Custodial Risk in the Post MF Global Era

QUESTION: Martin:

You have occasionally made short-quick comments that have made me loose sleep ! One of your past comments quipped that we equity/bond investors should entertain the idea of having the actual certificates to our stock/bond investments (which are typically digital entries held at brokerage houses) mailed directly to us instead of having them held in places like Depository Trust Company (Cede & Co). My question is—if a contagion occurs and/or mass panic erupts like in 2008, would this type of situation be a serious threat to getting our money/investments back, since the actual certificates for 98% of investors are not held personally, but instead seem to be held in a “step-ladder type of depository companies—supposedly for our benefit ??

PW.

ANSWER: The biggest danger is that the New York boys OWN the SEC and the TREASURY. When MF Global went bust because of trading by ex-Goldman Sach’s Jon Corzine, using their client’s money to trade in London, he was NEVER prosecuted for illegally using $1.6 billion of 26,000 client’s money. He was well connected right into the White House with Obama. Nobody went to jail and clients had to wait in bankruptcy to get their money – even cash in the accounts. There are clear risks with the broker and clearer. As long as the SEC is in gold of former Goldman Sachs staff, there will NEVER be an honest regulator. Trump promised to drain the swamp, but he is surrounded by too many swamp creatures. Even when all the banks pled criminally guilty, the SEC exempted everyone from losing their licenses. They would NEVER do that with anyone outside of New York City. The SEC will never prosecute the banks – EVER!!!!

Indeed, several federal investigations had been launched into MF Global, including probes by the Commodity Futures Trading Commission (its main regulator), the Securities and Exchange Commission, the Federal Bureau of Investigation, and Justice Department prosecutors in both Chicago and New York. The brokerage has also been the focus of several congressional hearings. Not a single one charged Corzine with trading with client’s money. The losses that eventually drove MF Global into bankruptcy stemmed from high-risk bets on European sovereign bonds that Corzine made as he swung for the fences. Corzine bet big that the bond issuers would not default.

Commodity Futures Trading Commission simply fined Jon Corzine only $5 million over MF Global’s rapid descent into bankruptcy on Oct. 31, 2011, as an estimated $1.6 billion of customer money went missing. Anyone else would have been in prison for a minimum of 20 years.

The MF Global incident establishes that the regulators protect the bankers before the customers. This is the same problem we have with the development of ending bailouts – the taking of customer money to bailout the bankers who are then never prosecuted. It is the ultimate collapse in public confidence.

 

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