Christopher Elias at Thomson Reuters describes how MF Global used its client’s money to make their own bets. They took assets which were restricted in one jurisdiction and by legal hocus-pocus transferred it to London — another jurisdiction where no such encumbrances applied. Thus at a stroke the monies were theirs to handle.
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. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
There was no act of desperation. It was how business was done. It was how perhaps $1.2 billion was lost.
Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. … But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).
Things were fast and loose in Old Blighty, but that is how London operates; and doubtless had MF Global’s clients wanted to play in such a heady atmosphere they could have taken positions in London themselves. But having put their money in New York they probably expected it would be handled by New York rules, which only goes to such that you can never take anything for granted unless you read all the fine print, check the telephone line for bugs, inspect the space behind the curtain for lurking assassins and look under the carpet for venomous spiders.
The problem was simply this: there’s the corner bank and there’s Las Vegas, and each is upstanding it’s own sphere. What might be horribly wrong is if your local banker takes your savings and goes to Las Vegas. You might not expect that. How did MF Global pull of this stunt? Well they put the pea under a shell and away it went.
Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules. …
In fact this is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished.
Vanished. As in “Gone With the Wind” and “Now You See It, Now You Don’t”.
But don’t expect Jon Corzine, a former CEO of Goldman Sachs, Democratic Governor of New Jersey and a former US Senator to share the secrets of this impressive act of legerdemain. Lawyers awaiting his appearance at a Congressional investigation into MF Global believe Corzine will remain silent as the tomb — take the Fifth in fact — before he educates the public for free.
Attorneys who specialize in congressional investigations said they expect Corzine’s silence will continue.
“Given the pending criminal inquiries, I’d advise him to take the Fifth,” said Mark Paoletta, former chief counsel for the House Energy and Commerce Committee who is now a partner at the Dickstein Shapiro law firm in Washington. “There’s too much potential downside to testifying.” …
Lawmakers, federal regulators and the Justice Department are all investigating MF Global’s demise and trying to find as much as $1.2 billion in customer funds that have gone missing.
You wouldn’t expect to lose money with the former Governor. Corzine knew all the best people. Men of unimpeachable characater. MF Global was represented in public by the topnotch public relations firm Teneo, which counted in its ranks Bill Clinton and Tony Blair. “Teneo served as a personal p.r. firm and political consultant for then-MF Global CEO Corzine, the former governor and senator from New Jersey. It also offered advice on European financial investments — like the ones that ultimately led to MF’s collapse in October.”
But that should only prove Corzine’s good intentions, because if Bill Clinton couldn’t see the Euro collapse coming, then who could? Mischance may happen to anyone. But was it mischance? David Beatty, battlecruiser commander at Jutland, suspected something out of the ordinary when he watched his battlecruisers blow up, one after the other, like giant firecrackers. “Chatfield,” he said, “there seems to be something wrong with our bloody ships today.”
Might there be something wrong with the financial system today?
Apart from the specific damage caused by the MF Global collapse, the debacle must raise some doubts in the minds of investors as to the probity and integrity of some parts of the financial industry. The “loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet” is worrisome in toto, but one phrase, the “many others” is more worrying than the whole. With financial skeletons rising from the graveyards in every direction the hapless investor must feel a little like Bruce Campbell, who in a horror movie, tries to escape the clutches of malevolent forces without much success. There are just too many of them.
But thankfully, those things happen only in the movies. In real life things are so much better.
Bruce, it’s ‘Klaatu Barada Nikto’ not ‘Re-hypothetication’
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” It was how perhaps $1.2 billion was lost.”
Money is never lost–unless there is radical devaluation–
The in this matter $1.2 B was transferred to other peoples wallets–
People have the illusion that money is ” lost” on the stock market
-it is not lost
-it goes to insiders who move it to gold and oil– etc
Corzine knows where the money/wealth went–he is not going to tell unless they give him immunity.
In the ENRON case they would not give the CEO immunity–so–while he was on appeal he killed himself
If you are under indictment-or your case is on appeal–and you die–then the case ends–relatives and the un indicted take the money and run
-to Switzerland or Israel
Dollars are fungible –but if you do not have Swiss or Israeli citizenship then you cannot easily profit from these scams and frauds–and many do profit.
No one has been extradited from Israel or Switzerland for the massive fraud they have committed in the US
–they are the elites and they are protected
It will be noticed that Corzine is being called up before a legislative agriculture committee and pleading the Fifth may keep him out jail….for a little while. One of the main concerns of the committee is the effect this debacle is going to have on food prices. Bulk producers and sellers use puts and calls to put tops and bottoms on their prices as a form of insurance. If they can no longer trust the system not to rip them off in the commodities trades then they’ll have to raise prices for self insurance. Voters and campaign contributors are not going to like that.
The people in the Fed and other agencies who knew that US regs were being bypassed in this manner for decades may be starting to sweat a bit. They may find themselves thrown under….the tanks.
Victor
“…$1.2billion was lost”
In all of this, you must distinguish between the Sum Assured and the premium for the Sum Assured. So when my life insurance company collapses, you must distinguish between my $1,000,000 Sum Assured and my miserable $100 premium.
Both lost, of course, but the media will report it as $1m, an actuary as $100. Painful no doubt, but not the headline figures that are bandied about.
Derivatives will be with us forever. We are only now beginning to develop a vocabulary to deal with them. To coin a phrase – “in the end was the Word”.
The real problem is that new and valuable derivative developments are now caught up with very old practices, having a hamburger today and paying you tomorrow, or – “Here’s a farmer that hanged himself on the expectation of plenty.” Shakespeare’s Macbeth.
ADE
Men of unimpeachable character
But of impeachable office, and that is their problem. The crooks are TBTF. If they were just greasy hypocritical businessmen then the system would chew them up and spit them out. In the original US system the Electoral College was supposed to include the leading intellectual spiritual legal and commercial figures in each state, who would then select the most worthy politician to vote for. Similar worthies were to be selected by the state legislatures to serve as the state’s ambassadors in the US Senate. The politicians were to be found in the state legislatures and the US House of Representatives. That was where the money was disbursed.
Now we have politicians getting paid off by moving into sinecures in big business, for years the Saudis have been running a retirement system for compliant politicians and foreign service officers, and businessmen buying offices. It is an importation of a European system, like the English “rotten borough” into America. The end of this would be foreign money interests not simply renting, they don’t even stay bought, corrupt politicians but grooming and installing one of their own. Imagine if the Muslims found some dubious nonentity and did that. Nah, it could never happen. Oh wait.
Irrational fear of zombies or other evils can induce paranoia. What do you do when the irrational turns out to be real? Fear and the potential for paranoia is hard wired into us. It must have some survival value. During normal times it should become an impediment to survival in a competitive setting, since it distorts the interpretation of signals. Coward-Pliven called for deliberately inducing bad signals to induce paranoia and crash the system.
“It will be noticed that Corzine is being called up before a legislative agriculture committee and pleading the Fifth may keep him out jail….for a little while.”–#2, toadold.
I don’t think it’s going to jail that scares them.
Obama just held a $38,000 per plate fundraiser in Manhattan populated with the scions of the financial services industry. There were no empty seats.
If Federal government employees held a Goldman Sachs alumni bash they would have to rent the L.A. Coliseum.
The raw material for Wall Street is money and the Fed supplies it on demand with no oversight or audit liability. We are being had. Ron Paul may be off the deep end on many things but he is spot on with how destructive the Federal Reserve System has been to liberty and the American economy.
Ahhhh, Wretchard, you have revealed yourself as a Bruce Campbell fan (first Bubba-Hotep and now another Army of Darkness quote) but you missed the quote might just be the most accurate one when describing our “elites”. When Bruce returns the Book to the wise man and is asked if he had said the the words correctly he confesses his failure, the wise man responds; “Dung-eating fool, you have doomed us all”. (I can’t find a clip, sorry)
That phrase should be driven into the heads of any and all Keyenesians everywhere, it shouold be the sound-track that they live their lives by for the rest of their miserable lives.
For they truly have doomed us all.
As I have pointed out many times (and will once more) the guys writing the rules are making 80K a year or so. The guys finding loopholes are making.. it looks like 1.2 BILLION or so. Who do you suppose will win that one?
Time to look again at how wall street is regulated. The current scheme isn’t working.
Do we even need to regulate wall street? There are ways besides regulation to rein in the greedy. What is needed is for somebody to figure a way to keep the baby while tossing the bath water.
This is just not fair. I want Obama to make things fair! And if he can’t make things fair, then make them average! Yes, average. And by average, I don’t mean mean. Because mean is not average. Sometimes the mean is confused with the average because the average just seems mean, especially when it happens to you. What I mean is…wait. You got Good. You got Fair. You got Poor — Poor written in red letters. Where is average and where is mean? Average comes between Fair and Poor. When you are at average it ain’t Fair and it sure ain’t Good and it might easily be poor. When you are at average, and look up, you see mean. So mean comes between average and Fair. But when you are at poor, and look up, you see mean before you see average. So mean comes between poor and average. But hold on! Mean also comes between average and fair so mean is found on both sides of average! That is why the two are easily confused. Below Poor — written in big red letters — you got meaner still. Beyond that, you got — or get — Dead. When you are stuck on dead it is hard to come back.
So it is like I was saying: What I want Obama to do is make things fair, to make it all above average and beyond “the mean.” Right now we are stuck on mean, and headed toward meaner still. Beyond that, as I mentioned before, is Dead. For this situation we got George Bush to blame and Obama to thank.
My advice to Obama is: He should get us on the Fairway. And he should keep us on the fairway. Do not go into the rough! Avoid the double-dip ditch. Don’t get bogged down in the sand trap! Head for the re-election green and shoot par. Just take par out back and shoot it. Don’t be swayed when par pleads for his life! Just say, “I do this for the children!”
But in the meantime, until you can shoot par and really mean it, avoid the temptation of the down hill course. Because on the down hill course the ball always seems to go farther. Or should I say further?
As bad as the missing client cash is…there is worse. The estimates of the client cash balances ‘missing’ vary between 11% and 20%. Jon Corzine and MF Global also pledged client owned assets against a last minute loan. When MFG went under, the lender (believe JPM Chase) seized the collateral even though it was not MFG’s to pledge. 100% of it is missing.
Clients of MF Global don’t really take delivery of energy or agricultural or base metal futures contracts, there is not a good way for them to store 5,000 bushels of wheat, or 55,000 gallons of crude oil or several tons of steel. But precious metals, silver and gold, are very storable. Many MFG clients had taken delivery on metals contracts, I myself had one, I know several others, and know a broker who had a client with 20 delivered silver contracts… 100,000 ounces of silver, over $3mm worth. There was even more gold stolen.
At least 1.5mm ounces of warehouse silver was ‘missing’ except not an ounce of it was actually missing. There was no break in, no covert theft, no bars physically moved, just the paperwork of who owns which bars got suddenly fuzzy to the detriment of small individual investors and benefit of JP Morgan.
I took delivery to limit counterparty risk, and paid to store it for a year. Jon Corzine illegally pledged my assets against a loan, and JPM seized it. It was theft by MFG and fraudulent conveyance to JPM, but the ‘trustee’ supposedly representing my interest as a customer, who happens to have a long relationship with the big Wall Street banks, can’t quite figure out how they managed to steal my property and get it back. It is not hard, that warehouse, these serial numbers, they’re mine. But too complicated to get resolved in only two months. While there is apparently a little gray area where customer segregated funds can be ‘segregated’ and then commingled and lost. There is no gray area about my property. MF Global has no legal ability to pledge my assets for a loan. But now laws limit the little people, and serve the powerful.
It is as if you have a paid off house, an identity thief applies for and receives a mortgage against your paid off house, takes the proceeds of the loan to Vegas. When the thief doesn’t make payment, the bank forecloses on your house with no mortgage. When you prove that the mortgage was an illegal fraud, the foreclosure illegitimate and catch the identity thief, the banks says, well, the thief blew the money in Vegas, so we’re keeping the house. And the prosecutor/lawyer supposedly representing you, who happens to have long professional ties to both the thief and bank, says, this is just too confusing, we will have to just leave things as they are, sorry, you are out a paid off house.
I encourage people to read Gonzalo Lira’s ‘The coming middle class anarchy’ Whether called ‘the 1%’ or ‘the powers that be’ when they push things too far, and they have, things will get ugly. Very ugly. I do not want it, it is not a good thing, but things will go from ‘occupy wall street’ to execute wall street, and there will be lamp post decorations in DC as well. The American revolution was just about the only revolution that ended in liberty. Virtually every other one ended in rivers of blood. We are heading towards another revolution, because things as they are too corrupted to survive.
I kept myself as far to the periphery of the financial system as I could and still be in it, I owned fully paid for specific serial number bars in a specific warehouse. I had the right to go pick them up. And they got stolen with impunity. Civil society is dying, or more precisely, killed by the connected elite. They will come to regret it, but so will we all.
Stoicheon: note the news report recently that over half of the US Congress today is made up of millionaires. I don’t say this to start some class warfare claims, but simply to point out that the “loopholes” you talk about are all put their INTENTIONALLY by people who are slumming in their so-called “public service” jobs just so they can be in a position to influence the outcomes of their REAL financial interests.
The more rules, the more complexity, the more the system can be milked by everyone involved. I’m in the legal business, and have to say that the entire legal business DEPENDS on the ambiguities, loopholes, and outright contradictions in the law. You think those are there by accident, when 1000 lawyers or more are involved in the writing of every new law? Chaos is our bread and butter – that’s how the profession makes its living! If the law was easy to understand and simply to apply, would any ordinary person or business need us? But now no one dares to make even a trivial decision without paying some lawyer somewhere to say grace over it first.
Stoicheon: note the news report recently that over half of the US Congress today is made up of millionaires. I don’t say this to start some class warfare claims, but simply to point out that the “loopholes” you talk about are all put their INTENTIONALLY by people who are slumming in their so-called “public service” jobs just so they can be in a position to influence the outcomes of their REAL financial interests.
The more rules, the more complexity, the more the system can be milked by everyone involved. I’m in the legal business, and have to say that the entire legal business DEPENDS on the ambiguities, loopholes, and outright contradictions in the law. You think those are there by accident, when 1000 lawyers or more are involved in the writing of every new law? Chaos is our bread and butter – that’s how the profession makes its living! If the law was easy to understand and simply to apply, would any ordinary person or business need us? But now no one dares to make even a trivial decision without paying some lawyer somewhere to say grace over it first.
We need to face the fact that our elected Representatives, including most Republicans and our last President George Walker Bush, have created a financial system where it is legal for their preferred donors to steal their customers money.
I repeat. It’s legal to rob their customers of oodles of money and rob them blind.
In what universe is it legal to transfer the jurisdiction to the rules that apply to your money?
Well, I guess in our securities universe courtesy of our politicians. If it’s legal to transfer the jurisdiction to Great Britain, why not Zimbabwe while we at it?
In related news, a few days ago Denninger reported:
“Recently Bank of America transferred a bunch of derivatives into their banking arm. “A bunch” means somewhere around $80 trillion worth. Now pay very careful attention, because part of the bankruptcy “reform” law in 2005 placed derivative claims in front of depositors in a business failure – including a bank failure.”
Got that? In case of default at B of A. the FDIC now has to bail out $80 trillion in derivatives before it gets to your deposits. Good luck with that. And B of A is in trouble these days. If you have any money at B of A get it out as fast as you can.
In fact get your money out of any TBTF. Now.
But the larger game afoot here is that by placing the derivatives in front of deposits, the TBTF has corrupted the FDIC to the point where it may be impossible, unless the law is changed, to take down into Bankruptcy any of the Big Banks because none of the depositors would get their money.
Essentially, the TBTF have effectively blocked cleaning up Wall Street.
And who did this to us? George W Bush and the Republicans.
I cannot wait for the Martha Stewart perp-walks to begin.
Ashcroft’s selection of a beloved stewardess and television personality to stand in for the Corzines-to-come was brilliant casting. It played to the affections of America’s family keepers by drawing a stark contrast: we loved Martha the home-maker, and we chafed at her public arrest and incarceration – but we hate, or are indifferent to, a fat-cat, big-city Democrat-party schemer, and will only despise him more after his public humiliation in court.
The lure that this remarkable contrast presents to America’s salacious, politicized media should be irresistible. Which outlet will be the first to attempt the comparison? Which one might dare to pop this balloon?
Today, what? less than ten years after her stay in the pen, Martha’s got a new pet line retailing at Pets ‘R Smart – replete with cozy, plaided doggie beds, colorful leashes and fitted halter-tops for cats. She served her role for our nation admirably, and has moved on to bigger and better ventures with aplumb. Lord love her!
Where will Corzine be in ten years?
it would be fun to see the break down of dem/gop affiliation for madoff and mft victims.
why would anyone buy gold/silver and not have it in your physical possession? that is so obviously stupid that it seems very fitting to have it stolen. to me, that is the natural order of things.
9. hdgreene
That was beautiful, I saw Abbott & Costello (a la Who’s on First?) in my head as I was reading it! Wonderful.
14. steveaz
Well, if he hasn’t done the “my feet don’t reach the floor” dance by then, I am hoping he busy worrying about who his mext cell-MATE will be.
10. Daedalus Mugged
I feel for you, I lost a lot of money in a similar way a few years ago. Counter-party risk is the name of the game and PMs are supposed to protect you from most of that.
Delivery, a GPS unit and a shovel are my preferred way of avoiding vaulting issues. You can put a LOT of money away in a tiny space with very high level of security that way. Your only counter-party risk is in who you tell.
Corzine and all like him are criminal scum and should be treated somewhat worse than drug lords. Which I guess they are – they are left alone.
I will point out that in this affair nobody is blaming events on Barney Frank or bad real estate loans, it is PURE bankster business. As is 80% of the rest of it, as I keep repeating.
Finally, I am unable to read a report and exactly understand what position they took and how it went bad. It *sounds* like they failed to anticipate the margin calls even when their bet was winning? Or did they lose the bet when the market value of Greek and other bonds plunged, even before any default (or haircut) has occurred? Either sounds like gross incompetence on top of fiduciary failure and fraud, even if the particular tricks may individually have been legal.
And as I understand it, elements of any of those can be converted to civil and criminal violations simply by the net loss of funds. Maybe it ends up waiting for a judge or jury to *decide*, but let’s GET it there already.
Do the Democrats even care? How about Geithner or Bernanke? Eric Holder? How about Republicans? Gingrich? Romney? Hello? What about the MSM? What about the other, honest bankers, hmm, aren’t they afraid of how this will reflect on their enterprise? Hahahhahahah. Sorry, lost it there for a second.
Daedalus Mugged has it right – civil society is being murdered – and not by those at the bottom, but by the so-called “elites” at the top – the people charged with the preservation of the order and the laws of civil society itself. What a horrible mis-label to call them “elites”, for we can now see that our politicians and the bankers are mobsters of the absolute worst order – and when Wretchard says “The problem was simply this”, and then goes on to explain the mechanics of their crimes, I’m afraid he misses the mark a bit…
“The problem was simply this”: the bankers abet the politicians – the politicians abet the bankers – and both know full well that the theft of some gum in a grocery store is far more likely to result in arrest and punishment than the theft of $billions or $trillions by the criminals who running amok in the herd labelled the global “elite”.
What happens when the laws of a civilization are hollowed out by the insiders at the top? We are witnessing the slow motion crash of Western civilization and norms before our eyes…
“Conditions Apply” or “Above offer void where prohibited by crony capitalism”
I guess one thing that is unknowable at the present is just how bad things have been corrupted, and by who.
When the first reports came out on what was really going on with Subprime Mortgages there was an uproar in Congress – by those concerned that the truth might shut things down. Sen Lugar even demanded that the investigators themselves be investigated.
Just prior to the financial meltdown we heard where people who worked for a regulatory agency, the SEC, were spending much of their work hours viewing online porn. Was this because the agencies had been staffed with incompetents, either deliberately or as a natural result of the hiring practices? Or was it because the workers had found that the issues they repeatedly raised fell on deaf ears and gave up? Or did they get a visit from a large framed man with past evidence of multiple broken noses who said “Nice little office youse got here. Would be a shame if sumthin was to happen to it. Now let me ‘splain how it’s gonna be….”
Will we ever know what happened?
Thank you Anton, I was wondering if anyone could get through that comment.
Daedalus Mugged, I am sorry to hear of your situation. You’ve been using that screen name for a while. I won’t ask about how it was earned. But if you change it to Daedalus ReMugged, I’ll understand.
My thoughts on gold usually occur when I’m driving in my car and someone is telling me I can get rich buying it and they are such good people that they will forgo this potential profit for themselves and give it to me in return for my soon-to-be worthless dollars. So I figured it must be some sort of charitable organization making the offer and do I really have the right to take advantage of their generosity? Should that not be reserved for the truly needy?
But there were other considerations as well. It seems to me that gold is the ultimate hedge against the moral hazard of, shall we call it, the apocalyptic moment. Therefore you would want to keep it somewhere close and somewhere safe. For instance, you might keep it in a safety deposit box at the bank if you own the bank. So whenever the charity offered to sell me the gold and keep it for me, well, I didn’t want to tempt them, if you know what I mean.
Nor did I want to take possession of the gold myself. I’m the sort of guy who never throws anything away but can never find it, either. So there I’d be, in the apocalyptic moment, saying “Where the hell did I put that gold?” Rather defeats the purpose. May as well left it in charge of John Corzine, twice removed. Or was it twice removed before they finally removed it? Without having to move it.
@21. hdgreene
It was confusing at first then I saw where you were going and ended up laughing out loud here in the office.
“I’m the sort of guy who never throws anything away but can never find it, either.” That is where the shovel a GPS come into play……just don’t lose the GPS unit!
alternately you can buy land…it is hard to misplace a farm!
22 anton
A shovel is okay, but I prefer a post hole digger. You can get much deeper much easier that way, and there are a lot of people around here so bored that they like to go out sweeping with metal detectors. That would be a hell of a way to lose your gold.
That is where the shovel a GPS come into play……just don’t lose the GPS unit!
But in the apocalyptic moment, Anton, the GPS won’t work. So perhaps buying the farm makes sense except you will have bought the farm before they turn it into a commune.
My strategy is to have a five year supply of baked beans and canned corned beef. Of course you have to rotate the stock so every day I eat baked beans and canned corn beef. To keep it from getting boring I use different spices. One day it is salt and the next day it is pepper. Friends have told me this is not portable wealth. But it is pot-able. And if you are hungry enough, it might even be palatable.
25. hdgreene
potable/portable
You are on fire today!
#10. Oh my. That’s terrible. But I’m not sure it’s illegal.
What’s the definition of ownership in these cases? If I signed an agreement with a broker (or the vault holding my gold bars) that had the re-hypothecation language in it, I’m fully at risk (however if my broker signed an agreement with MF with this language and didn’t tell me – I may/should be able to collect from him). If I signed it for no benefit, I should not have signed it. If I signed it as part of an instrument to offset counterparty risk (at arguably a lower cost) I made a bad trade – and should have not done it or taken physical delivery rather than wager these risk management instruments that created a market in paper-representing-a-commodity (gold in this case) would be infallible.
These instruments argued – represented themselves that they were “as good as (physical possession of) gold” – but they clearly were not if in order to “make-the-market” they came with re-hypothecation language (else the prices would have been different, the ROI (much) less)..
Too good to be true usually means it is. Especially (and sadly) for the small investor. Starting with “no money down” and ending with “the bank will take all the risk if housing values don’t go up.”
@ 21 hd, thank you. That made me smile. As bad as a six figure robbery is, the original inspiration of the name cut even deeper. Besides, given the way the world works today, I would be Daedalus ReReRemugged already, and who knows how many more I would need to add in the near future.
@27 Ari,the agreement did have hypothecation language in it. I knew my cash balance would be invested by them for their benefit.
However, it covered collateral. Warehouse delivery receipts are not collateral.
For example, if I had two futures contracts and a pile of excess cash in the account, that cash was collateral, and could cover the margins on either contract, and could be invested by the broker (but not levered…just invested, and they got the interest, and by convention it was US treasuries).
If I made no trades, stood for delivery on the earlier settling contract (providing the full notional amount of cash to pay for the metal) and used the big pile of cash to settle such that I had one contract fully paid for and delivered and the exact necessary margin for the still open contract I would be OK, and still have a huge amount of equity in the account (a fully paid for contract). If the open contract moved one penny against me, I would have to post additional cash collateral. Despite having a huge amount of equity…I didn’t have any available collateral. The warehouse delivery receipts are property, not collateral. And it is collateral, not property, that can be hypothicated.
I agree about the distinction between paper and physical metal. A physically settled futures contract is as close to physical as you can be and still be paper. But once that contract is delivered it is no longer paper it is physical. It is ownership of specific physical serial number bars in a specific secured warehouse, in my name. At that point, it is not different than keeping physical silver coins in a rented vault or a safe deposit box. It is my metal, not a paper product.
What happened was no different than if Corzine knew you had some coins and jewelery in a safe deposit box, pledged your stuff to someone else for a loan, didn’t pay, and that someone else showed up and cleaned out your safe deposit box. It was a robbery.
Losing most of my cash balance…yes that is a risk I took, I knew it, I understood it. It is a raw deal and a rip off, but I made a bad decision and I can accept the consequences. But that is a position I deliberately kept modest.
Stealing my delivered silver? Criminal.
“He who sells what isn’t his’n, must buy it back or go to pris’n”. Corazine and the entire executive suite, should be moved en masse to Marion Il. If for nothing else except terminal stupidity.
re: cash balance v. assets.
That’s the sticking point. Hopefully it will be as crystal clear to the judge. I moved funds/assets out of an account that had that similar language – but it took a while and written Q&A to determine the assets (not just cash) were not covered by the SIPC (at least up to 500K). Which was the aha moment for me.
I’m reminded of the original fiction about “gold backed” U.S. currency – when the government only had a small fraction of actual gold obligated by the notes in reserve. It works – until it doesn’t.