Forum Post: It’s Official: Wall Street Firms May Legally Steal From Their Customers

(Max Keiser)"…and they may not have to pay them back, even when they are caught" http://maxkeiser.com/2011/11/11/and-they-may-not-have-to-pay-them-back-even-when-they-are-caught/ .

It’s Official: Wall Street Firms May Legally Steal From Their Customers

http://jessescrossroadscafe.blogspot.com/2011/11/its-official-wall-street.html

...and they may not have to pay them back, even when they are caught. The customers will be expected to 'take one for the team,' and for the good of the system. Confidence and all that.

“This means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.” - Andy Abraham

If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be 'socialized' and haircuts received.

This is most likely a distortion of the principle known as 'rehypothecation' in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan.

The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them.

In a way it is just making the unbalanced relationship between Wall Street and its customers official.

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.

It means that brokers can go beyond the mere provision of funding for loss, and use customer accounts to fund their own leveraged speculation under exemptions duly granted by their 'regulators.'

This sort of systemic abuse is typically exposed when there is a market dislocation. It is what finally exposed Madoff, for example, despite the many years that the regulators were turning a blind eye to his scheme.

This sort of arbitrary distribution of gains and losses occurs more frequently than you might imagine on Wall Street, at least from what I have seen and heard, and not just with commodity brokers. I have even heard of specially privileged customers who can make $100,000 in a few trading days without even having any knowledge of the markets in which they have 'traded.'

I stopped trading on the futures exchanges a few years ago when I experienced enough one-sided 'rule changes' to persuade myself at least that it was becoming an insiders' game with slim odds of success for the 'outsider.' Or perhaps I was just becoming aware of it had already become, or had always been.

Unfortunately it is hard to escape inefficiency in markets, because despite all that has happened, these fellows still set the prices for much of the world's food, energy, and basic materials, at least on the official exchanges.

The CFTC has been disgracefully negligent, and given to cronyism, but in the spirit of modern American management practice it may just hide behind a claim of incompetence. They granted some exemptions to influential insiders, and the markets proved that the exceptions were loopholes for fraudulent abuse of the public trust.

The Justice Department is investigating the case of MF Global for any violation of the laws. I suggest they pay special attention to the laws regarding 'fraudulent conveyance' in the posting of the customer assets as collateral with MF's creditors, even as the firm was paying its employees bonuses, knowing that it was insolvent.

Actual fraud typically involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. Constructive fraud does not relate to fraudulent intent, but rather to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition.

For example, where the debtor has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to avoid giving certain business creditors an unfair preference (see generally, wrongful trading).

Obama should bring meaningful reforms to the regulatory agencies and the financial markets after the shocking abuses of the past twenty years. But I doubt he will bite the hand that feeds him. He will likely hide behind committees and a building of 'consensus' with the unabashed servants of the monied interests. It's in the nature of a credibility trap that reform will not come until the system finally seizes, and crashes, and there is an opportunity to hide their crimes in the rubble.

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