MF Global is the Canary in the Gold Mine

In this crazy market we see companies have learnt how to pray on others for self-preservation, to remain standing the next morning. The long term survival however is not realized, whereby they eventually fall from this short view behaviour. If all the firms participating in the particular market have the same strategy, it leaves the industry falling apart as customers will no longer want to participate in that market.

When growth and expansion beyond means is the desire, an overstepping of the natural balance occurs. We see this in the case of MF Global Inc. who tried this tactic which resulted in their demise. The institution took segregated account savings from individuals and invested it in the derivatives market at 40:1 odds and lost. Individuals were financially hurt and have yet to have proper resolutions towards their damages.

This story is not a new one as we have seen from the savings and loans crises in the 70s. The Glass–Steagall Act was introduced that outlined how financial institutions were to govern themselves in the market. Since then, segregated accounts were off-limits and not to be touched for the purpose of investing. This however was repealed by the Bill Clinton administration in 1995 thus allowing a repeat starting with the mortgage crises in 2008.

Unknown elements in the story are complicating the situation. There have been discussions around the silver holdings of MF Global and the speculation that this was orchestrated by the ComEx and certain financial interests (such as JP Morgan) as they are feeling the squeeze from the silver shorts. It is said that Corzine was ordered to conduct the losing bet in order to divest the corporation of its silver holdings. This starts sounding very much like a fantastical conspiracy, until we look into the type of bet that was taken. Not only did it involve the segregated funds, but they decided to leverage over $40 of liabilities for every $1 of assets in risky sovereign debt trades at the urging of John Corzine.

When we look at Corzine's background, we see he has a net worth of over 175 million dollars, a former Governor, former US Senator, and former co-CEO of Goldman Sacks. It is unfathomable to think that pure ignorance is at play but rather criminal intent. Additionally, there was supposed to be compliance controls, not just within MF Global but with other organizations. This would include PwC as the auditor and entity that setup the SOx controls within the organization. JP Morgan would also be a complacent party as they were the primary banker to MF Global and the trustee on the bond issue. The bankruptcy has been structured to put JP Morgan first to paying the customers.

MF customer funds should always have remained segregated and for that reason they should be paid first and made whole. Louis Free, the trustee for the parent company MF Global Holdings Ltd. is arguing against this stance. He states that this shouldn't apply to brokerage liquidations and that the creditors should be paid first instead of the customers. Of the missing $1.2 billion (or $1.6 billion depending who you ask) dollars, the only individuals that I've heard of that have been made whole were Canadian citizens, due to the laws which cover investing activities in Canada and those benefiting from this past weekend's announced settlement. A hedge fund manager has been ordered to pay $405 million to the victims whereby a portion of the investors will receive about 40 per cent of their losses, and up to $5 million.

The organizations to which the responsibility of control in a scenario like this falls to the CME Group and the Federal Deposit Insurance Corporation (FDIC). The CME is tasked to ensure that member firms in the market of exchange abide by the laws to protect the investors, and in the event of an incident, they are to make good on the losses. The FDIC is tasked to maintain stability and public confidence in a nation's financial system by insuring deposits. However, what we see is that the CME didn't protect the 60k clients invested in commodities and refused to cover their loses and the FDIC has also remained mum on the subject.

This is setting precedence not deterring individuals and corporations from committing financial fraud. With the no resolution or remedies proposed, the precedence is that the customers are the last in line when these firms go bankrupt to collect on assets. This becomes an unnatural order with serious ramifications that will trickle through the finance world, starting specifically with the futures market. The purpose of going into the futures market is to reduce risk. Investors will not want to be burnt twice, forcing the collapse of capital flowing through this market. The knock-on effects of introducing futures risk will move into a more physical market of how farmers farm, how miners mine, how oil gets explored, etc. 

The markets are starting to destabilize and it will be more evident when credit starts contracting. MF Global is the canary in the silver and gold mines, just as the canary was used in the coal mine to detect for toxic fumes. The toxic fumes are symbolic of the toxic credit derivatives that have been plaguing companies. MF Global being the next victim will trigger the next leg down for the financial crises we are entering. They have destroyed the understanding of broker dealers acting as independent custodians for customer funds.

We can take a lesson from someone who knows the inside workings of the financial system, Mr. Berni Madoff himself, who stated "the whole government is a Ponzi scheme". When more and more individuals start to realize this we'll see a credit contraction happen starting with the derivatives market. From there it will collapse the miscellaneous assets, securitized debt/stocks, sovereign currency such as Bonds, then finally the only credit left standing would be paper fiat currencies themselves. After this, precious metals such as silver and gold will be the last store of wealth and meet the definition of money/currency.

Trace Mayer elaborates on this concept in his eBook "The Great Credit Contraction" in which he so succinctly states that 'the system does not collapse but 'evaporates'. This is very accurate when we see statements such as that from the WSJ where they say the stolen MF Global funds have been 'vaporized'. This is a sign that we have reached the first stages of this credit contraction, soon we will see banks start to show their insolvency. When we realize that they can't all be bailed out, there are going to be bank failures pushing us into the next level down of contraction.

Drastic and draconian measures will be taken to keep the system propped up. Argentina exemplifies these measures with the passing of their version of the NDAA, where you can get 15 years in jail if they don't like how you're taking your money out of the system. This is due to their broad definition of terrorism that now includes taking money out of the bank.

This contraction period starts creating waves closer to Main Street where the purchasing power of the fiat currency will continue to diminish and will be noticed more and more by regular citizens. Eventually we can soon see bank holidays such is currently the case in Italy. Currencies will be revalued and specifically devalued where the value of the savers money (read savings) will be made to cover the bad debt. This will be called the greatest robbery in history with the likes of JP Morgan and Goldman Sachs at the helm.