Forum Post: MF Global’s Missing Funds May Be ‘Massive’ Ploy: CFTC’s Chilton
Posted 12 years ago on Nov. 13, 2011, 9:17 a.m. EST by MonetizingDiscontent
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MF Global’s Missing Funds May Be ‘Massive’ Ploy: CFTC’s Chilton
By Silla Brush - Nov 10, 2011
The $593 million shortfall in client money at MF Global Holdings Ltd., the broker that filed for bankruptcy on Oct. 31, appears to result from a “massive hide- and-seek ploy,” Bart Chilton http://topics.bloomberg.com/bart-chilton/ ...a commissioner at the U.S. Commodity Futures Trading Commission, said today. http://www.cftc.gov/index.htm
The agency took the rare step of publicly announcing its investigation, which began on Oct. 31, saying it was in the public interest to confirm the enforcement action. Jill E. Sommers was named as the senior commissioner during the probe, after Gary Gensler http://topics.bloomberg.com/gary-gensler/ ...the agency’s chairman, recused himself.
“This isn’t just a lost and found inquiry; it’s a full-on effort to get to the bottom of what appears to be a massive hide-and-seek ploy,” Chilton, a Democrat, said in an e-mail.
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Accounting for Financial Institutions Is a Mess
http://implode-explode.com/viewnews/2011-11-11_AccountingforFinancialInstitutionsIsaMess.html
With the leeway to choose how to value assets comes the risk that investors may conclude they cannot trust the numbers.
Distortions In Baffling Financial Statements
http://www.nytimes.com/2011/11/11/business/accounting-for-financial-institutions-is-a-mess.html?_r=2
This has been a bad year for banks. With sovereign debt no longer trusted and widespread fears of a new recession in Europe, share prices of banks have fallen sharply.
But in some cases, the financial statements look ever so much rosier. JPMorgan Chase reported net income of $15.3 billion during the first three quarters of this year, 22 percent higher than in the period a year earlier and a record for the first nine months of any year.
There are explanations for that — and JPMorgan Chase deserves praise for calling attention to reasons to think the numbers are misleading. But at base the problem is a simple one: Accounting for financial institutions is a mess.
And it is getting worse.
Under the rules, banks have a choice of three ways to report the value of identical securities. Even if two banks are using the same valuation method for the same security, they can come up with different values, and it is very difficult for an investor to get any feel at all for just how optimistic, or pessimistic, a bank’s estimates might be.
This year’s strange financial reports are being caused, in large part, by an accounting rule that has the counterintuitive result of increasing reported profits — and revenues — just because people are losing faith in the ability of the bank to meet its obligations. I’ll get into the details later.
The banks hate that rule now, but a few years ago they pushed for it. They did not foresee there would be a day when banks’ own creditworthiness would be called into question.
Sometimes the worst thing that can happen is that you get what you ask for.
And it is not just the earnings numbers that can be misleading. Bank leverage can be obscured by allowing totally unrelated positions to offset each other, so that rather than showing the bank has placed two bets, the financial statements seem to indicate there is no bet at all.
Revenue figures can also be all but meaningless. Did a bank’s revenues soar? If so, that could mean what it would mean in a normal company — that it is doing more business, and possibly gaining market share on its rivals. But it could mean nothing of the kind. It could reflect the good news that the bank is making money from trading, or the bad news that investors are growing worried that the bank may collapse.
Baffling financial statements can have negative effects well beyond confusing investors. Regulators can also be perplexed. A few months ago the European bank stress tests concluded that Dexia, a French-Belgian bank, was among the best capitalized in Europe. A few weeks later, it essentially failed.
Perhaps the most perverse effect seen this year, however, came at Goldman Sachs, which has not had good numbers to report. In the name of preventing unreasonable swings in earnings figures, it has essentially placed bets that its rivals’ credit standing will not deteriorate. The result would be to make Goldman more vulnerable if there were another financial crisis because it would have to pay out substantial sums if other firms collapsed.
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JPMorgan, Goldman Keep Investors in Dark on European Debt Risk ; Net Position Disclosure Hides True Risk
http://globaleconomicanalysis.blogspot.com/2011/11/jpmorgan-goldman-keep-investors-in-dark.html
(MISH) Banks keep investors in the dark on trillions of dollars of derivatives risk by only reporting net exposure.
Here is a net exposure example to show what I mean. Suppose I owe my sister Sue $250,000 and Uncle Ernie owes me $250,000. My net position would appear to be zero.
But what if uncle Ernie is bankrupt or simply will never pay the loan back for any reason. I cannot tell Sister Sue, "I am not paying you back, collect from Uncle Ernie".
Net position reporting only works if counterparty risk is zero. In my example counterparty risk from uncle Ernie is 100%. So what is the counterparty risk at JP Morgan, Bank of America, Citigroup, and Goldman Sachs on tens of trillions of derivatives contracts?
The answer is no one can possibly figure it out, on purpose, because banks are only required to disclose "net" exposure.
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http://globaleconomicanalysis.blogspot.com/2011/11/jpmorgan-goldman-keep-investors-in-dark.html
Off Balance Sheet accounting tricks, extend and pretend, hidden debt disguised inside of 'Credit Default Swaps', and 'Dark Pools' ...It all makes my poor head spin. They always hide the debt. It is never fully disclosed, so they will always find more. There is always more undiscovered debt waiting to be found in these debt bombs.
And now, in the case of MF Global we see the same tricks.
::::::::::MF Global And Jon 'Superman' Corzine::::::::::
http://dailybail.com/home/chris-whalen-mf-global-and-jon-superman-corzine.html
By Chris Whalen
There have been a number of good analyses of the MF Global collapse and the role of “repo-to-maturity” trades in the failure. See “MF Global and Repo Accounting,” http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/375 ...which also has links to Felix Salmon and several other good posts. Read Yves Smith’s comment on Lehman Brothers... http://www.nakedcapitalism.com/2010/03/ny-fed-under-geithner-implicated-in-lehman-accounting-fraud.html ...from last March as well.
But one of the things that most people seem to miss in this fiasco is the role of off-balance-sheet or OBS accounting in making the failure of MF Global a reality and, in particular, what it implies for other, larger banks.
Many observers say that the FASB erred by not “fixing” the OBS issue via disclosure, but in fact we need to eliminate OBS treatment of all assets, period. Indeed, the MF Global failure suggests that the US and EU banking systems may be facing a far larger problem than even the most bearish analysts suspect.
First let’s ponder a recent report by the International Swap Dealers Association or ISDA. A post on RiskCenter summarizes the findings:
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http://dailybail.com/home/chris-whalen-mf-global-and-jon-superman-corzine.html
:::::Extend and Pretend is Wall Street's Friend:::::
http://www.financialsense.com/contributors/james-quinn/extend-and-pretend-is-wall-street-friend?sms_ss=facebook&at_xt=4d9522e093452eab,0
(By James Quinn) “We now have an economy in which five banks control over 50 percent of the entire banking industry, four or five corporations own most of the mainstream media, and the top one percent of families hold a greater share of the nation’s wealth than any time since 1930. This sort of concentration of wealth and power is a classic setup for the failure of a democratic republic and the stifling of organic economic growth.” - Jesse – http://jessescrossroadscafe.blogspot.com/
-When You’re Losing, Change the Rules-
Wall Street banks had absolutely no problem with mark to market rules from 2000 through 2007, as the value of all their investments soared. These banks created products (subprime, no-doc, Alt-A mortgages) whose sole purpose was to encourage fraud. Their MBA geniuses created models that showed that if you packaged enough fraudulent loans together and paid Moody’s or S&P a big enough bribe, they magically became AAA products that could be sold to pension plans, municipalities, and insurance companies. These magnets of high finance were so consumed with greed they believed their own lies and loaded their balance sheets with the very toxic derivatives they were peddling to the clueless Europeans. They didn’t follow a basic rule. Don’t crap where you sleep. When the world came to its senses and realized that home prices weren’t really worth twice as much as they were in 2000, investment houses began to collapse like a house of cards. The AAA paper behind the plunging real estate wasn’t worth spit. After Lehman Brothers collapsed and AIG’s bets came up craps for the American people, the financial system rightly froze up.
After using fear and misinformation to ram through a $700 billion payoff to Goldman Sachs and their fellow Wall Street co-conspirators through Congress, it was time begin the game of extend and pretend. Market prices for the “assets” on the Wall Street banks’ books were only worth 30% of their original value. Obscuring the truth was now an absolute necessity for Wall Street. The Financial Accounting Standards Board already allowed banks to use models to value assets which did not have market data to base a valuation upon. The Federal Reserve and Treasury “convinced” the limp wristed accountants at the FASB to fold like a cheap suit. The FASB changed the rules so that when the market prices were not orderly, or where the bank was forced to sell the asset for regulatory purposes, or where the seller was close to bankruptcy, the bank could ignore the market price and make up one of its own. Essentially the banking syndicate got to have it both ways. It drew all the benefits of mark to market pricing when the markets were heading higher, and it was able to abandon mark to market pricing when markets went in the toilet.
“Suspending mark-to-market accounting, in essence, suspends reality.” – Beth Brooke, global vice chair, at Ernst & Young
-Let’s Play Hide the Losses-
Part two of the master cover-up plan has been the extending of commercial real estate loans and pretending that they will eventually be repaid. In late 2009 it was clear to the Federal Reserve and the Treasury that the $1.2 trillion in commercial loans maturing between 2010 and 2013 would cause thousands of bank failures if the existing regulations were enforced. The Treasury stepped to the plate first. New rules at the IRS weren’t directly related to banking, but allowed commercial loans that were part of investment pools known as Real Estate Mortgage Investment Conduits, or REMICs, to be refinanced without triggering tax penalties for investors.
The Federal Reserve, which is tasked with making sure banks loans are properly valued, instructed banks throughout the country to “extend and pretend” or “amend and pretend,” in which the bank gives a borrower more time to repay a loan. Banks were “encouraged” to modify loans to help cash strapped borrowers. The hope was that by amending the terms to enable the borrower to avoid a refinancing that would have been impossible, the lender would ultimately be able to collect the balance due on the loan. Ben and his boys also pushed banks to do “troubled debt restructurings.” Such restructurings involved modifying an existing loan by changing the terms or breaking the loan into pieces. Bank, thrift and credit-union regulators very quietly gave lenders flexibility in how they classified distressed commercial mortgages. Banks were able to slice distressed loans into performing and non-performing loans, and institutions were able to magically reduce the total reserves set aside for non-performing loans....
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