MF Global’s Guide to Casino Banking – The House Always Wins
The Occupy Movement’s successful slogan of the 99%-1% equality gap may well need to be revised, as the 1% begins feasting on its own members. The story which has yet to hit headline news around the world, yet independent media sources have been covering extensively, is the collapse of MF Global – the 8th biggest bankruptcy case in US history and the biggest banking collapse since Lehman Brothers. Today’s article takes a look at the seditious acts of corporate greed, and the role of the City of London as the world’s largest money launderer, which make this story top of the news agenda for anyone interested in economic justice.
Exactly. Headed by former Senator for New Jersey, and co-chair of Goldman Sachs Jon Corzine - MF Global were one of the world’s largest broker-dealers in derivatives. Derivatives are the shady financial instruments responsible for the financial collapse we are still watching unravel. Essentially, a means of traders, through complicated tools, to turn debt into profit. The missing point being, the debt doesn’t actually turn into profit for anyone except the person making the trade – by allowing them to cash in on mega salaries and bonuses in the short term. In the long term, the debt is still a debt, ready to go toxic and drag the company down.
MF Global filed for Chapter 11 bankruptcy in the US on 31st October 2011. The reasons given were a liquidity crisis – in plain English, they ran out of cash. However, over the days and weeks since, a catalogue of theft, manipulation and cover up has been laid open for the world to see. Despite this, the story has garnered little air time in the UK. There is good reason for this, which I will come to later, but first – what were they up to?
MF Global were masters of rehypothecation. This is where a broker-dealer uses its customer’s funds as collateral on its own investments and deals. Imagine, you go to the Bookie’s and put a five pound bet on a horse. Using rehypothecation, the Bookie you place the bet with can now bet on a horse himself using YOUR fiver as collateral. That seems a little weird, does it not? But it gets worse. Under US law, it is permitted for a broker to rehypothecate up to 14 times the initial sum. So in the case of you and the Bookie – since you’ve handed over your fiver, he can head off to the races and place a £70 bet himself, with just your fiver backing up his losses. Shocking? Yes. But not as shocking as the fact that in the UK, there is no upper limit on this practise at all. This means the Bookie can bet as much as he wants – millions, billions, trillions – all with just your fiver as back up (which doesn’t even exist, as you are betting it anyway).
Of course, MF Global made maximum use of its UK operation in order to get past the 14 times rules in its US base. While on their hypothecation rampage – what did they invest in? Something solid - like gold, oil, rare earth minerals? No. They invested over $6bn in soon-to-be worthless European government debt. Yes, they used their debt to buy some more debt; debt which was about to go loco as the Euro zone started to hit the skids. Bear in mind, MF Global made this investment after Iceland, Ireland and Greece were under the cosh of the IMF and the Euro was starting to look shaky. The so called sovereign debt crisis (what happens when tax payers get made responsible for corporate debt) was alive and kicking when these deals were made. Much to Jon Corzine's surprise (as per his testimony at the senate hearings) the debt went bad, MF Global went under and the rest of the world was left scratching its head.
There were a group of people who were having an even worse day than the rest of us though: MF Global’s customers. Major investors used MF Global to trade on their behalf, however their money was supposed to be held separately from other people’s money and the cash of MF Global itself in what are called ‘segregated funds’. This means that the George Soros’ and Warren Buffets of the world don’t mingle their huge wealth with the rest of us plebs, but have it segregated and retain some independence over their investments and trades. However, as the deals went bad for MF Global and they struggled to cover their trades in their final weeks, the company broke this rule. It started using customer funds, which should have been segregated, to make its deals and cover its trades.
So, if we return to the Bookie, not only has he made all these bets on lame horses based on the money we gave him to bet for us. But when the bets start going bad, he goes into our accounts, takes our actual money, and starts using it to make other bets, hoping to make back the money he’s lost. But then these bets go bad too. You go along on Saturday morning to pick up your winnings, to find the doors locked and the windows boarded up.
This was the experience of the MF Global customers. In fact, they were short $1.2bn. To which, Jon Corzine simply shrugged his shoulders and claimed he simply had no idea where the money had gone.
JP Morgan Strikes Again
After their pivotal role in the collapse of both Bear Stearns and Lehman Brothers in 2008, one might think that JP Morgan would be keeping a clean ship. One would be wrong. JP Morgan was MF Global’s largest creditor. They were in fact using the same instruments, Repurchase Agreements or Repos, which sunk these aforementioned banks. So folks; same players, same tactics, same result.
Repos are where one company sells its security to another for a fixed period, promising to buy it back at a future date at a greater price. Let’s head back to the Bookie analogy to explain.
As his bad bets start accumulating, he realises he is about to go bust, he’s busy using your money but it’s not enough. So he goes to the local Bank and offers to sell his business (including all the customer accounts) to the Bank to raise some cash. However, he also promises to buy his business back in a week. The Bookie’s plan? To use the money from the sale of his business to bet again, win, and buy back his business from the bank with the proceeds. If it works, the Bank makes money as the Bookie has to buy back at a higher cost than he sold, and the Bookie manages to stay afloat. A potential win-win, but a high risk endeavour.
In this case, JP Morgan is the Bank to MF Global’s Bookie. JP Morgan happened to enter into a repo with MF Global for, surprise surprise, $1.2bn; the same value of the reported missing segregated funds of MF Global customers. Customers are only able to gain their funds back from MF Global’s remaining assets, not JP Morgan. In short, they may never see anything near that whole sum back. 'They was robbed'.
The Bookie is now sipping a mango sunrise cocktail in Maui, while you bang on the door of his battered old betting shop, while down the road the Bank Manager buys a Ferrari on the bonus he made from setting up the deal in the first place, and wonders how much to sell on the premises for.
The regulators role in this is even more nauseating. One of the biggest con jobs in 2008 was the role of the credit ratings agencies. Just months before collapse, Lehman Brothers and others were rated AAA, by theagencies. This meant that pension funds were investing in their products on the basis that they were deemed as safe as government bonds. Just a few months later, the banks collapsed and millions lost their pensions.
In February 2011, just months before its collapse, MF Global bid for and won Primary Dealer status for the New York Federal Reserve. This meant, the Fed investigated MF Global and agreed they met the highest standards required, and accordingly they were given the coveted Primary Dealer status. This means the Fed sees the firms as so safe, so well run, that they can deal with the Fed direct, carrying out monetary policy. They also benefitted from being able to borrow and lend direct to the Fed at a bargain rate compared with the rates that Banks outside of the deal have to pay to lend to each other.
The Broker played the same games, in the same way, using the same instruments and supporters which the banks that failed in 2008 did. It failed in the same way the banks in 2008 did. The regulators and ratings agencies failed to prevent or foresee their failure, just as in 2008. Only this time, they took their own customers down with them.
Boo Hoo for the Investors – What’s it Mean for us?
Corzine and his motley crew are now being probed by the FBI and attending senate hearings to account for their grand theft, but with recent inquiries and hearings fresh in our memory, and their subjects (Hank Paulson, Fred Goodwin, Dick Fuld) still free and banking away in the world – we hold out little hope of proper accountability being applied. But what they hearings may lack in teeth, they make up for in information sharing. They give us a chance to find out what is still going on in our financial system. Did you think all that bad behaviour that took us into 2008 had stopped? Did you think we were making our way to a recovery? Well, this case tells you the truth is the exact opposite.
It has also has uncovered the UK for what the financial services industry has known it is for a long time – the money launderer of the world. This behaviour could not have happened if it were not for the zero-regulation zone that is the City of London. We act as a haven for the dodgy traders of the planet. Meanwhile, we don’t even get to skim off the top as unwitting accomplices. As this week’s report to the Public Accounts Select Committee will reveal – our big banking firms are not paying their taxes, and they are not even being asked to by our taxman. They are being allowed to keep the gains to themselves, and when their company finally goes bust, we get saddled with the debt.
It is not just hyper-hypothecation and repos either. This week, the Guardian published a damning article about the practise of ‘dividend washing’. Another scheme whereby, the City of London engages in a pass the parcel game with dividends, into the accounts of various tax havens and back to the customer, avoiding UK, French and German tax as it goes.
Worse even than this, is that our government is doing it’s very best to exacerbate this situation. In recent weeks, the UK Prime Minister David Cameron, used the British veto for the first time during an attempt by European heads of state to make a start on tackling the banking system. Europe is seeking to close down the loop holes and up the regulation to recoup the taxes, limit the riskier end of the behaviour and start balancing the books of the state over the books of the crony corporatists. It is no mystery to me at all that the ratings agencies and central banks are now piling the pressure on Europe to change course, they want them to stop and stop now.
While MF Global went relatively unfelt here – there are other much bigger players which are doing the same thing – and when they fail, they will collapse the banking system again – and it is the tax payer which pays up.
Whatever Happened to those ‘Lessons Learned’ in 2008?
The biggest lesson learned by the financial services industry in 2008 was this – when you fail, no one will be held accountable, you will keep all your bonuses, salary and pension earned, and the tax payer will bail out the biggest companies. In short, carry on as usual – the buck stops with the tax payer.
And when the country collapses under sovereign debt? You can make a killing on lending to it with outrageous interest rates, under the loan agreement you can privatise its profitable services like health, transport, education, while stripping back labour and civil rights.
What Can We Do?
We mainly need to get out of our comfort zone and start educating ourselves on these financial instruments.
If you are staying at a camp, attend the lectures at the Tent City University and read the books in the library. It is more important that you know why the austerity measures are happening, than simply being upset that the local school is closing. This is important because this knowledge can then spread like a virus. People are able to analyse what they are being told to do, and most importantly – kick back against the system attempting to strip them of their rights and freedoms. Set in its proper context, austerity and restrictive legislation go hand in hand.
We may not have as many rights as we would like, but we do have a freedom of mass communication and information sharing that makes it possible for us to organise like never before.
If you are reading this at home, or at work, you can be a part of this too. Support your fellow human beings in their endeavours to bring social and economic justice to the world. Donate to the organisations taking banks to court over their tax avoidance. Support your local occupation. Be active in conversation by sharing what you know in those water-cooler conversations, including why acquiescence is not an option. Teach your children. Wake up people! Stand up for yourselves and each other! These people are sleep walking us over a cliff – and as Jesse Jackson so eloquently put it, when speaking at Occupy London this weekend – the Occupiers are the canaries in our mind, warning of the dangers, hear them.
Together, we can make a great leap forward as a people - and make the failure our biggest breakthrough.