The Managed Funds Association (MFA) may be regretting inviting Commodity Customer Coalition (CCC) co-founder James Koutoulas to speak at its recently concluded Forum 2012 conference in Chicago this week. See Koutoulas took MFA and other industry leaders to task for failing to represent the interests of its members, leaving it up to CCC’s small team to advocate on behalf of traders despite MFA’s larger budget and defined mission.
Koutoulas asked those in the audience what they were getting from their investment in MFA.
Koutoulas referred to the MF Global debacle as the biggest crisis the industry ever faced. “If someone is allowed to steal $1.6 billion out of segregated accounts and get away with it, no one should have any confidence in the U.S. financial system as others could loot bank accounts, 401ks, or IRAs with impunity.”
Perhaps he should have added, hedge funds and commodity pools. He said, “The entire industry froze like a deer in headlights leaving customer protection to a 30-year-old lawyer with no bankruptcy or litigation experience, his little sister, two volunteers, and one bankruptcy lawyer willing to help at a deep discount. And, while we went up against JPMorgan and trustees who had billed over $50 million in fees using under $200,000 in donations, the industry groups who supposedly exist to protect customers spent their time and money lobbying to weaken regulations just like Corzine did for the loophole that allowed MF Global to trade European sovereign debt and Jamie Dimon did for the loophole that allowed the whale trade to happen. “
Koutoulas didn’t leave CME Group and other brokers out of his rant even with CME COO Bryan Durkin on the panel, stating that “it was in the best business interests of FCMs and the CME to form a consortium to give customers 100 cents on the dollar for their claims back in November so the industry could continue to say no one has ever lost a penny in a segregated account and restore the diminished faith in the clearing system. “
Oddly around the same time Koutoulas was ranting, MFA leadership was having a press briefing (the Forum event was not open to the press) where they still didn’t seem to understand the impact of MF Global. MFA President and CEO Richard Baker said, It is understandable that a firm with assets frozen would be concerned with the process in the manner in which those funds would be returned,” but then added, “It is not significantly different than what happened with the Lehman problem. We learned about the slowness of the bankruptcy proceeding.”
Here is the disconnect for Baker and MFA as MF Global is significantly different from Lehman because the sanctity of customer segregation was violated. That is the whole ball game. It is not the slowness of the process that has folks angry it is the fact that rules were not followed and the folks they thought represented them did not stand up and say ‘hey, wait a minute, customers need to be made whole immediately.’
“I advised not to attack the system I don’t think that is to anyone’s best interest,” Baker added. “We are trying not to be critical of the process or any individual in the process.”
He compared this to his work as a Congressman and stepping back from advocating on behalf of a constituent when an issue has become part of a judicial process. But part of MFA’s mission is education. Perhaps their lawyers should have asked for a seat at the table when a judge allowed MF Global to file Chapter 11. The Commodity Futures Trading Commission (CFTC) was there but remained silent when an attorney for MF Global stated that he didn’t believe there was any shortfall in customer funds despite a statement by the firm's general counsel to the contrary the day before.
Regarding whether the CFTC erred in allowing this to go to SIPC and its general handling of the situation, Baker said, “An outside trade association informing a regulator of their duties is not well advised from the long haul.”
I have a feeling that Koutoulas would not agree, especially as in this case, if the trade association represents people who would be harmed if the regulator does not perform its duties.
Baker concluded, “The focus should be for us to understand the factual matters as best they are determined and then going forward [with] how to keep this kind of train wreck from happening again.”
Koutoulas also explained CCC’s recent proposal to the Senate for an interim liquidity facility.
He concluded by highlighting crimes he believes were clearly committed by MF Global. Things we know happened that do not need to wait on an official investigation.
“Crimes were committed and people need to go to jail to deter future criminals from looting customer accounts,” Koutoulas told the audience.