Our story thus far: MF Global customers had their segregated accounts emptied — robbed is the precise term — by unknown senior management who raided all available cash to put on a leveraged Hail Mary trade on European Bank debt. The trade went against MFG before it could be pulled off, and the leverage generated both margin calls and a public discovery of the theft.

The trade would have paid off nicely if the firm had the wherewithal to meet margin calls. There are perhaps two lessons here:

1. When you put on a highly leveraged trade, its better not to purloined funds.

2. There are some people on Wall Street so fucking stupid and unethical that they need the above rule explicitly explained to them.

Regardless of the lack of intelligence or morals, there is some good news: MF Global customers are looking at a recovery somewhat better than 90% of their monies. While suffering a ~10% loss for the mistake of leaving money and stocks in your brokerage account may sound like big hit, it is much better than the initial fears of a total wipe out — a 100% loss.

The bad news? The momentum towards reforming Re-Hypothecation rules and other standard boiler plate is waning. I doubt anything will formerly change.

Investors do have an option: Don’t leave money with any firm that have their own proprietary trading. Indeed, if they needed a bailout, your cash was at risk. Keep your monies with them at your own peril. (I am obviously very biased).

I use a third party custodian — TD — that does just that and nothing else. Any of the third party brokers will work — including Schwab and Fidelity (E*Trade dabbled in derivatives and subprime, and accordingly, they are off my list).

It is hard to imagine that leaving stocks/bonds/cash in segregated accounts with a trusted custodian means those assets are at risk — the MF Global debacle never should have happened.

Then again, neither should the financial crisis have happened . . .


See also:
MF Global Customers Said to Get Offers for Their Claims
NYT, March 12, 2012     

Category: Bailouts, Legal, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “MF Global: Will Good News Be Bad News…?”

  1. cpd says:

    Any idea about Interactive Brokers? I use them – their trading platform is fantastic. They tell me they don’t take prop positions. Can I believe that?

  2. rd says:

    From the Dealbook article:

    Their money was by law supposed to be off-limits to MF Global, but the brokerage firm violated that time-honored pledge.

    This is the type of thing that really annoys me about financial reporting. The first clause says that the customers money was supposed to be off-limits by law.

    The second clause then states that the time-honored pledge was violated.

    It was either illegal or not to break into the customer piggy-bank under the various securities laws. If it was not strictly illegal, but instead a pledge from the company that was broken, then it would be a very different legal approach, such as fraud, where the company’s position was deliberately misrepresented.

    My understanding is that MF Global likely has both sceanrios in play. First, it appears that they may have routinely tapped into customers’ segregated funds during the day and then replaced them. This time they could put the money back in the till. Second, apparently, their corporate advertising trumpeted the safety of their strictly segregated accounts, so misrepresentation and fraud are likely germane for both criminal and civil cases.

    It is going to be fascinating to watch Holder trying to figure out the various legal strategies to avoid any prosecution.

  3. Sportello says:

    More than a few of the bigger hedge funds (a) pull out excess collateral at the end of every day and (b) transfer it to a custodian (with whom they have no lending or trading relationship). It’s a nuisance, but it is an effective way of protecting yourself.

  4. eddiebe says:

    I have the perfect solution: Execute Corzine, and the chances of this happening again wil decrease exopnentially.

  5. Sechel says:

    Barry, Would appreciate your insight on a few points.
    1) Why is Corzine not being charged under Sarbanes Oxley
    2) Does the theft appear to you as being driven by MF Global people or JP Morgan people
    I think its a not uninteresting point. Did MF Global fail to segregate or was there a pure grab for the
    money by JP Morgan placing its interests first in the dying days.
    3) Why was the bankruptcy handled via trustee vs receivership
    4) Any insight as to which parties are behind all these news leaks we are constantly inundated with

    I’m particularly interested in the 1st point, as there’s little use for regulations if the rules aren’t enforced.
    I for one thought Sarbanes Oxley a good idea, but am now rethinking that in light of MF Global.

  6. agden80 says:

    Re Interactive Brokers. On their website, they disclose that they are engaged in prop trading

  7. Sechel says:

    Excellent reporting on MF here including James Katoulis interview in the 2nd half


  8. Jim67545 says:

    I’m with eddiebe. The Romans executed the populations of entire towns when they misbehaved. Other societies took all possessions and executed all near kin. Perhaps a bit extreme but the bottom line is that you can pass all the laws you want, including seemingly inpenetrable segregated accounts and if someone has the means and the will to steal it, they will if given sufficient motivation. Ultimately, the only deterrent is to destroy their lives and the financial status of their family.

  9. Sechel says:

    One last question.
    Did clients directly finance the off-balance sheet bets that Corzine made? I don’t believe this has ever been stated.

  10. VennData says:

    Yeah, yeah, we don’t need regulation on Wall Street, Dodd- Frank…

    We don’t want anyone making sure a pipeline traversing the entire nation is safe, we want it built right now…

    I want a nuke plant built immediately near Boehner’s, McConnell’s homes. One right next door to Michele Bachmann’s. Across the street from Rick Santorum’s church… and I want the gov’t to not use the permit process already in place, but to just start these nuclear power plants and waste storage sites immediately, if not sooner.

  11. Petey Wheatstraw says:

    And the pillaging rages on. The sheriff is in on it, and so is the Mayor. They are the de facto law, because:

    a) they say they are, and;

    b) the townsfolk are too busy trying to get by and too scared of losing their diminishing stake in the rigged game to actually do anything about it.

    Everybody knows this to be the case, but no one can do a damned thing about it.

    This will end badly.

  12. 2. There are some people on Wall Street so fucking stupid and unethical that they need the above rule explicitly explained to them.


    while, I think, I get the gist..

    isn’t it that “There are some people on Wall Street that need the above rule explicitly explained to them, because they are so fucking unethical that they’ll feign ‘Ignorance’–amounting to ‘Willful Blindness’.

    “…Margaret Heffernan argues that the biggest threats and dangers we face are the ones we don’t see–not because they’re secret or invisible, but because we’re willfully blind. A distinguished businesswoman and writer, she examines the phenomenon and traces its imprint in our private and working lives, and within governments and organizations, and asks: What makes us prefer ignorance? What are we so afraid of? Why do some people see more than others? And how can we change?

    Covering everything from our choice of mates to the SEC, Bernard Madoff’s investors, the embers of BP’s refinery, the military in Afghanistan, and the dog-eat-dog world of subprime mortgage lenders, this provocative book demonstrates how failing to see–or admit to ourselves or our colleagues–the issues and problems in plain sight can ruin private lives and bring down corporations…”


  13. dsawy says:

    “I use a third party custodian — TD — that does just that and nothing else.”

    I’ve read and re-read this several times and I’m unclear on what you mean when you say “…that does just that…”

    Do you mean that TD does *not* do prop trades?

    Is there something written in their customer literature where TD says (explicitly) that they don’t do prop trading?

    As for your point #2: This is a behavior pattern with Corzine. Look at his behavior at Goldman (before he was co-CEO) and then as NJ governor. It’s pretty obvious that he’s always thought that rules are for other people, regardless whether we’re talking about internal Goldman trade policy or NJ speeding and seatbelt laws.

  14. Petey Wheatstraw says:


    The truth sets us free. Maybe real freedom is too scary or difficult to contemplate. The paradox of the caged wild animal comes into play: One can trade freedom for security, but the wild heart still beats inside. A caged, well-fed tiger is still a tiger.

  15. “…One can trade freedom for security…”


    wtf? that can never happen.

    with the Tiger, in the Cage, He’s scr*****, not “Secure”..

    totally dependent on Others, for Feed, Warmth..to say nothing of ‘being a ‘Sitting Target’..

    Where were you trying to go with that ? ~

  16. ESfreddie says:

    To take a small-size financial services firm in a post-Bear/LEH world and pursue a big bet in an activity that is worthy of the lowest-possible P/E ratio (i.e. prop trading) is the stupidest thing ever.

    The “risk/reward” dynamic on those activities sucked so bad for shareholders its ridiculous….after all what was the upside? Being rewarded with lots of P/E multiple expansion for any winning trade? Not likely.

    Total neglect for historic evidence on what activities can generate “shareholder value” on a “risk-adjusted” basis.

  17. willtruth says:

    I use a third party custodian. Great advice BR. People can stop the “Corruptness” of the system until 1 investor at a time make it happen.

  18. hammerandtong2001 says:


    Are we to believe that it is “good” the wronged customers of MF Global “may” receive 90% of their account values returned? This after they have received on average about 72% of account value in cash after 2-3 months after MF went bk; and here we are 6 months post-bk and an incremental 18% “may” be returned.

    In my view, it’s hardly assured these customers will receive anything further.

    This is an astonishing situation. And it is quite remarkable that no one has been charged with any criminal wrong-doing.


  19. Petey Wheatstraw says:


    It’s perception. Denial of the truth that we’re speaking of.

    That said, the relative comfort of slaves vs. “free” white, non-landowners in the antebellum South comes also comes to mind.

    The former was captive, put upon, and abused, but relatively healthy and fed enough to keep going. The latter was itinerant, hungry, and sickly, but “free” to be and remain so. Not advocating the former, just pointing out that what appears to be, and is accepted to be true, is usually very complex.

    If the caged wild animal doesn’t work for you. Maybe I should have used a non-predatory animal for my analogy. Yann Martel, in his novel, Life of Pi, demonstrates what I’m referring to (to wit, and borrowed from Sparks notes):

    “Wild animals in their natural habitat encounter fear, fighting, lack of food, and parasites on a regular basis. Given all these biological facts, animals in the wild are not free at all—rather, they are subject to a stringent set of social and natural laws that they must follow or die. Since animals are creatures of habit, zoo enclosures, with abundant food and water, clean cages, and a constant routine, are heaven for them. Given the chance, Pi says, most zoo animals do not ever try to escape, unless something in their cage frightens them.”

    Maybe this explains the fear of what would happen should we realize that we could fix our dilemma, tomorrow, by the simple act of choosing to do so, yet we don’t.

    I can’t find a better explanation.

  20. Petey Wheatstraw says:


    Posted a reply, but it went into the ether. Check back later — maybe it will magically appear.

  21. seneca says:

    The MF Global saga is consistent with the findings reported in CFA Magazine and featured on BusinessInsider.com that ten percent of the people in the financial services industry are psychopaths, versus one percent in the general population:


    That Corzine, as governor, often had his driver speed at over 100 mph in an SUV while not wearing a seat belt should given the board of MF Global a clue into Corzine’s personality and his predilection for taking insane risks.

  22. obsvr-1 says:

    A question comes to mind after reports that the money paid to the counter parties for trades can not be
    clawed back because these were legal trades, legal contracts that were paid out and not, like in the case
    of Bernie Madoff, ill-gotten gains. So the question I pose is:

    If you rob a bank to pay legal contractual debt or for losses in trades, do the counter parties get to keep the ill-gotten cash ?
    Extend to MF Global, they for all intents and purposed robbed the bank (customer accounts) to pay the counter parties ?

    Just asking ….

  23. Rick Caird says:

    “2. There are some people on Wall Street so fucking stupid and unethical that they need the above rule explicitly explained to them.”

    I support Mark Hoffer. These people are either stupid or unethical, but they are not both.

  24. Brett Tibbitts says:

    What do you expect? Eric Holder is a total political animal. He is far more concerned about the “outrage” of voters having to show their driver licenses in red states than he is about pursuing justice against top Democratic operatives.

  25. Petey,

    I hear ya, esp. w/ “…Denial of the truth that we’re speaking of…”

    though, this type of thing..”…relative comfort of slaves vs. “free” white, non-landowners…”, or “…zoo enclosures…are heaven for them(animals)…”

    always come with a Huge Caveat..”…with abundant food and water, …, …, n..”

    at the EOD, it’s Agitprop, promoting De-pendence (=”Security”)

    though, all to your point about..”Perception”/”Denial”..


    thanks for the Thought~ though, you know, the Idea is more important..~

  26. bear_in_mind says:

    @PeteyWheatstraw @ 11:15am — me, too! It posted to the board, then is see now it’s gone. Didn’t say anything profane or too controversial, so either there’s a technical problem in the blog code, or Justice Dept. is borrowing some of Carnivore’s clock cycles to sniff-out and squelch dissent.

  27. Giovanni says:

    Wow, great post and comments. In addition to all the great questions posted here the nuns from my past, rapping on my knuckles with rulers want to know if: “1. When you put on a highly leveraged trade, its better not to *have* purloined funds.?

    Keep on keepin’ on BR.