Watch This Development at the Fed Lost deep in Federal Reserve Chairman Ben Bernanke's recent flurry of press activity was a little note that it might not be in the government's best interest to backstop the risk of favored banks - particularly when those select few banks are significantly exposed towards risky European Sovereign debt. This apparently set off a "sell signal" to the favored banks, those with bailout status who have established a situation where the government backs their risk but they take all the reward. In other words, all hands on deck to defend what is a trader's dream: no risk, all reward. Defending the dream was Lloyd Blankfein in a rare interview with Bloomberg's Erik Schatzger, who both asked critical questions but also allowed Blankfein to explain the strategy. One can only imagine Goldman traditionalists watching the unusual specter of a Goldman official making such public appearances where they talk about a PR strategy targeting the general public. I'm not the expert on Goldman Sachs as are others, but it seems this strategy to influence the "general" public might be something rarely seen during the firm's historic 140+ year assent. But here was Mr. Blankfein discussing how it was important to influence everyday people - voters, that is - which for the first time might be a a strategic key Goldman Sachs battleground to retain the government's backstop for their risk. The key to watch with critical questioning is a potential tug of war that could ensue between protected banks, looking to defend the government backstop on their risk, and regulators who recognize the significant leverage exposure such firms have to European debt derivatives represents a potential threat to financial stability - and a likely bailout on the horizon if European debt and the political realities of austerity don't agree with the logical math of the bond market. The Real Story: MF Global Investigation Finally Begins In testimony before the Senate Banking committee, the MF Global crime drama officially began Tuesday, April 21, nearly six months since criminal activity was alleged to have occurred. This is when MF Global's bankruptcy trustee Lois Freeh confirmed "we are just beginning an investigation" into potential fraud and lack of fiduciary responsibility on the part of MF Global's executive management. (Video link to Lois Freeh documenting an investigation began close to six months after criminal activity took place: http://youtu.be/GXuBtN7_d2k). By beginning an investigation, one assumes that means questioning the "C" level executives, including Mr. Corzine. As was documented in March 28, 2012 Congressional Testimony, Mr. Corzine had yet to be questioned nearly 5 months after criminal fraud charges were alleged to have taken place. This is when critical segregation reports were said to be falsified to regulators, a topic that was expanded on considerably in this April 21 hearing. (Video Link: Mr. Duffy and Ms. Sommers discussing the falsified segregated funds reports from MF Global: http://www.youtube.com/watch?v=25fw8GV99yg&feature=youtu.be) Mr. Freeh's Role Holding Information In his role as trustee for MF Global Holdings, former FBI director Freeh primarily represents creditors but is also holder of documentation in the MF Global case. As he was the controlling source of information, many organizations, including the Department of Justice and fellow bankruptcy Trustee James Giddons, relied on information Mr. Freeh held regarding potential criminality that could point to Jon Corzine, the politically connected former US Senator and Governor of New Jersey. (Video Link: entire testimony from Senate Financial Services web site: http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=286182) The wire transfers from MF Global to counterparties in the final week of MF Global's existence were in fact illegal, violating the Commodity Exchange Act (CEA), who confirmed these and other legal violations existed, which were outlined by Commodity Futures Trading Commission (CFTC) commissioner Jill Sommers. Ms Sommers noted the general violations of the Commodity Exchange Act (likely rule 1.20 but also possibility exists of violations to rule 1.25). Ms Sommers further noted the CEA prohibits brokerage firms from tapping customer money without replenishing the deficit, failing to "properly supervise accounts" and - perhaps most serious - making false statements to regulators. This could include false segregated fund statements to regulators that concealed MF Global's illegal wire transfers to counterparties. In a potential nod to former MF Global CEO Jon Corzine, Commissioner Sommers noted the action could apply to those who "aid and abet" the misuse of customer money, noting the probe could target "control persons," though she indicated the CFTC has reached no conclusions. Through a web of unusual management decisions in the final weeks of the firm's bankruptcy, a number of questionable situations occurred. This includes a situation where the back office was absent of top level executives who claimed in testimony they would not have approved the questionable wire transfers.1 As e-mails leaked by Congressional sources revealed before March 28, 2012 Congressional testimony show, that final week Mr. Corzine was working directly with mid-level back office executive Edith O'Brien to transfer MF Global customer deposits to third parties, a highly unusual situation given the known liquidity crisis the firm was under.2 Further documented planning had MF Global customers receiving checks when they requested their margin deposit while MF Global counterparties received wires. Many of the checks later bounced while the wire transfers cleared. Such planning by MF Global's "C level" executives has been documented to have occurred well before the bankruptcy, including a highly questionable bond offering that occurred on August 2, 2011. Such planning runs run counter to public statements made by these same executives, who essentially claimed to be clueless to the firm's downfall preceding the bankruptcy. While the final weeks may have truly been chaotic, with a large number of "trades," as Mr. Freeh mentioned in his testimony, that's not the real issue. The real issue is a rather small number of illegal fund transfers and the management situations that created an environment where top compliance executives were gone during the week preceding the bankruptcy. This is just the start of what evidence suggests was an event a little less randomly "chaotic" than as initially reported. Pointing To Regulatory Violations In testimony both CMEGroup chairman Terry Duffy and CFTC Commissioner Jill Sommers addressed disclosure from MF Global regarding their segregated funds balances during the final days. (Link to CFTC Commissioner Jill Sommers shocked at shortfall in customer segregated funds: http://www.youtube.com/watch?v=nGOymCSh64Y). Regulators were in MF Global's offices the week of the bankruptcy monitoring the movement of customer assets when the wire transfers occurred. As Mr. Duffy testified, the day of illegal wire transfers began, Thursday, October 28, 2011, reports provided to regulators began to contain inaccurate accounting of customer funds at MF Global. (Video Link: Mr. Duffy and Ms. Sommers discussing the falsified segregated funds reports from MF Global: http://www.youtube.com/watch?v=25fw8GV99yg&feature=youtu.be) This is critical because the falsified reports concealed the fact that MF Global had overdrafted its account and hid the fact MF Global had reached into customer segregated funds to illegally transfer customer money to their counterparties. Initial reports from MF Global to regulators indicated the falsification of these critical segregation reports was an accounting error. "Dead wrong," is how Mr. Duffy described beliefs that an accounting "error" was responsible for a lack critical reporting to regulators during MF Global's final week of existence. (Video Link: Mr. Duffy making dead wrong comment: http://youtu.be/_nOwAqvTx_g) "We were told there was an accounting error of $900 million," Mr. Duffy said, recounting final bankruptcy weekend when MF Global had reported to CMEGroup a deficit in its accounting that lead to the customer shortfall. "Some people felt it was too big, it had to be an accounting error. Others among us felt it was too big and it could not be an accounting error. I was in the later camp," he added, pointing to potential fraudulent behavior. If a judge determines material fraud did occur in this instance, it could lead to jail time for the offenders. Regulator Calls for "Vigorous Investigation" After Tuesday's testimony, industry regulator National Futures Association (NFA), similar in scope to equity market regulator FINRA, released two letters.2 The first letter called on US District Attorney Patrick Fitzpatrick, Northern District of Illinois, to vigorously prosecute existing laws in the MF Global incident. The regulator noted that based on published reports "it appears that the misuse of customer funds may have been the result of intentional misconduct." The second letter called on one of MF Global's counterparties, JP Morgan, to approach the return of customer money with "a renewed sense of urgency." Noting a key regulatory principal, the letter stated "customer segregated funds can retain their protected status even when wrongfully transferred out of segregation." (Link to two NFA letters: http://www.nfa.futures.org/NFA-investor-information/MF-Global/Ltr_to_US_Attorney.pdf, http://www.nfa.futures.org/NFA-investor-information/MF-Global/Ltr_to_JPMorgan_and_Trustee.pdf) Sommers: CFTC Not Consulted on Bankruptcy Decision In addition to calling on criminal investigators to examine potential fraudulent activities, in Congressional testimony CFTC commissioner Sommers spoke for the first time about the early morning meeting of October 31, 2011. This is was reported as a pre-dawn conference call when a decision was made to place MF Global into a Chapter 11 bankruptcy as opposed to a Chapter 7. (Video Link: entire testimony from Senate Financial Services web site: http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=286182) Questions as to why a chapter 11 bankruptcy was selected over a chapter 7 remains an interesting topic. A chapter 11 reorganization bankruptcy has, in fact, placed customers on the same legal protection level as that of creditors. According to multiple sources, the chapter 7 is designed to liquidate a firm, which is the case with MF Global, and protections are written into the bankruptcy codes which provide very specific priority handling for a commodities account. Interesting exchanges occurred in Congressional testimony as Congressman Michael Grimm noted the damage that handling the bankruptcy in a Chapter 11 reorganization did not favor commodity customers as would a chapter 7 liquidation, which is considered to contain solid protections for CFTC regulated customers. (Video Link: Congressman Grimm questioning SEC chairwoman Mary Schapiro http://www.youtube.com/watch?v=2jYYwa2fyX4&feature=youtu.be) The chapter 11 is said to favor creditors and bankruptcy trustees, who often gorge hundreds of millions in legal fees from the estate, while the chapter 7 is said to afford customer segregated enhanced priority over creditors. It is also interesting to note that if fraud was alleged to have taken place from the start, the legal process would be very different, potentially favoring customers. Despite the fact that regulators had clearly identified fraudulent behavior in reporting of segregated account balances and a customer segregation short fall - red flags for at least an immediate fraud investigation - no such investigation was called for and this potentially damaged customer segregated account interests. Why did the processing of bankruptcy go without discussion or consultation with industry regulators? Regardless of the ultimate outcome of the bankruptcy process, how could a decision that ultimately ushered in an event challenging commodity market integrity not be managed in concert with the CFTC, CME and NFA? Based on Congressional testimony of CFTC commissioner Sommers, one can conclude the CFTC was not involved in the decision making process, which is curious. We know the bankruptcy decision was not due at 4:00 AM, so why not give it a few extra hours and a phone call to the industry regulators who understand the account structure issues? These significant questions still remain unresolved, and it was this tangled web that Mr. Cook avoided.4 Watch for a potential challenge of the chapter 11 / 7 issue from the likes of the Commodity Customer Collation. Gensler's Relationship With Corzine CFTC chairman Gary Gensler's relationship with Mr. Corzine remains the topic of considerable discussion. In Congressional testimony a several questions related to the relationship and Mr. Gensler's recusal from involvement in MF Global. Mr. Gensler worked for Mr. Corzine in the late 1990s when both were at Goldman Sachs. Mr. Gensler's "recusal" from matters involving MF Global has been said to be a "partial recusal" because he remains active in matters concerning the CFTC's efforts to plug potential regulatory holes that might have been exposed by the MF Global scandal. (Video Link: discussion regarding Mr. Gensler's recusal from MF Global http://youtu.be/aJRsbUB3bS4) The questions related to the Corzine / Gensler relationship are often associated with lobbying on Rule 1.25, which shows the extent to which the relationship existed. On July 19-20, 2011, just weeks before MF Global was set to sell investors $300 million worth of questionable bonds, critical meetings took place that could have changed the fortunes of MF Global. This is when rulemaking was successfully postponed on rule 1.25. Jeffery Henderson, partner at Chicago law firm of Henderson and Lyman, noted that on July 31, 2011 MF Global reported to the CFTC, through their 1FR, they were undercapitalized by in excess of $150,000, based on their monthly reporting. In other words, the writing was on the Wall as to MF Global's approaching liquidity crisis, in documented format. As the e-mails obtained by Bob English in a FOIA request demonstrate, Mr. Gensler changed plans so that the meeting could take place and gathered the entire staff to listen to rulemaking lobbying efforts. Mr. Corzine's expecting Mr. Gensler to change plans at a moment's notice might show the nature of the relationship, but it also belied the urgency of Corzine's request. A liquidity crisis was on the horizon and they desperately needed to raise cash, with a bond offering on the horizon providing a short-term fix. Had the CFTC changed the rulemaking on 1.25 and forced Mr. Corzine to liquidate his highly leveraged sovereign debt trade on July 20, his successful auction of soon to be worthless bonds on August 2 could have experienced a very different outcome. Inside Baseball Random Thoughts While the inside "crime story" aspect of the story was generally avoided in the media, the not so surprising headlines made the news. MF Global customer money was said to be "found," although those close to the situation had always said the location of the money was known. Even CFTC commissioner Jill Sommers revealed in public statements during December, 2011 that the money's location was known. Tuesday's testimony confirmed roughly $700 million was transferred to MF Global's UK subsidiary, approximately $680 million was transferred to other financial counterparties, including a significant portion to JPMorgan, and $220 million was inadvertently transferred from securities accounts to commodity customers. In other news, creditors bankruptcy trustee Freeh also announced that bonuses would not be paid to the three top "insiders," C level executives who ran the company after it declared bankruptcy and are the subject of criminal scrutiny. This was surprising in that Mr. Freeh had been previously quoted as offering bonuses to those running the company and did not deny this charge when it was widely reported. Mr. Freeh continued to make statements regarding the "chaotic" trades in the final days of MF Global's existence, which appears to some as a red herring. The trades were not entirely the issue, it was a handful of money transfers and the highly questionable situation where the top executives in investor protections were absent from MF Global during the week of a known liquidity crisis to which should generate focus. While nuggets of information relative to what happened during that week was revealed in April 21 testimony, the stated purpose was to reflect on what occurred with an eye towards improving the system. The sentiment was expressed by Mr. Duffy that the regulatory system works basically fine, so long as existing laws are enforced, but nonetheless several proposals basically called on additional accountability for top executives. An insurance plan for the industry was floated, which seems to have CFTC support. Undercurrents in the meeting included talk that the DRSO system was going on trial and some viewed the testimony as a platform for the CFTC to pitch for additional capital. Swaps War! The 14 Year Battle For Transparency into Derivatives that Could Be at Center of Deflationary Concerns The way some tell the story is that in 1998 Brooksley Born, then CFTC chairwoman, discovered what many now describe as "non transparent derivative products that lacked proper risk disclosure." That's the politically correct term for derivative products that ultimately exploded like an over-leveraged time bomb in 2008. It is from this historical perspective that certain professionals in the derivatives industry view the current SWAPS and CDO issues currently surfacing in light of the continued struggle for transparency and regulation of what could literally explode in Europe. Some might say that Mr. Corzine and his group have had their run managing derivative products and it might just be time for a little transparency and clear risk disclosure in what has potential to inflict serious economic damage on an economy. This is the background for the multibillion dollar battleground for the unregulated and often illiquid financial instruments, generically known as SWAPS, that derivative product that regulators can't even accurately define. For those close to the situation, the current issue is cross-border harmonization, with London being used as an example of competition to which US customer will flee if US regulations requiring transparency and full disclosure of risk are forced upon the industry. Keep an eye on EU debt and their challenges with an eye towards transparency (or lack thereof) into products that literally have the ability to damage with a force equal to any terrorist attack, to elongate Warren Buffet's comments. With looming sovereign debt issues surrounding Europe, transparency into the true risk of a margin call might be considered a benefit to market stability. One might say that is the "Roseman" school of derivatives risk management, to use the former MF Global risk manager who held his ground to Jon Corzine over proper risk management as a metaphor.
The Curious Case of the CFTC Whistleblower and Manipulation in the Silver Market Early this March, the Commodity Futures Trading Commission (CFTC) posted a comment in the Dodd-Frank section of its web site that had those deep inside the derivatives industry buzzing. The comment was allegedly written by a JP Morgan whistleblower who was hitting the raw nerve topic of manipulation in the silver market. The letter (below) was initially published by the CFTC and then quickly taken down. Derivatives industry insiders initially viewed the letter with skepticism and were trying to determine potential internal CFTC motivations for publishing the letter. Why Price Manipulation Matters? With oil prices rising, and room to run much further if military tensions in the middle east escalate, political pressure for a scapegoat for rising consumer prices is mounting. The favorite whipping boy is often futures market speculation. Manipulation of futures market prices - which influence prices on household items from the food on tables to gasoline - is a hot topic. Political opportunists often use rising oil prices as a rallying call to limit or end commodity speculation. Interesting that such outcry only occurs when prices travel in one direction. Independent market observers have noted the serious nature of manipulation on the markets, and point to the silver market manipulation as the shining example of such manipulation. Silver Market Issue What industry insiders viewed as significant charges were leveled against silver traders in London who were accused of market manipulation. The CFTC investigated in 2010 yet no significant action was taken. A March 25, 2010 statement from Bill Murphy, then chairman of the Gold Anti-Trust Action Committee (GATA) to the CFTC, summed up the issue:
The CFTC Whistleblower Post: What Industry Insiders Thought When the CFTC Whistleblower e-mail was posted, it could be observed that this was an attempt by those inside the CFTC who wanted hard enforcement of market manipulation charges to be investigated. Allowing this post to appear on the CFTC web site was significant in and of itself, sources noted. Their thinking goes, as such a hot bed issue pointing to political interference in market integrity issues was once never an issue now appears to be more commonplace. Some industry participants questioned the authenticity of the letter, as it didn't disclose information beyond that which was public - and in fact more details regarding the manipulation were available online than was disclosed in the e-mail. The CFTC response Explaining the post situation, a top CFTC official noted the post appeared on the Dodd Frank section of the web site and should have been posted to the Whistleblower section the site. The second reason the post was taken down was due to the fact the post came from an alias. This same CFTC source noted the current fight in Dodd-Frank legislation to weaken provisions protecting whistleblowers protecting market integrity are being fought by some inside the CFTC. This same official also noted progress in regards to whistleblowing, pointing to the recent appointment of Vincent Martinez as head of that office. Letter posted on CFTC Website: Dear CFTC Staff, I wish to remain anonymous as of now as fear of termination mounts from what I am about to reveal. Robert Gottlieb is not my real name; however he is a trader that is involved in a lawsuit for manipulative trading while working with JPMorgan Chase. He was acquired during our Bear Stearns acquisition and is known to be the notorious person shorting in the silver future market from his trading space, along with Blythe Masters, his IB Global boss. However, with that said, we are manipulating the silver futures market and playing a smaller (but still massively manipulative) role in manipulating the gold futures market. We have a little over a 25% (give or take a percentage) position in the short market for silver futures and by your definition this denotes a larger position than for speculative purposes or for hedging and is beyond the line of manipulation. On a side note, I do not work directly with accounts that would have been directly impacted by the MF Global fiasco but I have heard through other colleagues that we have involvement in the hiding of client assets from MF Global. This is another fraudulent effort on our part and constitutes theft. I urge you to forward that part of the investigation on to the respective authorities. There is something else that you may find strange. During month-end December, we were all told by our managers that this was going to be a dismal year in terms of earnings and that we should not expect any bonuses or pay raises. Then come mid-late January it is made known that everyone received a pay raise and/or bonus, which is interesting b/c just a few weeks ago we were told that this was not likely and expected to be paid nothing in addition to base salary. January is right around the time we started increasing our short positions quite significantly again and this most recent crash in gold and silver during Bernanke's speech on February 29th is of notable importance, as we along with 4 other major institutions, orchestrated the violent $100 drop in Gold and subsequent drops in silver. As regulators of the free people of this country, I ask you to uphold the most important job in the world right now. That job is judge and overseer of all that is justice in the most sensitive of commodity markets. There are many middle-income people that invest in the physical assets of silver, gold, as well as mining stocks that are being financially impacted in a negative way b/c of our unscrupulous shorts in the precious metals commodity sector. If you read the COT with intent you will find that commercials (even though we have no business being in the commercial sector, which should be reserved for companies that truly produce the metal) are net short by a long shot in not only silver, but gold. |
This article was published in Opalesque Futures Intelligence.
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