty]

I hope that I am misreading something.

To view the agreement from the web site:

https://personal.vanguard.com/us/litera ... countforms

Under Personal -> Vanguard Brokerage Account Agreement

PDF search for rehypothecate

[rokidtoo]

The vanilla VBS agreement has a rehypothecate "feature"

I'm sure Vanguard would argue that the ability to rehypothecate is a feature. This link implies that rehypothecation supports lower cost accounts.

"In an interesting twist, segregated accounts, particularly for large institutional customers, are more expensive for the customer, because the bank wants compensation for losing a source of collateral."

http://articles.businessinsider.com/201 ... l-customer

-----Jim

[zotty]

The vanilla VBS agreement has a rehypothecate "feature"

This link implies that rehypothecation supports lower cost accounts.

It's an unqualified grant of right.

It doesn't restrict rehypothecation to margin accounts and it doesn't restrict it to my posted collateral. It's a completely unqualified statement that allows my VBS assets to be levered by VBS. TIPS, Bonds, Vanguard ETFs. According to this agreement,[edit: typo] it's all fair game.


Am i just being tin-foil propeller head? I mean, at the very least, the contract is misworded? If the law doesn't allow this usage, then why is it in the agreement without qualification?

Anyone else?

[Beth]

Zotty, The section you cite does appear in a section captioned that it relates to "security" for present/future indebtedness. Captions, though, are meaningless in a contract. So the sentence you cite, which stands alone, would seem to be somewhat open-ended. However, note that the section specifically exempts Retirement Accounts. I, for one, am still having difficulty understanding how/whether an investor can, in fact/practice, lose title to his/her property in the absence of some kind of loan event, e.g., buying on margin. If a cash trade has settled, my understanding is that VBS (or any broker) is merely a custodian of your property. I don't see the word "custodian" or "custody" in the section you cite. Under a non-margin scenario, then, how would a broker have the basis to assert an interest in your property unless and until you initiated another trade and it hadn't yet settled, i.e., unless and until you did something to create at least a temporary indebtedness? Another issue relative to how concerned investors should reasonably be, it would seem to me, is whether the broker trades proprietarily, which is how the MF (Man Financial btw) matter got underway. I don't know for sure but it would seem that Vanguard's structure suggests it does not. But then, VBS and VG are distinct entities. I hope someone who understands this better than I can chime in. It's mainly of academic interest to me personally since I don't trade on margin and hold only a few brokered CDs in my non-retirement VBS account. But still.... Regards, Beth

[zotty]

Zotty, The section you cite does appear in a section captioned that it relates to "security" for present/future indebtedness. Captions, though, are meaningless in a contract. So the sentence you cite, which stands alone, would seem to be somewhat open-ended. However, note that the section specifically exempts Retirement Accounts. I, for one, am still having difficulty understanding how/whether an investor can, in fact/practice, lose title to his/her property in the absence of some kind of loan event, e.g., buying on margin. If a cash trade has settled, my understanding is that VBS (or any broker) is merely a custodian of your property. I don't see the word "custodian" or "custody" in the section you cite. Under a non-margin scenario, then, how would a broker have the basis to assert an interest in your property unless and until you initiated another trade and it hadn't yet settled, i.e., unless and until you did something to create at least a temporary indebtedness? Another issue relative to how concerned investors should reasonably be, it would seem to me, is whether the broker trades proprietarily, which is how the MF (Man Financial btw) matter got underway. I don't know for sure but it would seem that Vanguard's structure suggests it does not. But then, VBS and VG are distinct entities. I hope someone who understands this better than I can chime in. It's mainly of academic interest to me personally since I don't trade on margin and hold only a few brokered CDs in my non-retirement VBS account. But still.... Regards, Beth

Thanks Beth. The magic word is "(re)hypothecated", so you have to be hypothecated first, and that requires margin activity. Thankfully, a smidge of a vanguard ETF bought with real money is safe from re-confiscathication by the brokerage firm.

[hicabob]

so the current theory is "the money vaporized".

http://www.nypost.com/p/news/business/m ... tKEQvrzjdI

[beareconomy]

Why didn't anyone ask jack about the re-hypothecation issue yesterday at the forum yesterday along with mr. Volcker?

[LH]

yeah I saw that too "vaporized" out of segregated accounts.......

[FafnerMorell]

Well, after all his years as a politician, Corzine is probably mystified - he's used to billions and billions of dollars just "vaporizing", and this is the first time the media has ever acted upset about it.