Yes, Virginia, Brokerage Firms Keeping Client Ripoff Provisions in Customer Agreements in the Wake of MF Global

In the wake of the collapse of MF Global, and the evaporation of funds in customer accounts, even ones with no margin lending, investors big and small have become duly concerned about the safety of their funds. For those of you who are not brokerage customers, one of the big achievements of the 1930s security law reforms was their success, up until now, in putting rules in place that protected customer assets. Numerous broker/dealers have failed but their clients’ funds were recovered.

Needless to say, old market hands like Jesse have reacted with alarm:

One would think that the customers should be paid first out of all MF Global creditors. But I suspect that where it is possible, their loss will be subordinated to the unsecured creditors like JPM who have a powerful influence with this Trustee and the courts. The customers of consequence, like the Koch brothers, appear to have been tipped off weeks in advance.

This is the perversity of law without justice.

If that happens, then nothing is safe. If a customer in cash and Treasuries can be robbed, and then be made to stand in line with unsecured creditors, then your 401(k)s are not savings but loans to the custodians of your plans.

Now may be the time to exit all arrangements not specifically guaranteed directly by the government, and bring your money home. And better yet if no guarantees are required, and no parties standing between you and your wealth.

If they steal from one unpunished, they can steal from any and all almost at will. You are not an insider, and there is no honor among thieves. You are prey.

And what are a few customers, and the stewardship of funds, to a group of financiers intent on taking down whole nations and their Treasuries?

But it is always easier to steal with a pen than via more complex means. In support of our consumer protection efforts, reader Don H has sent evidence that the banks are keeping their rights to misuse customers firmly in place in the wake of MF Global:

Just got a 20 page ‘client agreement’ from from Wells Fargo for a security account which contains some amazing (to me) stuff.

It starts:
“This is your Client Agreement. It includes the terms and conditions and is the contract that controls your securities accounts.”

“Each account opened by you is a margin brokerage securities account, unless otherwise prohibited by applicable law or…” (so one can opt out but has to make a special request to set up a cash account. I wonder how many people who never deal in futures or short selling will realize they have a margin account?)

“We may, at our sole discretion and without prior notice to you, prohibit or restrict your ability to trade securities and/or other property.” (They can shut you out of the market at their whim)

“We may at any time and without giving you prior notice, use and/or transfer any or all securities and/or other property in any Account in which you have an interest, without regard to us having made any advances in connection with such securities and/or other property” (They can “MF Global” account holders without any further ado.)

You can see the relevant sections for yourself:

Wells Fargo Client Agreement

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  1. Fraud Guy

    Lovely. And boilerplate, so good luck negotiating. And if you can invest, you’re nominally considered sophisticated, so there goes that line of defense.

    Anybody have any copies of feudal agreements for comparison?

    1. Erik

      To be fair, it was ALWAYS their money.

      No one has a right to a single dollar unless that person has, say 25 million of them.

      It’s the law of financial gravity.

      1. Justicia

        It gave me some small bit of satisfaction when called by my bank’s “premium accounts” flack about investing in some product to say: “I don’t invest in the fraud economy, thank you.”

        Perhaps if enough of us refuse to hand over our cash under these conditions we’ll see a change. At least one can hope.

  2. monday1929

    All of your money on deposit at a bank is considered a “loan” to the bank. Four years ago I could not get a straight answer from Vanguard about the status of funds in their Short term treasury only fund in the case of vanguards bankruptcy or if any of their other funds (ie. money market) experienced problems and needed some “topping off”.
    Interactive Brokers is on the hot seat.

    1. sherparick

      Well, the reasons are pretty obvious why Pete Petersen and the boys want to privatize social security. It would make the stealing of a billion here or a billion there child’s play.

    2. Tony

      I have an account with Interactive Brokers (IB) and have been nervous since the thefts by MF Global as IB was considering buying MF Global.

      However, I thought the issue in MF Global was that futures accounts aren’t protected by SIPC and thus MF Global customers who had money stolen from futures accounts weren’t insured by the SIPC and thus are only able to go to the courts for recourse.

      My account with Interactive Brokers is a margin account and I have traded stocks and stock-options. I don’t know if I have the ability to trade futures. I had thought my account was covered by the SIPC, but maybe it is not? Are margin accounts not covered by the SIPC? What if I use my account only for trading stocks and stock-options, but I also have the ability to trade futures? Would it be protected by the SIPC in that case?

      Another thing I heard is that if there are rumors of an IB bankruptcy, that I should immediately put all my money into stocks as stocks will get transferred immediately to another brokerage whereas cash would have to get reimbursed by SIPC (if that is, my account is actually covered by the SIPC).

      Can anyone recommend a stock/stock-options broker that they feel comfortable with?

      1. Tony

        An interesting discussion of Interactive Brokers and MF Global can be found here:

        Here’s how IB describes the protection for IB accounts:

        ‘Customer securities accounts at Interactive Brokers are protected by the Securities Investor Protection Corporation (“SIPC”) for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under Interactive Brokers’ excess SIPC policy with certain underwriters at Lloyd’s of London for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Your stocks, options, warrants, debt instruments, and cash — denominated in all currencies — are covered by this protection. Futures, options on futures, and single stock futures are not covered. As with all securities firms, this coverage provides protection against failure of a broker-dealer, not against loss of market value of securities.’

        Here’s more detail on how Interactive Brokers handles customer money:

        At the bottom of that link is the following blurb on two ways that money can be lost:

        ‘In light of the recent bankruptcy of MF Global, customers should understand how it is possible to lose money in the event of their broker’s bankruptcy. Despite all of the protections described above, there are still two ways a customer can lose money without losing it to the market:

        1. If, in violation of the reserve and segregation rules, the broker does not keep some customer monies segregated, either by not putting newly deposited monies in the segregated account or if money is transferred out of segregated accounts for some other purpose, then there can be a shortfall. This may have happened at MF Global.

        2. Customers can lose more money in the market than they hold with the broker. When this happens the broker is obligated to make up the deficit from its own funds. If the broker fails to do so, (i.e., has not sufficient capital of its own to make up for the losses) and SIPC (and, if offered, excess-SIPC) coverage is insufficient or unavailable, then the other customers bear the cost of that shortfall. This, too, may have happened at MF Global.’

        I’m still confused on a couple of things:
        (1) If a broker were (without the customer’s knowledge) to move customer money out of an account that is protected by the SIPC into an account that is not protected by the SIPC, would the loss of that money be covered by the SIPC? I had assumed so, but item 1. above doesn’t say that SIPC would cover that loss. It would seem to be a massive hole in SIPC protection if a broker can effectively strip a customer of SIPC protection by moving the customer money to a non-SIPC-protected account.

        (2) What happens if a security that a customer bought in a margin account is lent out to another broker and that other broker goes bankrupt? Is the customer on the hook if that security can’t be recovered?

        1. Patrick

          This phrase “then the other customers bear the cost of that shortfall” means that if the “protections” offered by the broker and then the SIPC are broken then every account becomes part of the brokers “lender of last resort” fund. In effect all monies are communal. So basically a capitalistic enterprise is funded on socialist principles.

  3. Lyle

    Vanguard at least has two different agreements and when you set up an account you can choose the type. Actually I wonder if WFA has that choice but as hinted one has to ask for it. I just checked the Schwab application, and it has a box to check if you don’t want a margin account. Now a question is, did you discuss this with the advisor when setting up the account, since Wells Fargo is a full service high priced house, that includes human service? Now the Schwab agreement for example includes the same verbiage about a margin account, which I suspect is typical. As usual one must never trust any financial institutions any further than one can throw them, read everything in detail.

    1. jake chase

      Schwab requires a margin agreement to establish a margin account. Only dimwits keep cash or securities in a margin account unless they are trading on margin (in which case they are super-dimwits). Those who just sign the customer agreement have a cash account and cannot trade on margin.

      A US brokerage firm is prohibited by law from rehypothecating property in a margin account which exceeds 140% of customer indebtedness. If you don’t owe anything the firm cannot rehypothecate anything.

      The problem with futures accounts is that every futures trader operates on margin (generally 95%). Moreover, SEC Rule 15c-3-1 (the rehypothecation rule) does not apply to futures accounts which are regulated by the CFTC an agency that is totally captive to the industry it is supposed to be regulating. This explains MF Global. It only violated futures exchange rules by pledging customer free credit balances, and it (arguably) avoided those rules by sending customer money to a UK affiliate which was not even bound by those toothless rules.

      Why would anybody want to buy securities through Wells Fargo? I would wager its securities affiliate is a second class house of cards lacking any significant capital, any operations or market expertise. What is there but some dopey clerk at a desk drumming up business? Bank securities affiliates are just another empire building attempt at cross pollenization of clueless bank customers who believe they are protected by the FDIC. Move your money to a real brokerage firm where you can lose it prudently on decisions you make yourself on the advice of Jim Cramer and his ilk.

      1. Knut

        Wells Fargo got Prudential Securities via CitiBank and Wachovia. Prudential was and is a classy outfit. I dropped them some time ago because Wells Fargo was imposing fees on me for getting my own money back, but the actual investing was extremely well done.

        In Canada the accounts managed by the big firms are held in Trust by somebody else so that they can’t do do them what MF Global did to its clients.

        1. LeonovaBalletRusse

          If this is so, then Canadian bank customers should stand *en garde* since Harper has made it clear the the Queen of England is their Boss. Wouldn’t this put the City of London in charge of Canadian banks?

          1. JEHR

            Oh, for crying out loud! The queen is the “symbolic” head of the country and we get to pay for their many visits to Canada. Who knows, though, who controls or has an interest in our banking system? The Canadian banks are forever buying up banks in the US. I would worry more about that than London’s influence.

        2. jake chase

          Classy? In the Eighties that outfit turned a considerable number of unsophisticated wealthy customers into overnight paupers by recommending the volume sale of naked puts to “increase income”. That worked beautifully until the crash. Customers with million dollar portfolios ended up with net debit balances over the course of a week.

          Class on Wall Street is a figment of your imagination. I would sooner trust dart throwing monkeys.

        3. Yves Smith Post author

          Prudential gave me a clearly BS price on a futures order I placed (literally my second trade, off by nearly 3% of my account value). I made a huge stink and got maybe 1/3 of their error back. This was in the early 1990s. I closed my account and resolved never to have anything to do with them.

        4. ohmyheck

          And Wachovia had recently bought out A.G. Edwards, before Wachovia was taken over by Wells Fargo. I have had accounts with A.G. Edwards since 1995. But in quick succession, the letterhead read “Wachovia” and then “Wells Fargo”. I have had the same broker throughout. It’s a mess.

      2. Lyle

        Jake Chase makes a good point because the futures have a nominal value of the total of the commodity, then they are bought and sold on high margin. (One of the alleged causes of the crash in gold prices, as the price went up the margin went up…).

  4. craazyman

    If you read the contract, the last quote seems to be within the context of the brokerage recovering debts a client might owe — like if they don’t make their margin call. Such contract language shouldn’t be entirely unexpected and doesn’t seem inappropriate in that narrow set of circumstances.

    The MF Global situation seems to be a hypothecation issue (per Reuters and discussed at NC) or potentially some form of outright illegality.

    I am not sure how these two cases are equivalent, although I am very far from being a lawyer and eagerly defer to an informed legal analyst on this one. I am more than idly curious.

    1. Yves Smith Post author

      Not so sure about that. It is admittedly above my pay grade, but that section strike me as ambiguous at best. Most contracts have boilerplate disclaiming the headers as part of the interpretation of the contract, so the “Liens” header is almost certain to have no legal force.

      The sentence excerpted in the text specifically says they can grab assets irrespective of any advances (and this is drafted in such a way that you might construe it to mean not just advances against the collateral being used or sold, but more broadly, as in they can “use” collateral even if there is no lien, that is the part that is hard to parse).

      And it says clearly they can raid ANY Wells account, save an IRA. So they can go after your regular bank deposits, for instance, No restrictions and no notice. The no notice is bad enough to make this heinous.

      I suspect the reality is that this language is ambiguous enough that they can grab collateral and you fight them later, oh and via arbitration, which is stacked in their favor, not in court.

  5. monday1929

    ANY fiduciary putting client funds at risk in any account that allows rehypothecation or similar should be put on notice that they will have unlimited liability if those funds are lost.

    1. Lyle

      But that will mean no margin accounts, and no leverage so the fiduciary will be replaced in good times as others will give better performance. After all a hedge fund is essentially a huge margin account, the borrowings mean that the profits are much larger than just the capital.

      1. Ms G

        A new definition of “performance” is required that narrows the gap between what is beneficial and what is safe. It seems that the safety wheels have completely fallen off the fiduciary investment wagon as it careens down Speculation Road fueled by Other People’s Money.

  6. jsmith

    And this should be surprising, why?

    To extrapolate on the points I made on Pilkington’s piece as this perfectly ties in:

    When the rule of law has become a completely negotiable – from the elite POV – entity, then why would any thinking person NOT believe that the elite also consider any other such social constructs – e.g., political affiliations, treaties, contracts, etc etc – as nothing more than words, easy to chage and manipulate to their liking.

    Right now, in America, who/what institution can/will stop these people?

    With each passing “revelation” about how the this or that social construct no longer matters to the ruling class, one cannot help but see a pattern made ostensible by a casual scrutiny of the last 30 years.

    In 2002 Bush’s spokesman told us (I apologize for the length):

    The aide said that guys like me were ”in what we call the reality-based community,” which he defined as people who ”believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ”That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

    Sure, everyone thought he was just talking about the WOT but looking at the above NC article and all of the sundry actions taken by the elite over the last 3? 10? 30? years, one can only be left with the conclusion that these fools meant everything, not just the wars.

    Anyone look at the HFT/algo-ridden markets lately? Over the last year, 2 years?

    Sure, looks like reality to me what with the complete decoupling of the markets and economic indicators, huh?

    Why, I thought in our “free market” economy that the market was to be considered the final objective arbiter of worth and value in our society, right?

    Oh well.

    As one who tries to not be prone to hyperbole, let’s take a step back and list some of the other characteristics of our new “reality”, shall we?

    Votes shouldn’t be counted
    Contracts are now invalid if the elite want them to be(esp pensions)
    Corporations are people
    The POTUS can assasinate citizens without trial
    The POTUS can indefinitely detain you without trial
    Wars can be based completely and brazenly on lies
    Torture is legal
    etc etc

    And people are surprised that the same peopele responsible for the above and who have – to boot – synthetically created financial instruments nominally valued at many times the total amount of money on the planet actually give a flying fig what the constraints of reality are as concerns the serfs’ quaint ideas about their property ownership?


    1. readerOfTeaLeaves

      Without structures like tax havens, mark-to-market accounting, and trusts that hide ownership it would be much harder to ‘create one’s own reality’. These economic structures — which obfuscate, and which enable secrecy and opacity — enable the processes by which people create their own economically destructive behaviors and assumptions.

    2. Richard Kline

      jsmith: ” . . . [W]ho/what institution can/will stop these people?” Dr. Guillotine and his euthanasia mechanism. The behaviors we see are what get ruling classes massacred. Those ruling classes weren’t ‘victimized’ as a group however much so as individuals; they died for cause. It just takes lots and lots of lower class dead bodies to pull that off though, and leaves a society poisoned for a generation and more.

      1. Procopius

        I love this quote from Al Franken:
        “In her book A Distant Mirror: The Calamitous Fourteenth Century, Barbara Tuchman writes about a peasant revolt in 1358 that began in the village of St. Leu and spread throughout the Oise Valley. At one estate, the serfs sacked the manor house, killed the knight, and roasted him on a spit in front of his wife and kids. Then, after ten or twelve peasants violated the lady, with the children still watching, they forced her to eat the roasted flesh of her husband and then killed her.

        That is class warfare.

        Arguing over the optimum marginal tax rate for the top one percent is not.”

        –Lies: and the lying liars who tell them : a fair and balanced look at the Right By Al Franken

        1. Nathanael

          And that particular class war was only suppressed by the presence of a large, well-equipped, well-trained, well-treated military class — from another country.

          Our current lunatic elites have no such thing. They cannot themselves fight, and they don’t treat their mercenaries well, and there aren’t very many of them *or* of their mercenaries.

  7. gs_runsthiscountry

    Comments on the links below welcom…

    Rule 22e-3 — Exemption for Liquidation of Money Market Funds

    Exemption. A registered open-end management investment company or series thereof (“fund”) that is regulated as a money market fund under 270.2a-7 is exempt from the requirements of section 22(e) of the Act (15 U.S.C. 80a-22(e)) if:

    The fund’s board of directors, including a majority of directors who are not interested persons of the fund, determines pursuant to 270.2a-7(c)(8)(ii)(C) that the extent of the deviation between the fund’s amortized cost price per share and its current net asset value per share calculated using available market quotations (or an appropriate substitute that reflects current market conditions) may result in material dilution or other unfair results to investors or existing shareholders;

    The fund’s board of directors, including a majority of directors who are not interested persons of the fund, irrevocably has approved the liquidation of the fund; and

    The fund, prior to suspending redemptions, notifies the Commission of its decision to liquidate and suspend redemptions by electronic mail directed to the attention of the Director of the Division of Investment Management or the Director’s designee.

    Conduits. Any registered investment company, or series thereof, that owns, pursuant to section 12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E)), shares of a money market fund that has suspended redemptions of shares pursuant to paragraph (a) of this section also is exempt from the requirements of section 22(e) of the Act (15 U.S.C. 80a-22(e)). A registered investment company relying on the exemption provided in this paragraph must promptly notify the Commission that it has suspended redemptions in reliance on this section. Notification under this paragraph shall be made by electronic mail directed to the attention of the Director of the Division of Investment Management or the Director’s designee.

    Commission Orders. For the protection of shareholders, the Commission may issue an order to rescind or modify the exemption provided by this section, after appropriate notice and opportunity for hearing in accordance with section 40 of the Act (15 U.S.C. 80a-39)


  8. scraping_by

    Actually it sounds like the specialty of securities lawyer is going or gone.

    Reading Daniel Solin’s _Does Your Broker Owe You Money?_ it’s interesting how profitable the usual type of fraud can be. He’s happy to get back half of the money stolen, and considers it a victory to get back a dime on the dollar.

    This is in the context of competition and case law. Now that the customer has to sign away all his rights, rather than just the right to be protected by civil law courts, it’s not apparent why Wells or any other company would bother spending time and money replying to aggrieved suckers, er, customers.

  9. Paul Tioxon

    There is a reason my grand parents and my parents never put their money anything other US Savings Bonds and the local FDIC Insure neighborhood Savings And Loan. The S&Ls, their name very simply sums up economics for the average American. Money is saved and it it lent out and it is backed up by the Federal Government. You got about 4-5% per annum interest and the Bonds paid whatever. My mother started buying them in 1940 and stopped when she retired in 1980. Unfortunately, the really old ones stopped paying interest, but she only made money, never lost any principle or any sleep at night. She also never had a mortgage. The stock market was run by thieves. That’s what I learned from the folklore of the depression babies.

    1. Ms G

      It be nice if regular working folk could invest in treasuries today and get a median 4-5% rate over 10-30 years instead of pouring money through the fee & market meltdown sieve that are 401K (and similar) schemes.

      Thank you Alan Greenspan, Timmy G. and Co., for keeping treasury rates at about zero. And for thus steering folks to mutual fund (and equities and even futures) investing. I asked Santa for access to that magical discount window where some persons (well, the “corporation persons”) get to borrow at 0% and turn around and lend at 0% + fill-in-the-markup . . . so far no response :(

      1. bob

        4-5% on T’s is not possible anymore. 30’s are yielding 3% today

        But, you can roll the 401k into an IRA and deposit it at a bank. You get full FDIC coverage.

        For more than 250k, open another account at another bank.

        There may be rules in your companies 401k which penalize you for taking the money out.

        Disclaimer- I am just another anonymous internet poster, not a financial adviser.

        1. MsG

          Still a rip off. 10% penalty for “early” withdrawals and income tax (not capital gains) rate on any gains. Someone please explain why the gains in 401Ks and IRAs are taxed at the higher income-tax rates rather than the capital gains rates that apply to gains in any other context (besides the “tax deferred” environment). I really want a VIP pass to that Fed facility where I can borrow at 0% and lend at 5%:)

          1. bob

            Not sure I understand…

            There is no tax, or any other regulated penalty on rolling a 401k into an IRA. The IRA will give you vastly more choice that the 401k.

            Where a penalty may come in, in this situation, is within the 401k. Some companies “hold” their contributions. There are some that require a vesting period. Bottom line, if the company was matching your money, they may still be in “control” of their share of contributions. The money you contributed, pre-tax, is still yours, and may be moved at any time.

            But, before you go moving anything, figure out how your plan works. If your company matches contributions $ for $, you may stand to lose up to half of the account value. See above.

            The other issues have been beaten to death. IMO it’s just another attempt to make everyone a “share holder”, beholden to the share markets.

    2. Blissex

      From J. K. Galbraith’s “The Great Crash 1929″, page 25:

      «Just as Republican orators for a generation after Appomattox made use of the bloody shirt, so for a generation Democrats have been warning that to elect Republicans is to invite another disaster like that of 1929.

      The defeat of the Democratic candidate in 1952 was widely attributed to the unfortunate appearance at the polls of too many youths who knew only by hearsay of the horrors of those days. It would be good to know whether, indeed, we shall some day have another 1929.»

    3. Blissex

      «The stock market was run by thieves. That’s what I learned from the folklore of the depression babies.x

      Sure, but Real Americans admire and endorse thieves if they get a cut of the theft. Before the depression Wall Street was the miracle engine of boundless prosperity and immensely popular with Real Americans who wanted only to MAKE MONEY FAST.

      Usual quotes from J. K. Galbraith, “The Great Crash 1929”:

      page 32: «One thing in the twenties should have been visible even to Coolidge. It concerned the American people of whose character he had spoken so well. Along with the sterling qualities he praised, there also displaying an inordinate desire to get rich quickly with a minimum of physical effort.»

      page 68: «For now, free at last from all threat of government reaction or retribution, the market sailed off into the wild blue yonder. Especially after 1 June all hesitation disappeared.

      Never before or since have so many become so wondrously, so effortlessly, and so quickly rich.

      Perhaps Messrs Hoover and Mellon and the Federal Reserve were right in keeping their hands off. Perhaps it was worth being poor for a long time to be so rich for just a little while.»

      If MF Global had MADE MONEY FAST by betting that lenders to euro area sovereigns would be bailed out, they would have been heroes, and even a lot of embezzlement by heroes is quite popular.

      Today the median Real American is convinced that strapping young bucks, welfare queens, and Social Security are the thieves, and Wall Street are geniuses trying to give them a luxurious retirement based on tax-free capital gains. As Norquist wrote:
      «The 1930s rhetoric was bash business — only a handful of bankers thought that meant them. Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”. And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher.

      And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.»

  10. Michael C

    You’re being uncharacteristically polite here:

    “the banks are keeping their rights to misuse customers firmly in place in the wake of MF Global”

    It ought to read “the banks are keeping their rights to ABUSE customers firmly in place…”

    Re-hypothication is a pox on every investors house. Cordray can eliminate this abuse with a stroke of his pen.

    He now has the authority to demand individual investors opt in to rehypo.

    1. bob

      IRA’s are pretty safe anywhere. Different rules, and a Trustee involved.

      You can, if you are concerned, just open an IRA account at your local bank and hold the money as cash. The FDIC coverage is also bumped up in the case of IRA’s, I believe.

  11. bob

    I started noticing this a few years ago. The default was a margin account. You had to specifically ask for a cash account. I am not talking about futures and options trading accounts either.

    Another trick is to give you a margin account, but limit the margin. “we’ll only loan you 20%” This is not less risky. Same risk, less possible reward.

    Margin accounts also allow the broker to “lend” your securities, meaning that they get paid to allow another person to short YOUR stock, there is no payment to the account holder for this “service”.

    I think the lending part is one of the big reasons they are pushed so much.

  12. bob

    One more issue-

    Non Reg T accounts. I don’t know how they can offer them, but a lot of brokers are offering that as an option.

    IANAL, but it seems this is just a way to get the money into a london style brokerage account where people can and do lose everything if the broker goes bust.

  13. Clive

    For those who may wishfully believe that regulation might solve this problem, consider the situation here in the UK. Segregation of client monies is enshrined in the FSA’s rule book. Which is great. But it’s only as good as the monitoring and enforcement. And this has been found to be ah-hem slightly lacking on occasions:

    Once trust and ethics (and basic competence/fiduciary duty) are gone for the financial services industry what, really, are you left with ?

    1. Jessica

      “Once trust and ethics (and basic competence/fiduciary duty) are gone for the financial services industry what, really, are you left with?”

      Predation backed by force. Which is historically what debt run wild has led to.
      Graeber’s “Debt the First 5,000 Years” discusses this in detail that is both fascinating and appalling.

      1. Nathanael

        The banksters don’t have access to the force, however.

        So the result will be an investors strike — everyone will keep their money under their mattress — and, as a result, the collapse of economic activity. This will eventually impoverish the banksters along with everyone else.

        It may end up as a feudal system, but the banksters and the CEOs are not going to be the feudal overlords. They don’t have the skills for it.

  14. Conscience of a Conservative

    The biggest clients who have thought about this undoubtedly negotiate different contracts(they’ve been through this now twice(Lehman and now MF)). If anything this applies mostly to retail and small institutional. I believe MF Global to be a game changer, we just haven’t seen the full effect and there will be changes coming(the farmer is ticked off and is a powerful force), I suspect they will attempt to socialize these losses in the future via some type of industry wide insurance, which of course lets the banks and brokerages off the hook.

  15. Diogenes

    From where I sit, there is no way that there aren’t going to be more and bigger MF Globals. Indeed, I am unwilling to invest with any large brokerage firm that is involved in prop trading. I have assumed (perhaps a bit naively) that the likes of Fidelity and Schwab are safer bets if you want to avoid re-hypothecation risk on your assets. That said, I cancelled my primary remaining margin account a few weeks ago to minimize what risk there is.

    One step that my wife and I have taken is to hold a substantial portion of our Treasury assets directly at Treasury Direct. Never having been much of a one to trust the big banks and brokerage firms (even when I was still on Wall Street), I opened my first Treasury Direct account about 25 years ago. Securites held in the new Treasury Direct accounts not only can’t be rehypothecated but when they mature you have the option to invest the proceeds in zero rate demand securities in the same account. It’s this last feature which really stands out given the vulnerabilities of both traditional money market funds and an FDIC insurance system that folks like Bank of America may very well end up depleting thanks to their dodgey derivatives moves.

    1. Blissex

      «and an FDIC insurance system that folks like Bank of America may very well end up depleting»

      This is a common myth, there is no «FDIC insurance system» which can be depleted.

      The FDI Commission merely administers the FDI insurance system which is a pay-as-you-go joint liability system by all member banks for any member bank deposits.

      There are no funds to deplete. All member banks are liable down to the last cent of their capital for the insured deposits at all other member banks.

      The FDIC merely keeps for convenience an account where advances on their future liabilities are put in by member banks to make payouts quicker in case of ordinary, small bank failures. If that account gets depleted the payouts just get slower, as the FDIC merely invoices the member banks for whatever is necessary. Again, deposit insurance is pay-as-you-go and all member banks have unlimited liability for all member bank deposits.

      Of course if all the capital of all member banks were needed to pay back insured depositors Congress would recapitalize for free all member banks to show their solidarity :-).

  16. MacCruiskeen

    “Now may be the time to exit all arrangements not specifically guaranteed directly by the government, and bring your money home.”

    This has been my basic operating principle for years.

  17. Fraud Guy- Also

    I have a Wells Fargo Securities account. I went online to pull up the customer agreement, and lo and behold, I can’t find it. For my banking accounts, WF spams me constantly with notices that they are changing the terms (why they need to do this every couple of months I do not know, unless it’s to keep customers confused).

    I will email them today and request the brokerage agreement, and see what I get.

  18. JohnB

    Banks>Brokerage Firms to clients:
    “Be warned that your account/assests can and will be clean ed out or looted at our discretion”.

  19. Someone Who Trades

    Couple of things. Futures do not trade with ‘margin’. You post a ‘performance bond’ to trade futures. It is not the same as securities margin. Second , futures are forward contracts and are not regulated by the SEC.

  20. MsLondon

    The podcast on the Jesse website is very interesting until it gets to the end when they get to urging listeners to go out and buy guns and ammo. Aim off for the fact that I am English not American and I am as angry as the next person about all this but what the hell are we (and ok, I’m speaking for myself here) – pampered urban softies going to do with guns and ammo? If the financial system goes down we are just in trouble – the idea that ordinary Americans can go back to their wild west roots and shoot their way out of trouble is frankly ludicrous.

    1. ScottS

      I thought that’s the best thing we had going for us, but the Occupiers showed me the power of nonviolence. I’m convinced. The videos from Davis and Berkeley are literally stunning. So much power in restraint.

    2. Nathanael

      Guns and ammo might be useful in some situations, but only if you *first* have an organization.

      Basically, start by having an organization, which can work peacefully. If the organization ends up needing to have an army, then you get guns and ammo. Hopefully it won’t. Usually it won’t. Occasionally you find yourself in the French or Russian Revolution.

      But whether or not you do, *organization comes first* — those with the best organization win.

  21. Gareth

    I have a Schwab account that was set up as a margin account without my ever asking for it. I thought that as long as I didn’t buy on margin I was allright but now I’m not so sure. I will have to call Chuck and straighten this out.

    1. Lyle

      As stated above assuming you are trading stocks and bonds, the limit of what the broker can re-hypothecate is 140% of the margin borrowing. See the post by Jake Chase for details. So if you never go on margin, they can not re-hypothecate.

  22. Anonymous Comment

    This should come as no surprise to anyone. What would have been the motivation to change this behavior? There has been no movement by any authority to call these clauses ‘illegal’. As long as clients are willing to sign away their rights, the firms are more than happy to take them.

    1. Blissex

      «There has been no movement by any authority to call these clauses ‘illegal’. As long as clients are willing to sign away their rights, the firms are more than happy to take them.»

      And if clients are willing to sign them, why ever should these clauses be illegal?

      Is there some special about brokerage accounts that makes stock speculation something in the public interest?

      Something where the government needs to intervene to ensure that random people can speculate in stocks without worrying about the small print?

      People can always choose to avoid speculating in stocks if they don’t like or even just don’t understand the terms that brokers offer them, and if they sign them willingly, what exactly is the problem?

      Same as speculating in real estate, where however very many people expected to be able to speculate on margin 6 times their annual income on 20 times leverage without downside risk.

      But the only reason to encourage stock and real estate speculation is to that stock and real estate speculators have been proven to reliably for far-right (Republican and Blue Dog) politics, as Norquist eloquently argued.

    2. Blissex

      Put more briefly, I can understand there being a public interest in protecting the needy from one-sided deals with more powerful counterparts, but what is the public interest in protecting the greedy?

      Or has stock speculation also become a fundamental need like real estate speculation has become?

      1. Nathanael

        Fundamentally, the problem is that we want people with money to invest it, so that they will use their money for useful things (building factories, etc.) rather than stuffing it under mattresses.

        Turns out you don’t have to do much to convince people to invest money; just promise some form of “fair play” rules.

        But without those, nobody will do it. And what we’re seeing right now is an absolute absence of “fair play” rules in many markets. It means that many investors will eventually only consider one-on-one negotiated deals, and even then they won’t trust the courts to enforce them… which will cause an investors’ strike.

        Which will cause the velocity of money to drop.

  23. Up the Ante

    They’ve turned MFG into another trial balloon.

    Hearing echoes of “We’ll let you.” and “We’ll get that, too.”.

    And somewhere, Ladies Laughing with Salad.

    1. Blissex

      «opinions on Northern Trust»

      Well, there is a free market in opinions, and if you want one you can rely upon as to a potential or current partner, pay a consultant to do some research for you and give you a written assessment. If you are lucky, you get what you pay for.

      Other than that people could trade on any opinions they give you on a public forum, so don’t trust anybody who could be talking their book.

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