"Bulls make money, bears make money, pigs get slaughtered."
That trading axiom has come up in numerous conversations following the MF Global bankruptcy and has meaning beyond the fact that MF Global’s Chairman and CEO Jon Corzine was building a huge leveraged position in the sovereign debt of many of the so called "PIIGS" (Portugal, Italy, Ireland, Greece and Spain).
It has to do with greed and the simple fact that those positions were over-leveraged. But as we go to press two weeks after MF Global filed for bankruptcy, the details of the failed trades and legacy of MF Global and its predecessors are a minor sidebar in a scandal that goes to the heart of the futures industry — customer protection through segregation of customer funds.
The futures industry has held itself out as a beacon during the recent credit crisis based on the fact that futures customers did not lose a single dollar outside of market risk, and no regulated futures firm needed government bailout money. But MF Global Holdings declared bankruptcy on Oct. 31 because an acquisition by Interactive Brokers Group fell through when an apparent shortfall in the futures industry’s holy of holies was discovered: A shortfall of $633 million, 11.6%, of MF Global segregated funds.
It is the fact that seg funds were missing that turned what in the past had been relatively orderly bankruptcy transitions to a drawn out process with customers left in the lurch. Dan Driscoll says that any shortage in seg funds complicates the matter because it can entail more risk to the firms taking on the accounts. He says the segregated funds can be three places: a clearinghouse, FCM or a bank.
"What happened to the sanctity of customer segregated funds? Was it always a mirage? Were we just fooling ourselves all these years?" asks David Matteson, partner and member of the Investment Management Practice Group for Drinker Biddle.
His sentiments have been repeated dozens of times over by various segments of the industry.
Our timeline of the MF Global debacle (below) lists facts but cannot convey the confusion, dismay and ultimately anger that followed. Accounts were frozen, traders were blocked from the floor and liquidation-only policies were confused, with customers facing on-again/off-again access to their accounts.
"I lived through Refco and a couple of smaller bankruptcies in the industry, but this one is the most disorganized. This is not an orderly transition of business," said Dorman Trading COO Marc Nagel shortly after the bankruptcy.
The first order of business was assigning control. Because MF Global Inc. was registered as both a FCM and broker/dealer, the Securities Investor Protection Corporation (SIPC) was granted control of the liquidation by the U.S. District Court for the Southern District of New York, and James W. Giddens was named trustee.
This appears to be mandated by the Securities Investors Protection Act (SIPA) but has raised the ire of futures customers. According to the trustee, MF had 50,000 futures accounts and only 400 securities accounts.
"Where was the leadership from the CFTC (Commodity Futures Trading Commission) to argue that we don’t want the futures side to go through SIPC, we want it to be a Chapter 7, because we need to get our clients’ money in their hands ASAP, and we want to be in control of that?" Matteson asks.