For several years I’ve had a commodities trading account. I started with an account with Refco, but after bankruptcy proceedings they were sold to Mann Financial, eventually becoming MF Global. This firm recently was headed by Jon Corzine, the former governor of New Jersey. I guess all of this taken together probably should have given me pause, but I was like the proverbial frog in the pot of water being slowly brought to a boil.
I might add that I don’t trade futures for a living, but it is something I have been doing for over a decade. I have developed computer-based trend-following systems that I have had some success trading, but I certainly haven’t become wealthy using them. It is more like a zany hobby than anything else, although I am trying to make money. It certainly isn’t my family’s sole or primary source of income. Fortunately.
Last week, on 31 October 2011, MF Global declared bankruptcy. While not overly reassuring, this shouldn’t be a huge problem, as my personal funds are held in a segregated account. It says so right on the statement I get after each trade, and at the end of every month. Except that this time, some $600M or so of customer’s funds has gone missing. That isn’t supposed to happen with segregated funds. This is the cardinal rule of brokerages, I’m told by my introducing broker (IB).
After I heard about the missing funds, I called my IB and asked him what was going on. I wasn’t too concerned since I had received my October end-of-month statement and it didn’t have anything abnormal at all on it. My IB informed me that my account was frozen, along with everyone else, and that my orders had been canceled.
This is troubling, since I now have risk positions in the market and no way to exit them. Had there been a sudden crash in one of the 5 markets that I had open positions in, I could lose lots of money and the normal risk control measures, such as using stops or monitoring the markets and exiting positions when the market moves against me, were not going to work. The only real comfort was that there were literally thousands of others in my same position, so I doubted that a sudden market run would occur.
I called my IB on Tuesday, and he suggested that I call MF Global and try to exit my orders. I called MF Global and a harried soul answered the phone and told me that my funds had been frozen by a bankruptcy court and my positions were frozen, as the CME Group had suspended their access to their accounts. Rather troubling turn of events, I must say.
By Wednesday I was reduced to checking on my smartphone to see what I feared would be a sudden move against me, eliminating the profits from what had been a good year of trading so far. Fortunately, the market actually moved slightly in my favor, easing my concerns a little bit. I still couldn’t exit any positions, however. I debated adding money to another account that I could use to try to hedge, but I figured that I would have access to my account again before the money would be available for trading. I tried to read as much as I could about the MF Global situation, and it was rather troubling. It appears that their customers are about 11% short. Not good, considering this was in supposedly segregated accounts. While in my mind I knew this was probably theft, I was hoping that it was a simple clerical error. Come to think about it, only the government would be stupid enough to make a $600M clerical error. This had to be some sort of fraud.
Thursday came and after phone calls to my IB and MF Global I knew as little as before, except that things were not looking good. I took some comfort in the markets continuing to move in a profitable direction for me. Of course, it wasn’t hugely in my favor, but enough to keep full-fledged panic at bay for a while.
On Friday my IB told me that it appeared they would transfer the accounts to another broker so we could at least access our trades and eliminate some risk. Unfortunately, most of the money in the account would still be frozen in the bankruptcy proceedings for who knows how long.
Over the weekend, I started getting account statements from MF Global and a new broker that had my account transferred to. The MF Global statements still had all of my funds in them, much to my relief. But that doesn’t really mean anything, really, I realized, since the October end-of-month statement also showed no sign of any problems, either.
Sunday night I realized that I had a problem. The bankruptcy court only approved 75% of the maintenance margin (amount of money required to be in the account to keep a position open) for all of the trades, meaning that I would have to send in a fairly sizable sum by the end of Monday or close some of my trades. Since about 80% of my account is still frozen, this isn’t a hard decision at all. I closed most of my trades so I am under the margin requirement while I wait to see how long my money is frozen, and how much I eventually get back.
The good news is that Jon Corzine resigned, and was good enough not to seek his $12M severance pay. How big of him! I don’t know if he had anything to do with the missing $600M or not, but he is the head of this operation. While my account is relatively small, and not the source of my livelihood, there are many thousands of others who are in a real bind. I know that there are procedures to follow with bankruptcy, but if they don’t get their money back soon, we are going to be adding to our unemployment numbers. As my IB told me today, the silver lining in all of this is that President Obama is unlikely to appoint Mr. Corzine to be the next Treasury Secretary, as was rumored to happen soon. I must say he appears to be over qualified for that job, given the rate of losses and missing money.
I don’t know how this will play out; the folks in Chicago that I’ve talked to seemed pretty sure that some folks were going to jail over this, as it is gross negligence at best, but more likely fraud. Of course, whether we get our supposedly segregated funds back remains to be seen. I guess if you are held up at gunpoint and robbed, or participating in supposedly well-regulated markets, robbery is still a threat.
And don’t chalk this one up to lack of regulations. There are regulations all over the place, and now they have the government alphabet soup regulatory agencies poring over the files from MF Global. Either the regulators are also culpable, or there is criminal activity, but the regulations are on the books. Like gun control laws, financial regulations are only as strong as the conscience of those supposedly following them. Criminals, whether blue collar or white collar, are criminals because they don’t follow the law, not because there aren’t enough laws.