In Search of the Perfect Investment

If your bank goes belly up, your deposits are protected (to $250,000) and you will get your money back within two to three weeks — time for paperwork.

If your brokerage company goes belly up, you are theoretically protected to $50 million. BUT who knows when you’ll get your money back — if ever.

MF Global was a commodities firm with clients (like farmers) trading commodities — just as you and I trade common stock at Fidelity,  Schwab, TD Ameritrade, etc. Farmers hedged their crops at MF Global.

MF Global went broke because Jon Corzine, a seriously flawed man,  changed the company from being a commodities broker trading commodities for its clients to a gambling casino for Jon Corzine using money he borrowed. Whether he also used customer money to gamble is not clear, yet.  What is clear is that customers with trading (i.e. brokerage) accounts do not have their money back — but should.  Customer money and gambling money should be kept separately. That’s the law. Corzine is arrogant enough to think he’s above the law. But he’s not.

The simple moral of this horrible story is that you and I should not keep large amounts of our net worth with any single brokerage institution, just as we don’t with any single bank. Calling into question the viability and honesty of all our financial institutions (as I’m doing) is really depressing. But we live in a weird world where bankruptcy lawyers make out like bandits, draining their chapter 11 prizes of all their assets and the common man gets screwed.

There are two pieces you should read. First, This comes from a blog called Jesse’s Café Américain.

Are BofA and JP Morgan Really Blocking the Return of MF Global Customer Money?

“Once you have their money, never give it back.” — Ferengi, First Rule of Acquisition

Here is a white paper that suggests that JP Morgan and Bank of America are trying to subordinate the customers’ claims to their stolen funds and keep them in a pool of money to be distributed to the creditors by the Trustee, without any representation for the customers.  This is said to be the cause of the confusion and delay in the return of the funds.

There are also claims, not substantiated as far as I can tell, that the positions and assets that were taken from customers were liquidated in a manner so as to maximize the gains to other market participants with advantageous knowledge of those positions.  That is a serious charge that I don’t quite understand. I hope the regulators will look into the transfer of customers assets and exactly how they were treated.

I hope that the regulators and the Justice Department can sort this out quickly, and prevent any further loss of confidence in the exchanges and financial system on the part of their customers.

I think it is fair to say that this entire situation has been handled badly.   Some of the early suggestions that customers would have to take haircuts to ‘share’ the loss with each other, that the funds would be frozen for years, and the general secrecy that has blanketed this has contributed greatly to the anxiety felt by the more aware among investing public at large.

This is of concern even to those who have no funds involved in this, and have nothing to gain or lose from it personally. It should give a chill feeling to all customers, as it seems to be a shocking breach of fiduciary responsibility. It is not wise to wait until one’s own funds and assets are confiscated before asking questions and demanding answers.

As someone else has said, if a brokerage can take customer funds and assets at will, and use them for their own undisclosed speculation, and defy all guarantees, and neither they nor their accomplices are held accountable, then nothing is safe.

This white paper is obviously being told from the perspective of the customers and their attorneys.

I would be interested to hear the story or the party who received the customer assets. But as far as I know, they are silent, and their very identity remains a carefully guarded secret.

WHITE PAPER (Excerpt)
Background, Impacts & Solutions to MF Global’s Demise
By John L. Roe & James L. Koutoulas, Esq.
November 10, 2011

The failure of MF Global has wide ranging consequences for the American economy and its bankruptcy is being handled in a manner that is making these consequences much worse than they need to be. The freezing of customer segregated funds is having a chilling effect on global financial markets. It also has a less obvious but significant impact on the day-to-day operations of farmers, mining operators, ranchers, and other commodity consumers and producers…

In fact, the only person served by the current bankruptcy process is the Trustee who has already submitted bills to the MF Global estate at $891/hour for his time and an average of approximately $500/hour for his staff. This is the same Trustee that spent 3 years working on the Lehman bankruptcy and billed the estate over $160 million dollars despite not returning any customer funds.

If this bankruptcy is managed the same way as Lehman’s, it will be the end of the United States as a viable jurisdiction for commodity trading. Congress should use whatever power it has to prevent this from happening…

By subordinating customers with collateral in segregated funds to creditors of MF Global’s estate, the Trustee is essentially making the creditors the beneficiary of a criminal act. If MF Global comingled segregated funds with corporate assets, it was a criminal act. Paying such a creditor’s claim with a portion of those comingled funds would make them a beneficiary of that crime.

Paying JP Morgan with an Iowa farmer’s money is not only morally and legally wrong, it risks the future of the American economic model. Who would want to hold a commodities account in the United States ever again? Considering the MF Global’s clients have no representation on the creditors committee, but the big banks do (like JP Morgan and Bank of America), that is exactly what will happen without intervention.

Industry groups and regulators argue that the commodities trading industry is able to function with lighter regulations than securities trading because customer accounts are segregated from firm assets. However, in the MF Global case, there is $633M in these segregated client funds that are unaccounted for, either due to sloppy accounting or nefarious activity conducted by the firm. This has resulted in a compromise of the integrity of the segregated accounts system, and a complication of the bankruptcy proceeding by involving a number of parties with little to no experience in commodities.

The bankruptcy process has been delegated to SIPC, the securities insurance regulator, after it petitioned the bankruptcy court to begin a liquidation proceeding of MF Global’s broker-dealer. SIPC stands for “Securities Investor Protection Corporation.” It was created by the Securities Investment Protection Act of 1970 and was designed to protect owners of securities in a similar way to how the FDIC protects bank depositors. However, the vast majority of customer assets affected by this bankruptcy are NOT securities, rather they are cash and commodity futures contracts, and SIPC’s attorneys have limited experience with commodity futures contracts. Despite the fact that about 11.6% of the segregated funds have yet to be accounted for, 88.4% have been. There is no reason, whatsoever, that these funds should not be immediately released to their rightful owners.

Read the rest of the white paper. Click here.

Buffett bought 5.5% of IBM this year. Nice chart.

I listened to Warren Buffett talk about his IBM buy on CNBC this morning. It was typical Buffett. “I like it, because I like it.”

The new iPhone 4S — three things:

1. It’s significantly faster. The new iPhone 4S has the same bigger microprocessor as the iPad 2.

2. Its camera is much better. Pictures are clearer. There is more detail in the shadows. A typical iPhone 4S photo is 60% larger than an iPhone 4 photo.

3. Siri. You can say, “Dial Susan” and it really will.

Harry Newton who smelled the weekend’s roses by admiring Sunday’s sunset in mid-state New York. Neat?

Camera: Canon G10, with a little contrast help from Adobe’s Photoshop CS.