It’s time to get excited! They found the missing MF Global money!
Hate to burst your bubble, but you may want to wait a minute before you jump for joy. Here’s the background…
CFTC Commissioner Jill Sommers, who was put in charge of conducting the MF Global investigation after Gary Gensler recused himself due to his personal connection with Corzine, came out yesterday and said that they were far enough along the trail that they know where the money went. Now, it’s a matter of figuring out which transactions were legitimate and not.
This is certainly good news, and an improvement over the complaints about bad bookkeeping that we were previously hearing from the CFTC. That being said, there are a few things you need to think about:
1) They know where the money went- that doesn’t mean they have it.
The comments made by Sommers indicated that they now have a clear picture of the transactions that were made. She did not say that they had located the funds in an account, or that they had recovered the money, which, if it were the case, would definitely have been blasted out as a victory cheer from every corner of the earth. This development, unfortunately, does not give us any indication of when (or if) that money will be available to the clients.
2) They don’t know where all of it went, though.
Sommers may be confident that they now have the full story, but CFTC Commissioner Bart Chilton is not. Shortly after Sommers’ comments came out, Chilton tempered expectations of how much money had been accounted for, saying “Based upon the most up-to-date information available, I do not have confidence that we know where all the money went.”
3) They’re still figuring out if these transactions were legitimate or not. If not, well…
It’s been made clear that, assuming they do get their hands on any amount of the missing money, it will not be distributed until the nature of these transactions is fully understood. This is the part that makes us nervous. We’re hoping everything works out, but some have speculated that those funds could have been transferred from an American bank to an international subsidiary in order for MF Global to skirt regulations on rehypothecation and get access to extended lines of credit.
Such a transfer may happen regularly for an FCM such as MF Global, making the movement look routine on paper, but it’s that rehypothecation component that could cause an issue. Should it be determined that this was the case, it’s likely that we’ll be watching a complex financial legal battle over whether those funds are now the property of the lien holder (i.e. the bank to which the collateral was pledged) or the MF Global client- pitting individual investors against big financial institutions once more. Anyone else think this sounds like 2008?
Further reading: Reuters