CME to Customers: Drop Dead

When I worked for Sumitomo Bank, I needed to buy a pricey book that catalogued the equipment in cotton spinning mills for a client (we’d been engaged to help him acquire a manufacturer, and he was interested only in certain types of machinery).

I sent one of the guys in my department to get the expense approved by the General Affairs department (no approval, no reimbursement). For convenience, we’ll call the person I sent A and the General Affairs fellow Mr. Noh.

A: We need to purchase this book to complete this assignment for a client. You know he’s a really big and important customer. Here’s a copy of the engagement letter. You can see that they’ve agreed to reimburse all expenses. They keep nine figure balances in this branch, so there’s no risk.

Mr. Noh: There is no budget in your department for books.

A: I don’t understand why that matters since the client is going to pay the cost.

Mr. Noh: There is no budget in your department for books.

A: How could we know to budget for this? Are we to allow for every possible contingency? Then we’d have a budget way bigger than we needed and we would not be careful with our spending. You of all people know how expense conscious our bank is.

Mr. Noh: There is no budget in your department for books.

This went on, I kid you not, for 20 minutes, since A by this point was very well schooled in dealing with a Japanese bureaucracy. Finally Mr. Noh slammed his desk and exploded:

You do not understand. Organization is more important than customer.

The good thing about the Japanese is they are willing to tell you things like that straight up, at least is you persist in being a clueless gaijin long enough.

Most Westerners laugh when they hear that story, because it sounds patently ridiculous. After all, businesses depend on customers, and any business that acts like they have the whip hand will suffer a loss of business.

But we are now seeing that Sumitomo was simply ahead of its time. The bank had been the head of the Sumitomo zaibatsu, which after the war continued in a lite form known as keiretsu. The Sumitomo group was the most cohesive, and the bank really did tell certain group companies like Mazda what to do. Others operated more autonomously, which folks at the bank found annoying. So for it to assume it didn’t necessarily have to be all that attentive to “customer” needs was not quite as barmy as it sounds.

We see a variant of the Sumitomo “customer be damned” attitude becoming widespread in financial services. The latest example is CME, which is under the hot lights in the wake of the MF Global debacle. Legislators are trying to get in front of the unhappy mob of wronged customers and call it a parade. And an obvious focus of inquiry is the self regulated derivatives exchange, the CME Group, which also oversaw futures commission merchants like MF Global. Worse, MF Global had gotten a clean bill of health from the CME in its last audit.

Needless to say, this isn’t merely a “gee maybe we need to do something about bad practices” issue. As various market participants have fulminated, this strikes at the heart of the integrity of markets. If you can’t be sure a large and supposedly reputable broker won’t pilfer your accounts, it makes no sense to participate in those markets. Not surprisingly, CME trading activity has fallen sharply.

Now you would think a buyers’ strike would persuade the CME that it needs to restore credibility. But the 21st century version of that seems to be to engage in lobbying to preserve the status quo rather than do what it takes to win back customers’ trust. The Financial Times tells us the CME is girding up for a fight:

“CME has one of the most effective government affairs operations in the nation’s Capitol. I’ve rarely seen them on the losing end of an issue,” says Robert Holifield, a former staff director on the Senate agriculture committee.

CME has spent more than $8m on lobbyists since 2008, ranking each year within the top 20 biggest spenders in the securities industry, according to data compiled by the Centre for Responsive Politics, a non-partisan research group.

It has also been a big donor to political campaigns, laying out about $2m to candidates, party committees and leadership political action committees in the last two election cycles, according to the Centre for Responsive Politics.

This year, CME donated more than $75,000 to lawmakers who serve on the House agriculture committee and over $97,000 to members of the Senate agriculture committee. These committees oversee the Commodity Futures Trading Commission, the government futures regulator, which in turn supervises CME’s role as a self-regulatory organisation.

And you have to love the CME’s admission of failure couched as success:

“In the case of MF Global, we did everything we could within our regulatory power, but MF Global broke exchange rules and government regulations designed to protect customer funds. Because the firm failed to comply with regulations, that does not mean the system failed,” the group said.

Huh? First, we don’t know exactly what happened. Therefore the CME’s confident claim that it was blameless is premature. Second, it admits the process WAS defective. If the overseer did everything right and you have an MF Global level disaster, the system failed. I’m actually amused at this NewSpeakish formulation “We’ll admit to a damning fact set but maintain everything was fine.”

Now there is a possible out for the CME: that MF Global staff mislead auditors and/or filed inaccurate regulatory reports. Given that the firm unraveled quickly, it would not be fatal to the CME if it were hoodwinked for a while by doctored information. But that in turn would imply a real conspiracy by MF Global staff. So a scenario that is favorable to the CME argues for throwing the book at MF Global.

But back to the bigger picture. Here we have the CME taking a hit in trading volumes, and it acts as if it can just ride it out. I don’t see why customers would or should get over their shell shock quickly. We see the same behavior in the securitization market. Investors know damned well they were had. The FDIC put forward a proposal of reforms in a Advanced Notice of Proposed Rulemaking in early 2010 which looked to be a pretty good set of measures designed to get investors back in the pool. But the sell side refused to consider it, and so we remain with pretty much the entire mortgage market on government life support. And the worse is that the media continues to parrot the bank/originator line that it is “market conditions” that are keeping investors away from private label deals, when it is in fact the industry’s own intransigence.

Here the CME does not have (to my knowledge) the prospect of a government guarantee to boost business. And on top of that, futures traders and fund managers are far more aggressive and outspoken than their mortgage brethren, who have been remarkably slow to stand up to abuses. So it would seem to have far less reason than the mortgage industrial complex to be confident that it can stare its customers down.

But maybe I’m out of touch with the zeitgeist. Or perhaps the iron law of institutions is at work, and people at the CME are all working to preserve their posts, with little regard for what it does to the organization. Maybe in this brave new world of rule by banks, not ceding any ground is more important than profit. If you were really paranoid, you might wonder about whether any individuals here were confident a tough stand in this battle would lead to rewards elsewhere.

All I know is that self regulatory bodies can work in the wake of a 1929 level wipeout, when even more than forty years later, securities trading still had an unsavory air about it. That gave industry incumbents a big incentive to embrace tough standards. Now, with members operating almost entirely with other people’s money and looting a widespread phenomenon, the time for firm, outside oversight is long overdue. How we get that with DC largely captured by banks is an open question, but letting the industry mind itself is no longer a desirable option.

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  1. Hugh

    I’m not sure where the CME is in this but it wanted to set itself up as a derivative clearinghouse. Given its conduct with regard to MF Global, I have to wonder how much cred it would have as the guaranteeing counterparty. Perhaps this is a salutary event. Clearinghouses were never going to be remotely adequately capitalized to handle another crash. The CME’s current actions simply strip away the pretense that its guarantee meant jack.

  2. psychohistorian


    Thanks for another great posting on the ongoing “failures” of the finance industry.

    As I read it I couldn’t help but think about an analogy to the US being the current Reserve Currency of the world and all those countries continuing to buy US dollars in spite of our behavior.

    The iron law of institutions continues to work until it doesn’t. I think we are close to the tipping point but it is hard to track all the can kicking and finger pointing.

  3. Rcoutme

    I am not sure that tracking the finger-pointing will do any good. Meanwhile, I become more and more distressed at the behavior of the financial elites and their captured people in Washington. I suspect that a 1930’s distrust of the entire financial system (aside from local banks, maybe) may be on the near horizon. Hold on, let me jump up a bit. Ummf! Yep, I saw something over there–it looks like it’s coming.

  4. ebear

    Customer to CME: Account CLOSED.

    And thus begins the search for a better exchange…. or maybe we just make our own? I mean, seriously, who needs these guys? Anyone else smell a business opportunity here?

    1. Jim Haygood

      Some large players (such as Pimco’s commodity fund, last time I checked) use swaps based on commodity indexes, rather than exchange-traded futures. In effect, they can step out of the filthy CME gutter and collect commodity-linked returns on a wide paved sidewalk. But swaps aren’t open to retail players.

      Globally, there’s been an enormous consolidation of exchanges. Moreover, since investors crave liquidity, the most liquid products and exchanges tend to attract all the volume, crowding out the marginal players, as well as erecting a formidable barrier to would-be competitors.

      Government regulators are supposed to encourage competition. Competing ECNs (Electronic Communication Networks) exist for common stocks and currencies; why not for traditional commodities?

      Beside legal sanctions, the other way to make CME pay is to trade elsewhere. I’ve traded futures since the mid-80s, through a series of brokers that ended up being owned by MFG. Luckily, I closed my MFG account in 2007.

      Until an acceptable resolution is reached for MFG’s customers, I wouldn’t touch futures with a ten-foot pole. Futures appear to be a cesspool, and one’s first financial-health priority is to avoid contact with the fecal bacteria of an MFG or a CME.

      1. Bill Jones

        The futures markets have always been rigged, Hey we’re the Masters of the Universe and you’re a bunch of hayseed hicks, you didn’t honestly expect a fair deal did you?
        What’s new with Mo Fo Global is that the malfeasance always used to be confined to their products, not the customers cash.

        I’m still a believer that this was a hit to stop the increasing demand for physical settlement in metals by little guys.

        1. spooz

          lol, and trust ZH to dig up yet another conspiracy theory about MFG. The last one was Lawrence Lepard’s theory of the fed using Corzine to teach the evil speculators a lesson. Today we get Walter Burien’s theory that by taking down MFG, some shell company of Corzine’s buddies made off with the other side of the losing prop trades. He says a true investigation would look at who was on the winning side of the failed MFG bets.
          I won’t provide a link to the fight club. If you are interested you know where to find it.

        2. LeonovaBalletRusse

          BillJones, love the new appellation, MoFo Global; everybody’s been thinking it, a few have been saying it, but this is the first time I’ve seen it spelled out.

          Your hunch is close. It appears possible that the gold could not be delivered, so JPM decided to “pull it” and get the proceeds “legally” in The Black Hole of Londontown.

          That must be the magic phrase for riches: “Pull it.” You know how that works.

  5. rj

    Hi Yves,

    “Huh? First, we don’t know exactly what happened. Therefore the CME’s confident claim that it was blameless is premature. Second, it admits the process WAS defective.”

    When you say CME admits the process was defective, what are you referring to?

    1. wunsacon

      Yves’ quote: “Second, it admits the process WAS defective. If the overseer did everything right and you have an MF Global level disaster, the system failed.” The answer to your question appears in the second sentence.

  6. jake chase

    Great post! What is laughable is that industry lobbies like CME control our National Legislature with donations of chump change. Read through these numbers: $75 thousand, even eight million? Meanwhile, I will tell you what I believe happened to the MFG customers’ money: it was posted as collateral for MFG proprietary trading. Is this illegal? Not in Great Britain. Why do you think Corzine keeps telling Congress that he did not intend to violate any laws? His lawyers have told him that pledging customer money is legal in the UK. That’s probably the main reason why the City of London continues to exist. I would not be surprised if MFG in its customer agreement grabbed the right to hold customer money in an off-shore (UK subsidiary or affilliate). All those commodity traders are such suckers for free markets, why would any of them object? Why would any of them even understand the purpose of the provision, if they even bothered to read it? Incidentally, those of you who trade stocks on margin in the US. Read your margin agreement. It gives the broker a blanket right to rehypothecate any property contained in a margin account, without regard to the amount of a customer’s indebtedness. Those of you in the know will point out that SEC Rule 15c3-1 limits broker rehypothecation to 140% of customer indebtedness. Okay, so what? Every customer is required to arbitrate all disputes. You cannot litigate them. No class actions. Just one by one arbitration remedies after the shit hits the fan and the money is gone. If you think the average arbitration panel understands that SEC rules override the provisions of a customer agreement, you obviously have never handled a customer arbitration. Most of these arbitrators cannot find their ass in the dark with a flashlight! Anybody who keeps excess cash and securities in a margin account, consider yourself now warned.

    1. Doug Terpstra

      It seems those New Deal regulations, watchdogs, firewalls, and litigation rights weren’t such bad ideas after all, huh? Right-Libertarianism must, by DNA dictate, always transmogrify into violent fascist totalitarianism. And we are very nearly there.

    2. ron

      Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

      If and when your broker goes belly up your account whether margin or non margin is up for grabs. The industry has touted the idea that customer accounts are locked in segregated isolation far removed from the day to day financial well being of the broker. The reality is that when a customer wires money to a broker it becomes part of there community money pool the only segregation is your account number. The MSM, FED and Government via the 401K have pushed Americans into risky broker operations that have used the customers assets to generate out size bonus and salaries.
      Frankly its time the government got out of attempting to make the securities industry a safe haven for investors. Dump the SEC and the entire regulatory system that has developed as its prime function is to create the illusion that its safe to invest. Regulatory oversight nvever cleaned up the industry the reality is that its no better then the Vegas casinos and run by a MBA mob skimming legally to create vast profits for the insiders.

      1. andy

        Great article, and I learn so much reading the responses. My background is art and music, so I have much to learn about the financial services sector. I recomended the site to my parents, both of whom are english professors, and while reading ron’s reply I found myself a little embarased with the grammer. If the information and presentation wasn’t decent, then I wouldn’t comment, but it “becomes their pool of money”, not “there pool of money”. Trite and hypocritical? Oh well………

        1. LeonovaBalletRusse

          andy, these kinds of errors happen frequently, since the Commentariat usually is thinking and typing as fast as we can, and sometimes the wires get crossed in a hasty reply. Add to this the typos. At times the going gets fast and furious, so self-editing goes out the window. Then, there are the glitches that occur because of tech imperfection.

          I think we’re a pretty tolerant lot, tolerant of errors, and tolerant of correction of errors.

          We certainly welcome artists, poets, English professors, all citizens trying to right the Ship of State.

          Welcome aboard, and feel free to speak your mind.

      2. spooz

        Unless things have changed drastically from when I was responsible for customer seg funds for an FCM, you are wrong. The US DOJ, FBI and CFTC are all looking at the misuse of customer seg funds in the MFG case. CFTC’s Jill Sommers said today that customer seg funds for US futures accounts have a bankruptcy preference and that property illegally removed from within the bankruptcy estate will be clawed back. The bankruptcy trustee Giddens said it is “more complicated” for the foreign futures positions which are under the control of foreign bankruptcy trustees. The SIPC handles the securities accounts shortfalls.

        “If and when your broker goes belly up your account whether margin or non margin is up for grabs. The industry has touted the idea that customer accounts are locked in segregated isolation far removed from the day to day financial well being of the broker. The reality is that when a customer wires money to a broker it becomes part of there community money pool the only segregation is your account number.”

      3. Karen

        Brokerage accounts are SIPC insured, up to $500k, against theft by the broker.

        Not sure if that applies to commodity futures brokerages, but stock-trading brokerages are normally covered.

        1. spooz

          US futures accounts are protected by CME and CFTC rules, which cover segregation of customer funds and prohibit commingling. There is no SIPC-like insurance. The bankruptcy trustee for MFG says they will find funds or claw back if necessary to restore the CSF.

          “Not sure if that applies to commodity futures brokerages, but stock-trading brokerages are normally covered.”

        2. Nathanael

          The things to watch out for with SIPC coverage are this:
          (1) The $500K limit.
          (2) What you get is the securities. If the securities *themselves* were fraudulent, like mortgage-backed securities…. you’re in trouble. Money market funds are simply shares in a mutual fund and if their investments went bust, you have worthless securities in a bust money market fund.

      4. Nathanael

        Not entirely true. There is SIPC protection. Look up EXACTLY what it covers, because it’s quite limited.

  7. MeDotOrg

    CME’s rationalization is classic:

    “In the case of MF Global, we did everything we could within our regulatory power, but MF Global broke exchange rules and government regulations designed to protect customer funds. Because the firm failed to comply with regulations, that does not mean the system failed,”

    This is like saying if someone breaks into a bank and steals all the money, bank security didn’t fail, because the robbers found a way to circumvent the alarm. The act of circumvention is totally outside the control of the bank.

    CME should take pains to explain to customers that because funds are ‘segregated’ there is no assurance that their funds will not be plundered. CME apparently feels that telling people to abide by their rules is prima facie evidence of a working system.

    1. readerOfTeaLeaves

      Well, let me do a little good-natured, well-intentioned editing on one quotation in your comment (and I do hope you’ll forgive me):

      First, before reading, pretend to be CMA by plunging your fingers firmly into both ears while turning in circles and singing, “la-la-la, I refuse to discuss offshoring, tax havens, or tax evasion’s role in any of the MF Global thievery, la-la-la…customers will remain loyal, no matter how much money is stolen from their accounts… la-la-la…”

      “In the case of MF Global since we’d rather swallow fire ants live than say the words ‘tax haven’ or ‘Londongrad’, we did everything we could within our regulatory power which is limited to the geographical USofA. Consequently, there’s no way in hell that we can really get a handle on this situation, since at its gory core, offshoring and tax havenry are key elements used to turn customer assets into brokers’ leverage. In other words, to actually address the problems that resulted in losses at MF Global, we’d have to speak aloud the very scary words: “tax havens”. We don’t have the guts, so we’ll just fuss and fiddle and blame MF Global instead. We’ll ramble on about how MF Global broke exchange rules and government regulations designed to protect customer funds. Despite the fact that the firm failed to comply with US-based, US-limited, weasely mostly-pretend regulations, that we don’t have the guts, brains, stamina, funding, nor personnel to actually enforce that does not mean the system failed,”

      The estimable Nicholas Shaxson is showing how MF Global is a tunnel leading to the dark hole of City of London based tax havens, all of which are critical to Wall Street’s growth over recent decades.

      On a closely related topic, the Guardian has a stunner of an article about Britain being run “by the banks, for the banks”:
      This article provides evidence of what Yves has been saying for the two years that I’ve been reading her now: big banks are destroying more wealth than they are creating. However, if you note that 50% of Tory electoral funds now come from banking, then don’t expect Cameron or the Brits to crack down on their banks or tax havens any time soon.

      Meanwhile, CME must figure that no one in the public, including investors, will ever start connecting dots about the incredible social costs our big banks are now extracting, nor apparently do they suppose we’ll ever start waking up to the damage being done by tax havens.
      Because after all, if we did, all our money would go under our mattresses, and when they whine about reduced ‘investment’, I will be plunging my fingers into my ears and singing ‘la-la-la, la-la-la’ because I have better things to do with my energy than listen to these wankers refuse to come to grips with reality.

      What a clown show.

      1. LeonovaBalletRusse

        readerOf – thanks for this illuminaing comment. You have just explained The Iron Heel on the throats of the American people, through The Black Hole’s irresistable lure to organized crime syndicate called *one-shop-banking*.

        It was in the 1970’s that BritImperial-style *investment banking* became sexy. Commercial banking was for “losers,” and Boomer money became the *banker/broker* slush fund, due to The Black Hole’s convenient Tory rules. Thus did the 1% put We the People firmly under The Iron Heel of the very tyrannical empire that our Founders delivered themselves from. My claim that the banking/brokerage/insurance Organized Crime Syndicate worked for a *foreign power* has proven to be just. They and their Agents in our three branches of government are indeed guilty of treason.

        In the Constitution, the penalty for treason is “to be hanged by the neck until dead.” By the Constitution, We the People have the right, the duty actually, to change our government, root and branch. This is patriotism writ large.

        1. JR

          “In the Constitution, the penalty for treason is ‘to be hanged by the neck until dead.'”

          Ya know, I’m racking my brain and I just can’t remember what Article that’s in. Do you suppose you could find a citation? Much obliged.

      2. LeonovaBalletRusse

        readerOfTeaLeaves – and there’s more. If we study the book, “OPIUM WARS: The Addiction of One Empire and the Corruption of Another” by W. Travis Hanes III, Ph.D. and Frank Sanello, we see that the STRATEGY that the Victorian Empire used to conquer and plunder China then, has been the SAME strategy used for conquering and plundering the United States through today: MonopolyFinance Tyranny; bribery and corruption of governors and civil servants; aggressive Lebensraum(appropriation of real property); destruction of regulatory structures and the laws of nations; ruin of the population through impoverishment, forced idleness, reduction to impotence, drug addiction, corruption, and death; perversion of the commercial banking system into a British Global system that encourages tax evasion, looting of treasuries, drug money laundering, de facto embezzlement, and other crimes which directly profit the British Imperial 1% and The Black Hole in particular.

        This has led to the impoverishment, misery, and enslavement of We the People to the *British Crown* BY Agents of the same within our three branches of government–the traitors aiding and abetting the rule of The Black Hole, the “Great Satan” of which you write–leaving We the People crushed beneath “The Iron Heel” of the Global Imperial Rentier 1%.

        We know the names of the Big Three Traitors to the U.S.A. Geoffrey Robertson’s “The Tyrannicide Bried” shows the way.

        Shall we not do what the Founders did, what they insisted we must do in our turn, against tyrannical governors? Shall we not treat TRAITORS according to Constitutional Law?

        readerOfTeaLeaves, what is the answer?

          1. aet

            Great googly-moogly!

            Is that the shade of Lyndon LaRouche that I discern, cresting yonder rise between these thickly billowing banks of rhetorical fog?


            Well, holy snappers! – I actually thought that guy was dead! Like Abe Vigoda, kinda.

            But just now I see from Wikipedia that Mr LaRouche yet stalks this veil of tears!….well whaddaya know…

        1. Ransome

          Suggest reading The Drugging of a Nation by Samuel Merwin. Merwin is interesting because he was a rags to riches Saturday Evening Post writer that most likely influenced Rand. He made an observation in this story of China.

          China, as the Middle Kingdom, dismissed much of the countries beyond the edge of the sea. It lost both Opium Wars because of superior western technology, a fact that did not escape them. After awakening from the anti-cultural revolution, China has been absorbing as much western technology as they can.

  8. roy partridge

    CME did one of the worst possible things. All MF Global customers whose accounts were transferred were transferred at only 60% of initial margin. This meant an immediate margin call or position liquidation.

    Customers who wanted physical delivery were have to put up additional funds even if they were paid up.

    CME pretends to help customers and was touting the hugh reserve it had in case of customer loses but this shows their true colors.

    Our system has become a joke.

    Canadian and Singapore immediately restored 100% of customer funds and then went after MF global.

    Here it seems the customers are left out in the cold.

    1. Glen

      “Canadian and Singapore immediately restored 100% of customer funds and then went after MF global.”

      Darn, there goes more money offshore to places with actual LAWS and ENFORCEMENT.

      Hey, let’s deregulate some MORE – what could possibly go wrong?

      1. LeonovaBalletRusse

        Glen, aren’t Canada and Singapore in positions of complete subordination to the Victorian Reich? We have not yet been completely throttled/starved into utter submission and complete subordination to the The Black Hole’s 1%, so I think this is the real reason for the different treatment of MFGlobal customers.

    2. spooz

      You are right. The farmers who testified before the senate ag committee today had big losses because they weren’t able to adjust their positions when the accounts were frozen, and now are having trouble with collateral for bank loans.
      Duffy from the CME said with $158 billion in Customer Seg Funds in the US, they can’t possibly guarantee them all. He suggested possibly having a special SIPC-like fund for farmers, ranchers and the like.

      CME did one of the worst possible things. All MF Global customers whose accounts were transferred were transferred at only 60% of initial margin. This meant an immediate margin call or position liquidation.

      Customers who wanted physical delivery were have to put up additional funds even if they were paid up.

      CME pretends to help customers and was touting the hugh reserve it had in case of customer loses but this shows their true colors.

      Our system has become a joke.

      1. LeonovaBalletRusse

        spooz, it’s not like this hasn’t happened before (see “Pecora”). After the Great Depression, regulations on “naked speculation” (think: naked CDOs) were put in place to protect legitimate commodities traders whose business was farming/ranching, who hedge their future *delivery* prices for cost control. These, like Glass-Steagall, were destroyed by the Gangsters of High Finance. They’ve advanced from “ruin of markets” through hyperspeculation to “ruin of farmers” and small-fry gold traders waiting to take delivery from Comex (cupboard bare). This scenario, now considered likely, effected the embezzlement via JPM in “The Black Hole” of London. The command to “Pull it” killed two birds with one stone.

        There may be more to it yet. As mentioned in another comment, perhaps cryptically, Corzine might have “pulled it” to enrich his “identity economics” group–members of “the Club”–on the other side of the “pull.” By “the Club” I mean the one George Carlin spoke of, not the Fight Club currently running a bead on this scenario.

  9. roy partridge


    Customers of BofA (and other large banks) are in a similar position.

    BofA’s recent transfer of some derivatives from other units to the banking unit puts customers deposits at risk.

    Not sure if even FDIC could/would help.

    Congress needs to get in front of this.

  10. wunsacon

    I have a commodities account and thus wonder: Could this CME/MFG debacle hypothetically happen at any US commodities broker, because the (dangerously permissive) rules are set by CME?

    1. Art Eclectic

      Let me put it to you this way – the entire market is a casino. You choose to put your money in and if you think it is protected in any way, you are wrong as the customers of MFG are finding out. Stay at the tables if your gambling addiction compels you to, just don’t be surprised when the house takes all your chips and won’t give you so much as a complementary cocktail in return.

      Play at your own risk.

      1. Maximilien

        wunsacon: I agree with everything Art says. I just finished reading “No One Would Listen” by Harry Markopolos (Madoff whistleblower). Investment fraud is far, far worse than most people know. Even ma-and-pa mutual funds are being skimmed by market-timers and late-traders. The common Wall Street rationale? “Everyone does it.”

        Things are going from bad to worse. At first it was just dodgy accounting. Then it was bailouts. Then it was stealth bailouts. Now it is brazen, undisguised theft, as MFG shows.

        Regulators and DOJ are useless. So why jump into a pool filled with sharks?

        1. wunsacon

          Art, Max, the problem is: these same crooks collectively are simultaneously destroying the value of our currency. I do not want to hold much cash. Everything — including your FDIC-backed accounts — depend on promises that might be broken (one way or another).

          As they destroy the paper markets and destroy the value of our currency, then the paper prices will come down but the goods will become unavailable.

          I’m probably wasting my time but think I’ll look into how long you can store wheat or soybeans and perhaps take delivery…

          1. Nathanael

            If you want to invest in commodities, you need a warehouse and you need to take delivery.

            Perishables — don’t bother unless you own a farm. They rot fast and storing them requires expertise (which you probably have if you own a farm).

            Durables — you need armed guards to protect your warehouse filled with copper ingots.

            So, both difficult. There are people doing both, but I just can’t be bothered to hire armed guards or learn farming!

  11. john bougearel

    Being involved in the futures industry, the MF Global abuses leaves a strong distaste in my mouth and with zero interest in ever again signing or requiring a client to sign off on seg account forms as it only carries a negative value for FCM customers from this point forward.

    But, one reason the CME may not care much about the dropoff in volume is that they see it as an unavoidable but temporary disruption in trade flows.

    Those involved in the industry will never forget what MF global did to customer accounts, but there are always new entrants to the game who either won’t know or won’t remember what MF Global did, so the industry will survive, and the loss of trade flows at the CME will be restored over time.

  12. Mark C

    Who exactly are MFG’s customers?

    Isn’t this just a case of the filthy rich .1%, having already feasted on and picked clean the bones of the 99% starting to feed on the merely rich 99.0-99.9%.

    Serious question. What kind of people hand over billions of dollars to the likes of Jon Corzine?

    1. Art Eclectic

      “Serious question. What kind of people hand over billions of dollars to the likes of Jon Corzine?”

      People with a gambling addiction, that’s who.

      Why do people who can barely afford to put food on the table still pony up for lottery tickets?

      Why does anyone, anywhere still invest in Donald Trump projects?

      Greed and the desire for something for nothing drives people to do stupid things.

    2. Jim Haygood

      No. You can open a futures account with $10,000 or so.

      Plenty of farmers use CME futures to hedge corn, soybeans, wheat and other crops. One can lock in the sale price of a million-dollar crop by putting up a margin deposit of around $50,000, and selling post-harvest dated futures contracts with a $1 million nominal value.

      Many small speculators use ES (e-mini S&P futures) to trade stock indexes, and similar electronic contracts to trade gold and silver. Unlike the NYSE, these contracts trade on a nearly 24-hour basis from Sunday evening to Friday evening, so one can react to (for example) a developing selloff in Japan or Europe while it’s happening … whereas the NYSE will simply gap down at the next morning’s open.

      These are legitimate uses of futures, and they aren’t mainly for plutocrats. Indeed, your stereotypical 0.1-percenter plutocrats are more likely to engage hedge funds to do their trading, rather than interrupt their valuable leisure time by soiling their hands trading futures themselves.

      1. decora

        Jim Haygood

        futures manipulation hurts everyone. it screws up the price of soybeans, corn, wheat, etc, so that there were food riots in 2008. the Goldman Sachs Commodity Index Fund and its bretheren were all based on commodities futures amiright? artificial price increases in basic commodities are things of revolution.

        ask the Polish communist authorities about how something called ‘KOR’ got started, and how it led to Solidarity. In the mid 1970s people were protesting Poland’s artificial inflation of food prices, with no corresponding increase in wages. Amongst all the other protests, against violence by police, corruption, repression of religion, etc, what really got the ordinary person going was the fact that they could not feed their family.

    3. wunsacon

      You’re probably mostly right. But, FYI, I’m not nearly in the top 1% and invest half my money in commodities anyway, because I want to own more “things”, not:

      – “cash” that becomes worth less and less over time, held by insolvent banks (that I hate) and that the FDIC, in case of loss, probably won’t refund unless they simultaneously call a bank holiday and simultaneously depreciate the currency overnight by 50%;

      – physical PM’s that I have to pay to assay/store/guard;

      – bonds of wrongly-rated companies that will suffer horribly if the USSA central planners ever reduce their exponential debt issuance;

      – stocks (of those same companies) that insiders dilute via new issuance and manipulate with games;

      The kleptocrat community-of-interest is boxing us in, so that There Is No Alternative than to pay the bastards.

      1. Nathanael

        There’s also local real estate with unclouded title. :-) Also requires hard work to investigate quality and so forth, and determine what the appropriate price is (given that we’re in a massive, long-term crash of the real estate market). But all real estate is local…

        I’m pushing money into home sustainability (starting with insulation, but it leads to other things), so that whatever happens it will at least be really easy to stay warm in the winter. If you expect to stay in your current location, that will probably pay better than anything else.

    4. LeonovaBalletRusse

      “Little guy” money in Pension Funds, Mutual Funds, 401Ks, etc. was delivered by the “Fund Managers” into the maw of the Gangster machine.

  13. Jim Haygood

    “You do not understand. Organization is more important than customer.”

    Mwa ha ha ha! Having worked for some Japanese keiretsu companies myself, I inferred the same.

    The furious outburst of Mr. Noh (actually a Korean surname) to the thick-skulled gaijin illustrates the ‘tatemae/honne’ distinction. ‘Tatemae’ is the ostensible, public explanation; ‘honne’ is the unrevealable truth.

    Normally ‘honne’ only emerges in the karaoke bar well after midnight, when the liquid level in the private whiskey bottle is running on empty.

    1. Yves Smith Post author

      That’s was not his real name. And you do have Noh dancers, but yes, Noh is not a Japanese surname.

      Sumitomo was a Kansei (western Japan) bank. They are the traders of Japan. A fair number of the Japanese there were blunt.

      1. Nathanael

        What happened to Sumitomo? I’d expect that attitude to eventually destroy them, but that sort of collapse takes 50 years or more.

  14. phichibe

    I’ve been in Illinois the last month and have watched an entertaining little drama unfold here where CME and Sears (Ackerman’s LBO, in other words) have threatened to move their HQs out of state unless they’re exempted from a recent hike in corporate income tax. Yet these will be the first to scream if crime rises around their locations, streets aren’t cleared of snow, etc.

    My mom, whom I helping with some issues here, came to this country from France in 1947. She has maintained a withering hatred for the Republican party and the laissez-faire country club set for the past 64 years, and they still continue to live down to her low opinion of them with how absolutely pernicious they and their self-interested actions continue to be. I’m rapidly on my way to becoming a French socialist (already have the passport ;-)


  15. ein Volk ein Führer

    Is there anywhere that money is safe from thieving GS scum like the parasite Corzine, or Gensler, his corrupt GS crony?

    How about a Treasury Money Market fund at a discount broker such as Vanguard, Fidelity or Charles Schwab? Could that be considered safe, or could the Squid’s blood funnel sniff out the money even there, and re-hypothecate it somehow to a GS account in the Cayman’s?

    What if the fund’s custodial bank fails, would it be safer to buy T-bills directly from the government, in order to eliminate the middle man?

    But even here, you no longer get actual T-bills, you get a book-keeping entry that *says* you own T-bills, guaranteed by the government, the same government that’s 100 percent owned and operated by the Squid.


    “Sometimes paranoia’s just having all the facts.”
    -William S. Burroughs

    1. Nathanael

      It’s all about who you can trust.

      Nothing is safe if the fascists get total control of the government; the government will probably fall soon after. Nothing is safe if the fascists decide to steal your money on “terrorism” or “national security” or “drug war” or “copyright” pretexts either.

      Short of that:

      If history is any guide, Federal Reserve Notes will be accepted for years even after the government falls, so honestly, money in a local strong box or safety deposit box at a local trusted bank is pretty secure — but I wouldn’t keep LARGE amounts of money like that, as it’s too tempting a target!

      A local credit union with NCUA insurance is your next best bet for safe and accessible.

      Then a local bank with FDIC insurance.

      If you have enough money to go over those limits (business perhaps, or richest 1%),

      Charles Schwab still has a good reputation for trustworthiness. And I mean Mr. Charles Schwab. I expect his company’s trustworthiness to last exactly as long as his life.

      There are probably other discount brokers with a good rep left out there.

  16. jerry 101

    Hey, CME’s gonna be okay.

    They just managed to hold up the Illinois Legislature for an $85 million subsidy.

    Wait…how much did MF Global lose because CME didn’t provide the necessary oversight? $500 million? A billion?

    Oops. Maybe CME should spend more time “regulating” it’s brokers and less time lobbying for tax breaks.

    1. spooz

      In his Senate Ag Committee testimony today CME’s Duffy says Corzine lied. He says CME looked at 10/26 Customer Seg Funds on 10/27, which showed $200 million in excess customer seg funds. CME was 80-90% done tying it out to MFG books on Friday 10/29, and then was told on Sunday 10\31 by MFG to stop looking for an accounting error, that $950 million (pretty sure that was the total he mentioned)seg funds had been improperly transferred to the broker dealer. On Monday, MFG revised the 10/27 report to show a $200 million shortfall instead of excess.
      Duffy also says a CME auditor was told by an MFG European affiliate employee that that Corzine knew of a $175 million loan that was made to a European affiliate from customer seg funds and that the transfer was disguised from regulators.

      “Oops. Maybe CME should spend more time “regulating” it’s brokers and less time lobbying for tax breaks.”

      1. Valissa

        Please share a link to your story. I found this one, but your comment seems to have more details…

        CME Chief Suggests Corzine Knew MF Global Dipped Into Customer Money

        Testifying before the Senate Agriculture Committee after an earlier panel featuring Corzine and two other top MF Global executives, Duffy said during Q&A that one of the firm’s employees told the CME that Corzine knew about a loan to European affiliates shortly before the company’s Oct. 31 bankruptcy filing, a loan that came from commingled customer funds.

          1. Valissa

            Then thanks for your report spooz, and taking the time to share it! Will add your info to my own notes. I’ve noticed you can get more complete info by actually watching the hearings yourself, but I’ve mostly not got the patience to do so.

      2. spooz

        My paragraph was kind of confusing. The seg funds report that Duffy referred to, that was revised four days later by MFG, was from October 26. It originally showed a $200 million excess in customer seg funds, but was revised on the following Monday to show a $200 million shortfall.

  17. Laocoon

    Bad practices aren’t confined just to banks, although I’m closing my business account before they sock me with a $25 a month fee.

    Has anyone tried to deal with the phone companies, either landline or wireless? No customer protections at all. It’s an outrage.

    My larger concern is that this behavior has gone on for so long that the next generation will think it’s OK and these outrageous business practicces will continue because no one knows otherwise.

    1. LeonovaBalletRusse

      Laocoon, unfortunately, the younger generations have been trained to accept all kinds of “cost externalization,” fees, exorbitant prices, and other corporate abuses that we find abhorent. They are used to being abused, their “neuronal circuitry” has been created to make them obedient, submissive slaves to the 1%–OWS notwithstanding (where they use Facebook continually).

    2. Nathanael

      Telephone companies? Encrypted VOIP, folks. SIP with ZRTP. Twinkle.

      Yes, the Cable monopolies who provide most broadband internet are awful too, but they’re not nearly as bad as the Telcos.

  18. decora

    this reminds me of the story of the Potato Bust in ‘The Asylum’. in the mid 1970s, someone jacked up the potato futures trading and left a bunch of outstanding contracts … and this screwed up the New York Mercantile Exchange, because traders lost confidence. most people stopped trading there and it almost closed up shop…

    except for Michel Marks, his dad, and a few others who figured out how they could make a market for ‘heating oil’, and slowly, slowly, rebuild their reputation as an operable marketplace.

    but does reputation matter anymore, if there is only one supplier?
    who else sells ‘derivatives’ like CME does? why cant someone else do it?

    1. LeonovaBalletRusse

      decora, sad to say, “there is only one supplier” to those ambitious to be rich: the .01%, and their agents who profit themselves and their masters by “bringing in the money of the suckers” (from the 99%), to be lost in the Great Shell Game of the 1%.

      1. Kunst

        JR says:
        December 13, 2011 at 10:56 pm

        “In the Constitution, the penalty for treason is ‘to be hanged by the neck until dead.’”

        Ya know, I’m racking my brain and I just can’t remember what Article that’s in. Do you suppose you could find a citation? Much obliged.

        *** Still waiting for your answer. More accurately, for you to admit that what you said is incorrect. Until then, I can’t see why I should pay attention to anything you write. ***

          1. Attitude_Check

            You realize you have just admitted that he is right and you were talking out your a%%

            If you are going to quote something then quote it. If you remember badly and it is pointed out – admit it and move.

            Of course you could just cop an attitude…..

  19. V_Charter

    Aren’t the external auditors supposed to be the ones who verify that the funds are actually in the locations (banks and other financial institutions) that MF Global said they are?

    Before we blame anyone other than Cozine and the MF Global Board of Directors (MF Global rank and file, CME, external auditors), let’s look at what CME’s regulatory responsibilities actually are versus what the external auditor’s responsibilities are and what the rank and file did. Then we can attribute culpability. I’m sure there is plenty to go around.

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