MF Global Debacle Will Get Uglier

This is going to get uglier. MF Global was what is called a FCM (Futures Commodities Merchant.) It was a major player in the options and futures business. Apparently they made a big bet on Eurozone debt which turned out to be a disaster. When they tried to sell the company to another FCM it was discovered that there was $633 million in customer accounts missing. It is not legal for a FCM to commingle customer accounts with shareholder assets.

SIPC does NOT insure commodities. Even customers with only cash in their MF account may take a loss if the trustee looks at account activity and determines that cash was only being used to trade commodities such as futures and options.

These accounts are mainly used by market players in futures and options. These folks often must keep buying and selling positions to mitigate their risk. Google the expressions “delta neutral” and “gamma neutral” to learn more. Someone with substantial positions in MF would have to open another account at another FCM just to contra against their present positions.

This is akin to being locked in your house and watching a big piece of ice melt because you are not allowed to go out, get it and put it in the freezer.

This is likely to become a story about Jon Corzine. The fact that this gentleman was a Democratic governor of New Jersey and a big backer of Obama is going to become a cause celebre for the right wingers at at Fox and Drudge. The position that MF took which destroyed it was his idea and the chatter I have heard was that many folks at MF were against it. The misappropriated $633 million is going to become an extremely ugly legal issue.

MF is not an entity like AIG. It is unlikely to create counterparty risk. The only people screwed will be its well-off clients. This runs counter to the OWS theme. This is a case of one Wall Street firm screwing its wealthy clients. These folks are not likely to be demonstrating anywhere soon.
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