The MF Global blowup fallout continues to spread - couple of links posted by Denninger today:

First, the [URL="http://market-ticker.org/akcs-www?post=198641"]MF Global[/URL] angle of the issue:
[quote]MF Global’s burned commodity customers turned their ire from Jon Corzine to Jamie Dimon yesterday after MF’s creditor committee, led by Dimon’s JPMorgan Chase, objected to a plan to distribute $2.1 billion to customers who have seen their accounts frozen since Halloween.

In a Manhattan bankruptcy court filing, the creditors committee, which also includes Bank of America and hedge fund Elliott Management, said they want more assurances that the $2.1 billion is not their money.

Among their requests: [B]They want customers to agree in writing that the money they receive could be clawed back[/B].[/quote]The claims by JPM et al involve derivative contracts they had with MF. How could this affect you, Joe Retail Bank Customer? Well, in case you thought your money was 'safe' in an FDIC-insured account, think again - That recent shady transfer by BofA of trillions in derivatives contracts to their retail banking arm (where their millions of customer accounts reside) illustrates a little-known but extremely frightening aspect of the 2005 Bush-era bankruptcy "reform" law (the same one which made it difficult or impossible to discharge many forms of debt - e.g. student-loan debt - in bankruptcy):

[URL="http://market-ticker.org/akcs-www?post=198650"]Frightening Implications of the 2005 Bankruptcy Reform Law for Consumer Savings Accounts[/URL]
[quote]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 [B]placed derivative claims in front of depositors in a business failure - including a bank failure.[/B]

What JP Morgan is claiming in the MF Global case is that the derivative trade (which is exactly what a "Repo to Maturity" trade is - it's a derivative) is entitled to preference in the case of MF Global over those who had cash there for safekeeping either as a margin deposit or just as free cash as you would hold free cash in a bank.

If a major bank blows up this very same claim, supported in existing Bankruptcy Law with the changes signed by George Bush in 2005, will be used to steal the entirety of your bank account, and if you detect the impending blowup shortly before it happens -- say, 90 days before -- you're still exposed to the risk through clawback!

...
Don't run any crap about FDIC insurance in this sort of event either -- in the singular case of Bank of America we're talking about $77 trillion in face value of derivatives. While "notional" values are wildly beyond what anyone would have to pay (as that figure assumes the reference all goes to a literal value of zero) the fact remains that with even a 5% loss the amount of money required would be roughly equal to the entire US Federal Budget, which the FDIC clearly does not have -- nor could it acquire.

A cascade failure of several large banks would easily result in loss claims that would exceed the entire US GDP; for obvious reasons virtually none of that would actually be paid or recovered and in the case of you, the average person, your reasonable expectation of recovery in such an event is zero.

There is a fairly cogent argument to be made that what BofA did is tantamount to intentionally placing an armed financial nuclear device in the center of the board room table and then daring anyone -- including the government -- to come tamper with it and risk setting it off, knowing full well that if it explodes it is utterly impossible to contain the damage to our economy and financial system.[/quote]The next one is more small-potatos in terms of the sums of money involved, but is just another example of the venality and financial corruption which so completely pervades Washington:

[URL="http://www.humanevents.com/article.php?id=47938"]Claim: Clinton Collected $50K Per Month From MF Global[/URL]
[quote]A former MF Global employee accused former president William J. Clinton of collecting $50,000 per month through his Teneo advisory firm in the months before the brokerage careened towards its Halloween filing for Chapter 11 bankruptcy.

Teneo was hired by MF Global’s former CEO Jon S. Corzine to improve his image and to enhance his connections with Clinton’s political family, said the employee, who asked that his name be withheld because he feared retribution.
...
Clinton is the chairman of the company’s advisory board. His duties and compensation have not been released. The other member of the board is former British prime minister Tony Blair.[/quote]

Continuing the MF Global trend:
[QUOTE]"I simply do not know where the money is, or why the accounts have not been reconciled to date," Corzine says in the statement. He says he can't say whether there were "operational errors" at MF Global or whether banks or other companies have held onto funds that should be returned to MF Global.[/QUOTE]

[url]http://news.yahoo.com/corzine-dont-know-where-firms-missing-money-122722350.html[/url]

Corzine is testifying to a congressional panel today and is expected to state that he recommended the high risk strategy the company took over the last 20 months but that he tried to reduce the risk overall.

Translating the above, Corzine bulled through some high risk investments betting with house money until the house money was all gone, then investor money got swept up into the maelstrom. Compounding the problem was the use of high levels of leverage. The result was that a loss of a few billion could trigger bankruptcy. I haven't tried to calculate the leverage ratio, but from past examples, it would probably have been in the range of 30:1 to 40:1. At those levels of leverage, a very small loss turns into bankruptcy. Granted also that at those levels of leverage, a 1% gain turns into a 30% to 40% gain. It is a very high risk strategy.

Now consider, the major banks and investment brokers are all employing high levels of leverage in their businesses. This gets down to a crap shoot. Sooner or later, another one will get caught in a squeeze and we will have another bankruptcy to wade through. What happened to the days that 12:1 leverage was considered risque?

DarJones

Even if Corzine genuinely "doesn't know" what happened to the client money, the 2000ish Sarbaneso-Oxley law (designed to curb such handwashing by CEOs which was running rampant in large numbers of dotcom fraud corps.) makes it a felony for him to not know such stuff. I really, really hope there is no kind of immunity deal attached to his congressional testimony.

Anyway, it beggars belief to think he really doesn't know - perhaps not all the details, obviously, but this is basic big-picture stuff. A Reuters business law piece describes what is likely at work, and note it's not just MFG doing this stuff. It's a long in-depth piece, but I thought it worth quoting a god-sized portion because it is so fascinating (and frightening). Especially interesting is the key role played by UK banking laws - ever wonder why the UK is so averse to increased financial regulation? - and the "we learned nothing from Lehman" aspect:

[URL="http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/"]Securities Law: MF Global and the great Wall St re-hypothecation scandal[/URL]
[quote]A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

MF Global's bankruptcy revelations concerning missing client money [B]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[/B]. 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.

If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.

FINDING FUNDS

Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy.
[B]
Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name - a legal loophole that may mean that MF Global clients never get their money back.
[/B]
REPO RECAP

First a quick recap. By now the story of MF Global’s demise is strikingly familiar. MF plowed money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase later. Repos are a common way for firms to generate money but are not normally off-balance sheet and are instead treated as “financing” under accountancy rules.

MF Global used a version of an off-balance-sheet repo called a "repo-to-maturity." The repo-to-maturity involved borrowing billions of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the loan itself. With the collateral and the loans becoming due simultaneously, MF Global was entitled to treat the transaction as a “sale” under U.S. GAAP. This allowed the firm to move $16.5 billion off its balance sheet, most of it debt from Italy, Spain, Belgium, Portugal and Ireland.

Backed by the European Financial Stability Facility (EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds would remain default free whilst yields would continue to grow. Ultimately, however, it proved to be MF Global’s downfall as margin calls and its high level of leverage sucked out capital from the firm.
[B]
Puzzling many, though, were the huge sums involved. How was MF Global able to “lose” $1.2 billion of its clients’ money and acquire a sovereign debt position of $6.3 billion – a position more than five times the firm’s book value, or net worth? The answer it seems lies in its exploitation of a loophole between UK and U.S. brokerage rules on the use of clients funds known as “re-hypothecation”.
[/B]
RE-HYPOTHECATION

By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults.

In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default.

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

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. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.

U.S. RULES

Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.
[B]
But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.[/B] 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).

This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.
[B]
In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK.[/B] With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.[/quote]

[url=http://www.cnbc.com/id/45659547]Realtors: We Overcounted Home Sales for Five Years[/url]
[quote]Data on sales of previously owned U.S. homes from 2007 through October this year will be revised down next week because of double counting, indicating a much weaker housing market than previously thought.

The National Association of Realtors said a benchmarking exercise had revealed that some properties were listed more than once, and in some instances, new home sales were also captured.

"All the sales and inventory data that have been reported since January 2007 are being downwardly revised. Sales were weaker than people thought," NAR spokesman Walter Malony told Reuters.

"We're capturing some new home data that should have been filtered out and we also discovered that some properties were being listed in more than one list."

The benchmark revisions will be published next Wednesday and will not affect house prices.

Early this year, the Realtors group was accused of overcounting existing homes sales, with California-based real estate analysis firm CoreLogic claiming sales could have been overstated by as much as 20 percent.

At the time, the NAR said it was consulting with a range of experts to determine whether there was a drift in its monthly existing home sales data and that any drift would be "relatively minor."[/quote]
No surprise that the NAR are a bunch of housing-bubble-addicted lying sacks of crap, nice to see them get busted badly enough that they have to "make relatively minor revisions" which are apparently not-so-minor enough that the Reuters piece sourced by CNBC describes the resulting housing picture as "much weaker than previously thought."

And speaking of lying pumptards, we move on from Realtors to Retailers: It seems Black Friday sales were up rather less than the "way, way up!" and double-digit-percentage gains touted at the time: Sales turn out to have been basically flat, and may have only achieved that break-even-ness at a steep cost in terms of lost profits due to deep discounting ... Barry Ritholtz explains/links:

[url=http://www.ritholtz.com/blog/2011/12/retail-sales-dissappoint-on-false-black-friday-reports/]Retail Sales Disappoint on False Black Friday Reports[/url]

Black Friday, the day after Thanksgiving, so-called because it is the day that retailers finally take in more money than they spent for the year, has enough reputation to make people like me yawn and stay away. I didn't buy anything I wasn't already planning on buying, and I suspect a lot of impoverished and unemployed workers just didn't have any budget for such a splurge.

"Evidence of market manipulation in the financial crisis"

Abstract:

[URL]http://arxiv.org/abs/1112.3095[/URL]

[quote=Vedant Misra, Marco Lagi, Yaneer Bar-Yam](Submitted on 14 Dec 2011)[INDENT] We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007. The type of manipulation, a "bear raid," would have been prevented by a regulation that was repealed by the Securities and Exchange Commission in July 2007. The regulation, the uptick rule, was designed to prevent manipulation and promote stability and was in force from 1938 as a key part of the government response to the 1928 market crash and its aftermath. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. Our analysis of financial industry data shows that this decline coincided with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the total trading volume. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners. A similar number of shares were returned on a single day six days later. The magnitude and coincidence of borrowing and returning of shares is evidence of a concerted effort to drive down Citigroup's stock price and achieve a profit, i.e., a bear raid. Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior. Markets are not sufficiently transparent to reveal even major market manipulation events. Our results point to the need for regulations that prevent intentional actions that cause markets to deviate from equilibrium and contribute to crashes. Enforcement actions cannot reverse severe damage to the economic system. The current "alternative" uptick rule which is only in effect for stocks dropping by over 10% in a single day is insufficient. Prevention may be achieved through improved availability of market data and the original uptick rule or other transaction limitations. [/INDENT][/quote]PDF:

[url]http://arxiv.org/PS_cache/arxiv/pdf/1112/1112.3095v1.pdf[/url]

Interesting, but curious that the authors appear to only be concerned about possible *downward* manipulation of share prices. What about the by-now-uncountable instance of upward manipulation by spreading false rumors of imminent-bailout/acquisition/rescue which have been ongoing since 2007? We get multiple "Europe is rescued" rumors each week now. Most of this manipulation is directly attempted by top government and financial authority figures. What about the huge rally in financial shares which began in march 2009 as a direct result of such lies-about-solvency, coupled with the multitrillion-dollar accounting fraud represented by government-orchestrated suspension of the FASB mark-to-market rules, which has allowed the TBTF banks to hide massive losses in off-balance-sheet fantasy-price wonderland?

Anyway, I have a simpler explanation for what happened to Citi (and other bank) shares:

1. Government/treasury insider gets wind that Citi is massively insolvent;
2. Government/treasury insider passes info on to former colleagues at a Wall Street iBank;
3. Former colleagues of Government/treasury insider start putting on a massive short on Citi shares;
4. The spike in shorting, plus further spread of the credible-rumor-of-insolvency, causes multiple iBank prop-trading desks to similarly start shorting in volume;
5. HFT robots amplify the selling pressure, leading to a crash in Citi share price.
6. Government is far too busy wrestling with the possible end-of-the-world-as-we-know-it in the following year to bother dealing with the above insider trading.

There was a similar spike in put activity in Bear Stearns prior to its collapse ... and Lehman ... and, and, and. It recently came to light that none other than then-Treasury head Hank Paulson tipped around a dozen of his Wall Street iBank/hedge-fund buddies about the imminent government conservatorship (a status just shy of outright receivership) of Fannie and Freddie at a 'working lunch' the previous week. Where are the SEC investigations into that?

----------------

Aside: the news of the above Fan/Fred-lunch discussion points up an interesting technicality related to insider trading, to wit;

1. It was not obviously illegal (though it was ethically highly questionable) for Paulson to tip off his buddies - only *trading* based on such inside info is clearly illegal (though rarely prosecuted).

2. One of the hedgies at the above lunch said he had a large short position in Fan/Fred at the time of the lunch. Finding out that the govt was going to *rescue* Fan/Fred and covering his short before that happened would have been clearly illegal. As it was, though, finding about the imminent conservatorship - which would be expected to have a similar effect on share prices as receivership (common equity would drop to penny-stock status) - caused him to hold on to his shorts, as it were, for a sweet profit the following the announcement. In other words, an example of highly profitable "insider non-trading". Question: was that illegal?

[QUOTE=ewmayer;282327]Interesting, but curious that the authors appear to only be concerned about possible *downward* manipulation of share prices.[/QUOTE]/begin sarc/ Oh, of course -- I forgot -- anyone who studies anything [U]has[/U] to study all possible permutations of events, in order to demonstrate non-partisanship to Ernst. /end sarc/

What a pitiful curiosity you have.

Did you even bother to actually read the PDF?

[quote]What about the by-now-uncountable instance of upward manipulation by spreading false rumors[/quote]What about them? Are they subject to the same type of objective analysis that bear raid transactions are?

[quote]What about the huge rally in financial shares which began in march 2009 as a direct result of such lies-about-solvency,[/quote]What about it? That was over a year later than the bear raids that were the subject of this study. How would the uptick rule have affected that rally if it had still been in effect?

[quote]coupled with the multitrillion-dollar accounting fraud[/quote]What about it? Why does a study of bear raids have to also mention accounting fraud in order to escape your "curiosity"?

[quote]Anyway, I have a simpler explanation for what happened to Citi (and other bank) shares:[/quote]... and creationists have a simpler explanation for what happened to the dinosaurs.

- - -

Gee, Ernst, the authors of the bear raid study don't dispute or contradict anything you've speculated in this forum AFAIK. They don't say, "E. Mayer is wrong."

Look at their opening sentence:

"We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007."

They studied a particular type of market manipulation at the beginning of the financial crisis in November 2007. Period.

So, why your "... curious that the authors appear to only be concerned ..."? Does it bother you that the authors confined themselves to their stated scope of investigation, instead of expanding their study to encompass all of [i]your[/i] concerns about the financial mess?

I think bear raids are among the least of the problems that bedevil the financial industry. If people want to make a difference they would be better advised to concentrate their attention and resources elsewhere. Some people find topics like bear raids especially emotional. I wonder if this set intersects with those who call all bears anti-American and hate them from profiting when most are losing.

Ernst raises a very important issue because we have to see whether bull raids occur in the same way as bear raids because if they do there is nothing especially evil about bear raiders and the uptick rule wouldn't have solved anything. Nobody has ever talked about bringing in a downtick rule. Why this asymmetry? So having skimmed the article I do think there is an agenda behind it. At best singling out bear-raiders distracts from far more important topics such as lack of regulation in the derivatives industry, IBGYBG culture that focusses on short-term profit while destroying the companies and the economies, the emergence of dark pools and Congress insider trading.

BTW, the thesis of the bear raiders was right. Citi and the other banks were in the shitter in less than a year and not because of bear raids. They were and are still insolvent and if there was justice in this world they would have been declared bankrupt three years ago.

PS
 

A more detailed reading reveals that the authors of this article are officially idiots!

[QUOTE]Changes in investor behavior are often explained in terms of specific news items, without which it is expected that prices have no reason to change significantly [13, 14]. The press attributed the drop of Citigroup's stock price on November 1 to an analyst's report that morning [15, 16]. This report, by an analyst of the Canadian Imperial Bank of Commerce (CIBC), downgraded Citigroup to "sector underperform" [17]. Any such news-based explanations of investor behavior on November 1 (similarly for November 7) would not account for the difference in behavior between short sellers and other investors. Under the assumptions of standard [14] capital asset pricing models, all investors act to maximize expected future wealth [18], and should therefore respond similarly to news.[/QUOTE]Their entire thesis is based on CAPM, that long investors would react the same way as short-sellers would to a news event. Evidently, they have never bought a stock and held it as the news went against them. I can tell from personal painful experience that that is not how people react. We are emotional creatures and far too many of us keep holding on to something when selling it would require us to admit a mistake.

So I call a big load of bullshit on this article. :poop: :poop: :poop:

But that having been said, those days are statistical outliers and do point to the undue influence large traders and insiders have on stock prices. Stock exchanges in the US are singularly failing in providing transparency and a level playing field to all investors.

[QUOTE=garo;282400]Their entire thesis is based on CAPM, that long investors would react the same way as short-sellers would to a news event.

< snip >

But that having been said, those days are statistical outliers and do point to the undue influence large traders and insiders have on stock prices.[/QUOTE]So their entire thesis is based on one thing, [I]except that their topic sentence is that they provide direct evidence (those outliers) of something else?[/I]

I find your logic confusing.

Why is this report a load of b___ when it specifically points to what you yourself admit they "do point to", something you cite ("undue influence") as a problem?