More Evidence that JP Morgan Stuck the Knife in MF Global

The death of MF Global and JP Morgan’s role in its demise is starting to look like a beauty contest between Cinderalla’s ugly sisters. As much as most market savvy observers are convinced that there is no explanation for how MF Global made $1.2 billion in customer funds go poof that could exculpate the firm, JP Morgan’s conduct isn’t looking too pretty either.

Reader Michael C sent a link to a Reuters investigative piece on the MF Global collapse, and it’s a doozy. While in proper journalistic form it is careful about reaching firm conclusions on a post mortem that is still underway, the pattern it has uncovered is not surprising to those of us who are onto JP Morgan. As many, including this blogger, have pointed out, it was JP Morgan that did in the doomed Lehman by withhold $7 billion of cash and collateral. And we’ve written how it used one of its best private clients, billionaire investor and industrialist Len Blavatnik, as a stuffee for toxic subprime debt in summer 2007, when every financial firm was desperate to offload US housing dreck.

The short form of the Reuters story is that JP Morgan, by virtue of being both a lender to MF Global as well as clearing its trades, has a big information advantage and could see how distressed the firm was. MF Global drew down the full amount of a newly-syndicated $1.3 billion credit facility, a huge warning sign.

The Reuters story makes clear that JP Morgan went into “possession is 9/10ths of the law” mode, calling for full compliance with transaction procedures when normal business practice was to be more forgiving. The New York bank offers up the excuse that it lost money to MF Global, but that is not the issue. Any creditor to a bankrupt company will lose money. The issue is whether JP Morgan did anything irregular or impermissible to cut its losses, which in this case appears to have come in no small measure out of the hides of customers.

The story is worth reading in full, but this incident gives a picture of the sort of behavior JP Morgan was engaged in:

MF Global also decided to sell $1.3 billion of IOUs known as commercial paper. The short-term debt was part of some $7 billion of securities the firm sold that week. But this sale was critical, people familiar with the situation said, because MF Global had used customer funds to invest in the short-term debt and now badly needed to liquidate the IOUs and move cash into the customer accounts to meet their demands. The investments in the IOUs were allowed by industry regulations, these people said.

For help, Corzine turned to his old employer, Goldman Sachs, which specializes in trading the short-term paper. Corzine phoned Goldman President Gary Cohn to ask him to buy the IOUs, offering a slight discount, according to people familiar with the situation.

Cohn agreed, and Goldman traders made the purchases, these people said. Because it needed the cash immediately, MF Global sought to settle the deal that day, according to Corzine’s testimony in Congress.

JPMorgan, in its role as middleman, was able to control the speed with which MF Global’s asset sales were processed, according to people familiar with the situation.

Two people familiar with the transaction say that JPMorgan was slow to process the trade…It remains unclear exactly whether cash from the sale was ultimately routed to MF Global.

This was not a time of generalized market stress. Goldman was clearly good for the trade. JP Morgan hanging on the money had nothing to do with that trade and everything to do with it trying to lower its credit exposure. I don’t know why there isn’t more noise about how this situation illustrates the dangers of having a bank be both a major clearing firm and a lender (ex via clearing exposures) to the same customers. Either JP Morgan should hive off its clearing business or there needs to be much stricter regulation about these conflicts of interest.

It’s also pretty clear that a lot of customer money is sitting at JP Morgan, but JP Morgan will argue in bankruptcy court that it should not have to disgorge it (it almost doesn’t matter what the facts are, JP Morgan will lawyer up to make the case). Unfortunately, since most of the counterparties hurt don’t have the political clout of TBTF bank, JP Morgan is unlikely to take a reputational hit anywhere close to what it might deserve.

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  1. Deus-DJ

    Wow, that’s pretty shady stuff.

    Hopefully you’re wrong about what they’ll be able to do in bankruptcy court.

  2. Francois T

    “It’s also pretty clear that a lot of customer money is sitting at JP Morgan, but JP Morgan will argue in bankruptcy court that it should not have to disgorge it ”

    Wait! Are you saying that since MF Global went belly up and the customer money was at JPM when it happened, JPM has no obligation to give it back to MF Global customers? It can simply keep it? Just like that?

    I’ll repeat the same question again, and again, and again until I get a satisfactory answer:

    Why would anyone want to invest in the US when the safety of your investments depend on your political clout??

    1. Yves Smith Post author

      It won’t argue in that form but that is what it will amount to.

      First it will fight tooth and nail any effort to give back any monies that are arguably funds belonging to the bankrupt estate.

      Second, (and there have already been reports of efforts to do this) it will make every effort to argue that its claims come ahead of other creditors, including customers.

  3. bob

    It was bank fraud, pure and simple. 1.3 billion dollar unsecured line of credit should read “1.3 billion dollar line of credit secured by MFgloabal’s segreagted customer funds”.

    I guarantee that was the line of thinking when the loan was made-

    “sure, lend them back some of their customers money”

    That the CFTC and the CME are the only one’s investigating is further proof of regulatory capture. The OCC and the FBI should have been at JPM 3 months ago.

    1. Breton

      You just do not realize how personally and insitutionally conflicted and co-dysfunctional are all of these people (and Firms).
      The entire Culture is in-bred with a winner take all meme.
      Take a group of lawyers, add a dash of sociopathic multi-generational (my Dad taught me…) scoundrels and POOF, the Alchemy is powerful!

      Many thought there were limits to self dealing?
      When the SHTF, oh boy, the reality is sobering.
      Good luck out there trusting ANYONE!


  4. ambrit

    I am absolutely falling off my chair laughing at the preceeding “Guest Post” concerning Internet Censorship!
    Sorry if this comment is off topic for this post, but it had to be said.

    1. Because

      lol, Democrats are the core supported for excess flatuation

      fwiw, the Republicans big oil pipe thingy O’bama shot down was all for Asia. They made the deal with Harper and boy what a scam that was.

      But you will never here that in the media. They just act like they lost their best friend.

  5. andy

    Unregulated free market capitalism is a disaster. Our current campaign peddeling political system represent those who can afford to buy it. The corporate owned pro military censored media refuses to investigate the people who pay them. Go figure. The only hope is for the people of the United States and the world to change ourselves first. The revolution will not be televised because it is not a violent revolution. We must be great Americas; impartial, fair, colorblind, just, and competent. No doubt this is and has been happening for a long time, or this place would already be gone. Be patient and go easy on those slower to change, as well as those less fortunate. Fear is disorienting and distrustful. If leaders create fear and mistrust, then their followers will mirror the fear, spreading doubt,and hate. In the absence of real leadership, we should consider our elected official not leaders, but public servants. America needs no leader king. We need a human being with respect for the law, and real courage. Courage is not making demands from the seat of power; it a human attribute of action in the face of unestimable danger and risk.

    1. Breton

      “Unregulated free market capitalism is a disaster.”

      Always has been and always will be.

      This stuff today is tame compared to the time of TR!
      Go read about Teddy and Gifford Pinchot then Senator Clark, MT (As,in Clark County Nevada)
      Follow up with chubby Taft!
      America’s real History will make your eyes roll.

      Some good ideas Andy but it is a big Hill to climb, I am dearly afraid.


      1. nonclassical

        “Teapot Dome Scandal” is where Fred Kock (Koch bros. ) gained his illegitimate
        oil $$$$$, from the very beginning…Senators left in disgrace.

    2. BDog

      Free market?? we don’t have a free market, if we had a free market all of wall street would be out of business, don’t blame fraud and corruption on free market capitalism, and the supreme court has it wrong, corporations are not people. Our major food crops are subsidized. Is the Federal Reserve a free market, are interest rates a free market? Blaming free market capitalism is just plane wrong. Fraud, corruption, cronyism, and fascism is what we have, not free market capitalism. I hear this over and over again, repeated endlessly and it will never be true no matter how many times you repeat it.

      1. Historicaecon

        “Fraud, corruption, cronyism, and fascism” is what a “free market” looks like. There are no historical examples of any other kind. If you oppose “fraud, corruption, cronyism, and fascism,” you should support free people, not free markets.

    3. Mark P.

      “The revolution will not be televised because it is not a violent revolution.”

      Good luck with that.

      As Breton cogently notes, today’s shenanigans are somewhat less brutal than the era decades of the last century witnessed. Things only changed after a presidential administration’s deliberate trustbusting, decades of violent faceoffs of union, IWW and socialist party members against company goons and cops — with deaths inflicted on both sides — and events like the 1920 bombing of Wall Street, in which a buggy loaded with 100 pounds of dynamite and 500 pounds of cast-iron slugs exploded across the street from JP Morgan headquarters, killing 30 immediately, injuring hundreds and completely gutting the interior of the JP Morgan building’s interior.

      That’s the historical record. Just saying.

      1. dshatin

        I’m lovin’n it! thanks guys for the historical references….truth be, our past provides little to elucidate how to survive in today’s Mad Max Thunderdome world.

        The vietnam war and and its catastrophic impact on American culture is rarely considered when we look to our past for guidance into the future..the entire phenomena of PSTD was ignored..50% of our prisons were filled by our Troops who returned with all kinds of illnesses and untreated.. and self medicating just to survive…over 50% of our boys drafted to fight in Viet Nam become addicted to heroin while serving their country..this was a huge ‘secret’ to be kept from the American people, however, it was the basis for Nixon ‘s declared the ‘war on drugs’…Forty years later, more US kids are addicted to heroin at $10 a packet…crime up…no future…a life of criminality…married to the blanketing of hard drugs across America…disintegration of American families and culture in every village and hamlet across America…the Reagan Revolutionaries were chomping at the bit to pour accelerant on the working class and disabled; make oil the US foreign policy. Bush and Clinton and their respective syndicates finished the job. Today the USA is ruled by the global elite including the highest levels of the People’s Liberation Army (PLA), the Brazilian crack cartel, the J. Bush Educational software mafia with allegiance or loyalty to noone but themselves. I do keep in mind at all times the Whiskey Rebellion as a reminder of the courage and fight of our ancestors who embraces risk and the fight for principles larger than any one person.

  6. MichaelC

    I hope the CFTC and SEC demand answers from JPM (loudly and immediately) as to why their guarantees are in jeopardy if this is true:

    “It’s also pretty clear that a lot of customer money is sitting at JP Morgan”

    If the customer money is orphaned at JPM pending reconciliation,(which likely was completed before year end), why are MF globals clients being asked to settle for less than 100 cents on the dollar from their guarantors?

    1. Yves Smith Post author

      “A lot” may still be “a lot less than what customers had in their accounts at MF Global”.

      I know I am doing this on instinct, but the whole way JPM has conducted itself plus the report in the article about JPM footdragging and circular trades is super sus. The apparent refusal by JP Morgan to send money from the sale of commercial paper FROM CUSTOMER ACCOUNTS to Goldman back to MF Global looks like a real smoking gun. If nothing else, that is customer money that JPM has refused to disgorge.

  7. RiverTrader

    The key here is something called s
    ‘safe harbor’ This is what gives JPM th right to expropriate MF Global customer funds. I want to see some deeper analysis of this.

  8. Fiver

    “MF Global also decided to sell $1.3 billion of IOUs known as commercial paper. The short-term debt was part of some $7 billion of securities the firm sold that week. But this sale was critical, people familiar with the situation said, because MF Global had used customer funds to invest in the short-term debt and now badly needed to liquidate the IOUs and move cash into the customer accounts to meet their demands. The investments in the IOUs were allowed by industry regulations, these people said.”

    I look at the last sentence and have to wonder whether what was going on at a firm in distress was/is actually fairly routine for all these high achievers ON THE ASSUMPTION of honour among thieves (the rules are plastic), but that JPM once again saw an opportunity for a lucrative kill – who knows how much they may have bet that MFG would go down long before the doo hit the whirly gig? Who do you suppose alerted regulators to possible problems, which of course became public and triggered a run on MFG well before Moody’s grenade? I nominate JPM, which doesn’t really distinguish itself from its nominal overseer, the Fed. Why did Dudley just let Corzine hang instead of providing cover for a relatively small amount for a short period (Corzine did not miss on the timing by much, if I recall correctly)? I can almost see Dimon claiming it was in the public interest even while he’s setting his sights on the next targets – Europe is full of them.

    What simply amazes is how many big money interests are STILL greedy or arrogant enough to believe they are sharp enough to protect their money and/or business in the hands of the lizards at JPM, Goldman et al. Imagine how much of Somebody’s Work is right now being done on someone else’s dime?

  9. Conscience of a Conservative

    One point I disagree, MF Global and Lehman did themselves in. On the article, it would be interesting to learn how JP Morgan conducts itself in the final days of a company it lends to going down, at the very least this needs vetting.

    1. Yves Smith Post author

      There is a difference between letting nature take its course and taking advantage of a bad situation.

      JPM did administer the fatal blow to Lehman. It withheld $7 billion of cash and collateral. That led to the raiding of London customer accounts, by the way, which is still a very sore point with the Bank of England and the FSA.

      Why did JPM lead a $1.3 billion syndicate a WEEK before MF Global failed? If the placement was successful, it would have had very little of the syndication. Was it hoping that the placement would reduce its other exposures? How did “fortress balance sheet” JPM get itself in a position that it had to squeeze MF Global so hard when it was in trouble?

  10. Chris Cook

    If Goldman Sachs is Colonel Sebastian Moran, it’s J P Morgan which is Professor Moriarty.

    There are those who believe – obviously conspiracy theorists – that both Bear Stearns and WaMu were collapsed and assimilated by J P Morgan, who were thereby themselves bailed out at the expense of those firms’ creditors and counter-parties.

    Who could believe such a thing of such a fine upstanding bank?

  11. Woodrow Wilson

    “Who could believe such a thing of such a fine upstanding bank?” –

    I don’t know, but when Americans feel the urge to start public hangings, let me know. Until then, I’ll continue to read stories like this and ask myself: “At what point will it take for Americans to start taking matters into their own hands to stop the pillaging?”

    The Rule of Law no longer exists for these people. CONgress sure as shit doesn’t care, as Legislation they created or abolished is actually helping these shitbags.

    Or maybe I’m in the minority and people think harsh language/writing is working?

    1. Fiver

      I suspect the root of the public’s inertia is that the Boomers, the wealthiest generation ever and now in control, hung up their Citizen hats decades ago. They have this curious, life-long sense of satisfaction in the notion they’d ended the Vietnam War, so deserved the rest of their lives off from the travails of Civics to pursue the sure happiness of material well-being. The fact they’d only ended the Draft for themselves still eludes most.

  12. drfrank

    Suppose you are a bank that has been lending money to a client who is on the verge of failing. You see that a large check has been deposited in the client’s account with you. The check is from a payor you know to be good for the money(they likely also have accounts with you). Within normal parameters for clearing checks, or making the money available to the client, you take as much time as you can. And during this time, you call your loans, and your demand for immediate payment forces the client into a bankruptcy.

    Of course, you have timed the demand for payment to coincide with the appearance of money in the client’s checking account. For, with respect to the money owed to you under the defaulted loan, you claim a right to offset against the cash that has simultaneously been posted to the client’s checking account under your administrative control.

    You will expect a fight in bankruptcy court over the ownership of the money that you have claimed in the checking account. Your downside in this is nothing more than the legal fees.

    If you had not grabbed the money coming into the checking account, you would have had no chance to win your claim to it in court. The bankruptcy court process exists to sort out the priority of conflicting claims to assets when there is not enough to go around.

    As the bank, you had no way of knowing that the cash you diverted had anything to do with the misuse of funds held by your client as a fiduciary, nor is it your responsibility to investigate the client’s level of probity as fiduciary.

    Yves, there is plenty to fear and loath about the behavior of banks and especially the unfairly protected and excessively powerful enormous financial conglomerates, I agree with you on most of what you publish on this theme, but you need not exaggerate the meaning of an example of a creditor exercising an old-fashioned right of set off just to keep the flame of criticism alive.

    MF Global would have been smarter to clear their transaction through an intermediary to whom they owed no money. Not only crooks, but dumb crooks evidently as JP Morgan took them by surprise doing what anyone familiar with the insolvency game would reasonably have expected them to do.

    1. Bridget

      Except for the fact that JPM sent a letter to MF Global asking for verification that funds held by JPM were not customer funds. That letter was never signed by MFG. Ergo, JPM knew or should have known whose money it was holding. This fact should be relevant in any action seeking disgorgement, if the customers are ever able to light a fire under the trustee’s ass and get him to file such an action. (Not bloody likely because JPM is a client of his firm.)

      The real problem the customers have is that, as the article points out, “the investments in the IOUs were allowed by industry regulations”. Margin agreements signed by the customers consenting to the rehypothecation of the assets in their accounts is the alchemy by which JPM will seek to convert customers into unsecured creditors.

  13. Crazy Horse

    Business is warfare by other means.

    Which brings up an interesting question. How much of the Greek CDS swap liability is held by Goldman Sachs? Are they in a similar position of vulnerability to MFG, and the other banksters are circling for the kill by forcing a credit event?

    Since Goldman is the prime stockholder in Obama/Geither Manangement Inc, will the US bail out Goldman at the last minute buy funding the IMF for a trillion or so?

      1. Ms G

        It will be AIG-BackDoorBailout Redux. The draft one-page document that says “here’s fiat to make you whole on those bad bets; no strings attached; Enjoy” is in Tim’s top drawer waiting for execution.

    1. different clue

      One supposes, or at least hopes, that that is true only of FIRE sector financialist bussinesses and some predatory resource-extractive corporations. One would like to think that makers of useful things like Yuba Shopsmith and Mantis Tiller and TroyBilt RotoTiller and so forth and so on do not view bussiness as warfare by other means.

  14. 80on40

    Infinite Rehypothecation is an interview with Nicole Foss over at The Automatic
    Earth – podcast by KMO at C-Realm. With only the mention of MF Global by
    name, she (Stoneleigh) paints the picture of musical chairs leading to MFG’s
    blowup. If the usual suspects or cast of characters bore the hell out of you, go
    take a listen. Remarkable.

  15. Lou

    “As much as most market savvy observers are convinced that there is no explanation for how MF Global made $1.2 billion in customer funds went poof that could exculpate the firm, JP Morgan’s conduct isn’t looking too pretty either.”

    Does anyone else get tired of reading blogs whose authors can’t write coherent sentences in standard english? An 6th grader could tell that the above is not a sentence!!

    1. ebear

      Form vs Content? The meaning is clear enough. If you want to rag on someone’s syntax, go read Martin Armstrong…lolz.

      Yo! Language evolves. And their is know weigh ewe or N E 1 L’s can stop it.


    2. Yves Smith Post author

      You want a copy editor, you are welcome to pay for it. Please note the time at which this post was written.

    3. F. Beard

      It sure is a sentence! I would change “went poof” to “go poof” but it is still a sentence.

  16. Frank Speaking

    I believe this is more evidence—even though not yet fully prooven this is one of those instances where the addage “if there is a doubt there is no doubt” applies—that what is playing out with MF Global and JP Morgan is another chapter in the ongoing saga of capitalist killing capitalism.

    While 99 percent of the nation’s population makes one last desperate shriek for applying rule of law in the hope of achieving a semblance of justice the 1 percent are settling scores personal, professional and political.

    This is a fight amongst the gods atop Mt. Olympus as is what much of what has transpired over the past five years has been.

    When elephants fight, it is the grass that suffers.

  17. richme

    “”””MF Global also decided to sell $1.3 billion of IOUs known as commercial paper. The short-term debt was part of some $7 billion of securities the firm sold that week. But this sale was critical, people familiar with the situation said, because MF Global had used customer funds to invest in the short-term debt and now badly needed to liquidate the IOUs and move cash into the customer accounts to meet their demands. The investments in the IOUs were allowed by industry regulations, these people said.””””

    Would someone explain this part? Customer funds were used as collateral in the short term debt?

  18. Skippy

    Um… Extinguishments of Liabilities ( plus+++ ), is a term that comes to mind.

    JP Morgan or Jaunty Pig farm, the smell of CDS effluent travels far and sticks to anything it comes into contact with.

    Skippy… ye can rob the dead, hold their hand in in seemingly a compassionate manner… yet pinch their pocket at the threshold?

  19. Glen

    It’s starting to look like the Mafia running the numbers racket is more honorable and fair than Wall ST. Who’s going to want to invest in Wall St if it’s such a rigged and crooked game?

    Third world America?

  20. Sandra

    Reply for Richme. Legally the firm is allowed to invest customer funds, but only in certain low risk instruments. Assuming this was high quality CP, MF is ok. Firms like MF get to keep the profit made on these instruments. You might think that’s wrong, but that’s another story.

    Separately, I read the Reuters story the day it came out and found it had so many things hanging, but maybe that’s what’s going on. I sometimes trade money market instruments for an institutional money market fund. It’s always same day settle. Also, the regulators easily can follow the money. The trade tickets (typically set via bloomberg) have settlement days and are time stamped. Same for each GS and MF trade. Once the trade occurs the money and the securities get matched across DTC. The regulators can check this at DTC. So if GS sent the money, they had settlement instructions and that’s where the money should be on that day with a time stamp at JPM. Elsewhere in the story but not in the story portion above, supposedly Corzine called a regulator to say JPM hadn’t sent the money to their account. This was interesting b/c it wasn’t mentioned, to my knowledge, in his testimony before Congress. It’s hard to tell if the regulators are really that inept (after being through 3 routine (scheduled) SEC investment manager audits in my career, I do wonder), if JPM was being sly or if Corzine is being economic with the truth. Either way, it’s puzzling that it is so hard to trace the most simple security there is.

    1. richme

      reply to Sandra,
      Why can’t the regulators/auditors look at a single customer account where, say $583,154 worth of assets are “missing” and track where this amount was “lost”??

  21. irv shaff

    I’m still short about $5,000 from my MF Global account.
    I also owe JPMorgan Chase about $5,000 of credit card debt.
    Following their logic of “possession being…” should I just not pay it ?

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