Archive for December 8th, 2011
(Reuters) – For the first time in 25 years, Minnesota farmer Dean Tofteland has missed his deadline to buy seed for next spring’s corn and soybean crops.
With $200,000 of his money yet to be returned from the accounts of MF Global, his former broker, the 49-year-old farmer has missed a $5,000 discount for early buyers, and is watching friends and neighbors snap up the best varieties of seeds.
In the latest sign of how MF Global’s failure is continuing to cascade across the commodity industry, Tofteland and other farmers who have yet to recover more than a third of their money from the bankrupt broker now find themselves in a cash crunch that risks rippling far beyond the futures market.
Some farmers have had to postpone purchases of land or equipment. Tofteland still expects to sow his 1,000 acres in the southwest corner of the state, but may have to borrow money to do so.
Still, the delay in returning billions of dollars in customer funds more than a month after MF Global filed for bankruptcy is starting to affect actual decisions on the farm. This threatens to cloud the outlook for U.S. crops, warn farmers who have been ratcheting up pressure on the bankruptcy trustee to move faster to disperse any cash he secures.
“That’s pretty serious when you’re raising food for the country and the world,” Tofteland said.
For most farmers, the fact that their broker may have taken as much as $1.2 billion of customer money for its own use is bad enough. But the seasonal business of farming is now being disrupted since regulators still can’t account for the missing funds, or even agree how big the hole is.
The chief regulatory officer for CME Group said on Tuesday the exchange was confident after more investigations that some of the higher estimates of the shortfall in MF Global customer funds were inflated. CME was MF Global’s main regulator at the exchange level.
“The amount of money that we have tied up is significant,” Tofteland said. “Because of this I’ve been delaying my seed purchase decisions.”
Tofteland normally would have made his purchases at least two weeks ago to take advantage of discounts for farmers who buy early. He has avoided borrowing money in order to do so because he does not want to take on more debt but says he will consider a loan if the delay persists.
Tofteland worries his harvest next fall will suffer because the best-performing types of seeds will likely be sold out by the time he makes his purchases. He still plans to plant his crop in the spring.
Farmers are among the thousands of former MF Global clients who are missing money from the brokerage. The firm run by former New Jersey Governor Jon Corzine, an ex-CEO of Goldman Sachs, collapsed on October 31 after making bad bets on European debt.
The bankruptcy had an immediate impact on farmers’ abilities to hedge their crops at grain exchanges. Many had to liquidate positions or put up additional cash to meet margin calls after their accounts were transferred from MF Global to other brokerages.
Now, the collapse has begun to impact farm decisions that can directly affect output.
In Montana, Marty Klinker, who grows wheat and barley, is missing about $275,000 from his accounts at MF Global. He said the shortfall caused him to delay buying more than $500,000 worth of farm equipment, including a tractor and combine, from manufacturer Case IH.
Klinker didn’t know whether he would eventually buy the equipment, which would replace older models on his farm. He said he has to decide by the end of the year to take advantage of prices he previously negotiated with the company.
Case is a brand of CNH, a majority-owned subsidiary of Italy’s Fiat SpA. A Case spokesman did not respond to a request for comment.
“We’re right in the middle of year-end equipment decisions,” Klinker said.
FARMERS CAUGHT OFF GUARD
MF Global’s collapse has not completely halted farm purchases.
Stine Seed, which calls itself the largest independent U.S. seed company, has not seen a slowdown in sales, said Myron Stine, vice president of sales and marketing.
Yet, other agribusiness professionals confirm shockwaves from the bankruptcy have disrupted plans affecting crop production.
Diana Klemme, a broker for Midwest grain elevators and vice president of Grain Service Corp in Atlanta, said one of her clients was holding about $400,000 cash in an MF Global account at the time of its collapse. The client had to delay purchasing some land because the money had been frozen, she said.
Farmers were caught off guard by the disappearance of their money because it was held in segregated accounts considered to be immune from troubles at brokerages. Several farmers said they had felt it was safer to keep cash in the accounts than at local banks.
Aaron answered them, “Take off the gold earrings that your wives, your sons, and your daughters are wearing, and bring them to me. So all the people took off their earrings and brought them to Aaron. He took what they handed him and made it into an idol cast in the shape of a calf, fashioning it with a tool. Then they said, “These are your gods, O Israel, who brought you up out
of Egypt.” – Exodus 32:2-4 (NIV)
It seems to me that in this day and age of economic/social/political uncertainty, more and more people are frightened and have started clamoring for something away from the Old System of our economic norm: principally fiat currency (i.e. money with no tangible assets backing it, but just the good faith and credit of the government). These people are alarmed by the recent decline in monetary values and the specter of inflation and possibly hyper-inflation. Increasingly, they use the examples of runaway inflation in Argentina in the 1990’s and Weimar Germany in the 1920’s to prove that fiat currency is inherently evil and unreliable. So, in their fear they turn to a substance which they believe is indeed right and true, gold, in order to return us all to what we want: a bull market and good times.
While there are indeed many problems with the status quo, I firmly believe that a rush by the people to call for a resurrection of the “golden bull” of a gold standard in the United States may lead to inevitable ruin, just as it did for those who strayed in the Hebrew Bible. As much as the gold-standard proponents tend to point to history, I too will take a cue from the pages of days gone by. Following the establishment of the Federal Reserve System in the U.S. in 1913, the American people were promised economic stability and prosperity. Instead, they underwent two recessions and The Great Depression within 25 years, all while under a Gold Standard. The Panic of 1907 was instigated during a Gold Standard, as were recessions, depressions, and bank runs throughout the 1800’s in our country.
In times of antiquity, many countries can attribute rising economic periods and prosperity for the majority of their citizens while using fiat currencies. The Romans (copper and bronze coins), England (tally sticks), and the American Colonies (Colonial Scrip) are but a few examples of economic prosperity and development under stable fiat currency systems, some lasting for centuries.
So, why the sudden push for a return to a Gold Standard?
I believe there are two reasons, primarily. One, the average citizen today is not aware of the economic setbacks under gold standards in the past and is lulled and enticed by terms such as “solid,” “stable,” “real,” and “inherent” when describing gold’s value. They often point to gold’s scarcity to highlight its inherent value to societies throughout history, stating that it will not lead to inflation or hyper-inflation. However, I submit that it is specifically because of gold’s scarcity that it is a dangerous commodity to base one’s economic hopes. Gold’s scarcity makes it easier to control and manipulate by a small number of powerful elites, which leads me to the second reason for the recent push for a gold standard: Central Banks.
While publicly central banks around the world appear to downplay the value of gold and its role in establishing a “stable” currency anytime in the near future, their actions seems to discredit their assertions (in recent Congressional testimony, Federal Reserve Chairman, Ben Bernanke went so far as to say “No,” when asked if gold is money). In the past decade most central banks around the world have turned from being net sellers of gold bullion to net buyers. The largest single holder of gold bullion today is the International Monetary Fund (IMF, the central bank of central banks). And there is substantial evidence to suggest that the gold thought to be in Fort Knox, Kentucky is no longer there and has been transferred to the control of central banks, out of the hands of the American people.
So, while the American people may run to their high priest of finance and cry for a new golden calf to be made so that they may worship at its feet, we should all remain vigilant of the need to steer away from anything that takes more power out of the hands of the American people and puts it into the hands of a select group of über-rich bankers. Perhaps instead we should wait for the prophet, who right now is getting the divinely inspired word that yes, indeed, we can have economic prosperity, if only we will take the power to create money out of the hands of the big banks and put it back into the hands of We the People. I think I see him coming down off the mountain now…
What we need instead of a Golden Calf is an end to the debt-standard of money creation. Currently, when the American government issues more money, they do so by borrowing it into existence, issued out of nothing, by a small group of mega-banks. And while that system may work for a while, it is inevitably doomed to collapse, as you can never get rid of debt by borrowing your way out. Instead, we need to get back to what our government is constitutionally mandated to do: coin money and regulate the value thereof. It’s been done before in America. President Abraham Lincoln won the Civil War with debt-free currency (the “greenback”). The colonies prospered under a debt-free fiat-money system.
If the American people are tired of economic uncertainty, depression, and stagnation, we should indeed consider the past – and not consider a gold standard.
By Torin Nelson
If you want a way out of the perpetual debt slavery, make your vote count this time. Support real hope and change you CAN believe in: Bill Still Still2012.com
“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine’s prepared testimony read. “I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules.”
Sarbanes-Oxley requires him as the CEO of a company to (1) guarantee that effective risk controls and rules are in place and (2) monitor their compliance. It renders failure to do so — that is, the old-fashioned “I didn’t know” defense that was routinely used after 2000-era failures in the Internet space – a felony.
Now of course Mr. Corzine is entitled to the presumption of innocence and he is entitled to a trial before being pronounced guilty, but the law on this point is clear: Executives, the CEO and CFO in particular, are required under Sarbanes-Oxley to factually know about matters such as this and they are required to attest to that knowledge — and the presence of appropriate and sufficient risk controls under penalty of felony indictment.
It appears that Mr. Corzine has admitted in front of a Congressional Committee that he does not know, and therefore this appears to be a prima-facie admission that he is in direct violation of this law.
If this is not dealt with on an expeditious fashion and the law is not enforced you have just seen proof on national television that there is no longer a rule of law in this nation of any substance.
You must, therefore, presume that there is no longer any Constitutional protection afforded to you and you thus have no rights and no recourse to the law of any sort. Your “rights” have just been downgraded to only that which you are willing and able to personally enforce at any instant in time.
This in turn means that it is impossible for you to engage in any sort of commercial transaction where performance cannot be verified before you hand over payment in full, because you have no means of compelling the other party to perform and no recourse of any sort to the law, nor do you have any expectation that someone who violates the law, irrespective of who it is, will be held to account.
This sucks, to be blunt, but it is the world we live in as of today and if you have any hint of intelligence it is the operative assumption you must make here, now, today and forward until there is evidence otherwise.
As I opined rather quickly when MF Global collapsed, the real risk is not that a futures merchant went under. Brokerages go under all the time — I went through two “consolidations” after 2000 and in both cases my assets and trading accounts were simply moved over to a new entity. How “forced” those were is open to some question, but from my perspective I went to bed one day with an account at “X” and woke up with one at “Y”. Nothing disappeared.
The problem occurs when you wake up and assets have disappeared. This has become a disturbingly-common pattern of late, from Bernie Madoff to Stanford and now MF. As Reuters reports:
(Business Law Currents) A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.
MF Global’s bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
What most people don’t understand is that when you open a brokerage account you allow your assets to be used to ”borrow, pledge, repledge, transfer, hypothecate, rehypothecate,loan, or invest any of the Collateral”
Absolutely standard boilerplate language.
But here’s the problem — this is “in accordance with Applicable law.”
This use, incidentally, is why brokers scream that trades are “just $5!”
Well, yes. But your money is being used by the brokerage, more or less, as collateral.
But there’s a difference between earning on your funds and securities (which brokerages do all the time) and stealing your assets. The latter occurs when the law is circumvented — whether legal or not.
And it appears that it was — UK laws appear to contain no limits on the amount of hypothecation or re-hypothecation that can take place. MF Global thus appears to have transferred client assets outside of US jurisdiction where they were then subject to much looser — effectively zero — in the way of risk controls!
But the underlying means by which this escaped surveillance is the same means by which both Lehman and Enron blew up — the use of off-balance-sheet vehicles to hide total risk exposure.
Specifically, these “repo to maturity” deals which our current law permits to be booked as “purchase and sale” agreements, thus realizing the expected coupon flows as “profit.”
The flaw in this reasoning is that a “true sale” must be just that — it must leave you with no obligation beyond the execution. But that’s not true here — if the collateral declines in value either in the interim or at maturity the entity can be forced to make up that shortfall either through posting more margin or through an offsetting settling charge.
As such allowing this to be taken off the balance sheet is an outrage, as there is a continuing obligation and risk of loss that goes beyond the date when the agreement is consummated. That is, it’s not a “true sale” despite being able to be counted as one under existing law.
The myth that is operative here is that lending to sovereigns is “zero risk” and thus the face value of a sovereign bond is the value at maturity. This fiction leads to the accounting treatment. But this is a factual lie — not only now, but always, because lending to a sovereign is nearly always, as a matter of both fact and law, unsecured.
As such there is nothing other than a bare promise standing behind these loans – and governments break promises all the time.
If you remember some of my earliest rants from 2007 they focused on the off-balance-sheet games that were being played at the time. I called them nuclear financial weapons of mass destruction because they are — such vehicles are always a scam in some form, as the only reason to use them is to hide from customers, regulators and the common public the amount of risk you have on.
That is, they have as their essential purpose in each and every case the intentional hiding of the amount of leverage that the entity involved has taken on, and thus it serves to intentionally overstate the amount of loss that entity can absorb before it is rendered bankrupt.
In short, in each and every case the intent is to deceive and thus induce other parties to enter into transactions at terms they would not be willing to transact under were they to know the truth.
THEY ARE THUS INHERENTLY FRAUDULENT CONSTRUCTS IN EACH AND EVERY CASE AND IF WE HAD AN ACTUAL JUSTICE SYSTEM IN THIS COUNTRY EACH AND EVERY INSTANCE OF THESE CONSTRUCTS WOULD BE TREATED AS A SERIOUS FELONY RESULTING IN ARREST, INDICTMENT, PROSECUTION AND IMPRISONMENT.
We learned this when ENRON blew up with their infamous “barge” transactions and then once again in 2008. Yet despite these two stunning examples and absolute proof that the essence of these transactions is the intentional hiding of risk and deception of clients and counterparties we have refused to prosecute these “instruments” as unconditionally unlawful acts despite the fact that their essential purpose is in every case the deception of others.
And now we have farmers and others who did the right thing — who engaged in ordinary financial practices that have existed for centuries and which should have involved no execution risk of materiality at all – who once again got robbed through the intentional hiding of risk and this intentional deception.
The damage is to systemic liquidity and confidence. The games are still being played this morning over in Europe in a furious attempt to “restore confidence” but in point of fact the underlying scam lies here — and until it is addressed and stopped there will be no resolution or stability.
The Agriculture Committee this morning is once again playing “dog and pony show” while Eric PlaceHolder refuses to indict and Obama says that “nobody did anything unlawful.” This is a blatant and outrageous lie by all parties in the government — off-balance sheet acts are in each and every case an act undertaken with fraudulent intent as their entire purpose is to conceal the risk and size of a given transaction.
And finally, let me reiterate what I’ve said since this story broke: So long as there are off-balance-sheet liabilities and derivative contracts have preference over deposits — both of which are true in the present time — this very same risk is present for anyone with a BANK OR INVESTMENT ACCOUNT OF ANY TYPE in The United States. If you believe otherwise you are wrong.