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November 9, 2011

The Collapse of MF Global

There are few commodity traders, if any, who are not at least indirectly affected by the sudden collapse of MF Global, one of the largest futures commission merchants in the world. Tens of thousands of customer accounts were frozen over a weekend as the firm was forced to declare bankruptcy and stories emerged that customer funds had been raided to cover the firm's proprietary bets. I know of at least a few subscribers to my Member Area who are directly... and deeply... affected by the loss of access to their own money.

The fraud committed at MF Global is nothing short of a travesty. In fact, the separation of customer funds is a sacred tenet of the commodity futures world, and the fact that customers have been divided from their capital... with no assurances yet made of being made whole... undermines confidence in the system and threatens a worse and more rapid failure the next time there is even a whisper of a potential problem at another FCM. Our political and financial governing bodies therefore need to step in quickly and reassure the marketplace. I propose the following actions to be taken by our leaders:

Make the customer accounts whole
The single most important action the Federal government can take with regard to MF Global's collapse is to immediately step in and make all customer accounts whole. Faith in the system... in a well-regulated and fair playing field... is crucial to the efficient funtioning of markets, and that faith has been deeply shaken. After all, the CFTC and CME... regulatory agencies empowered by the Federal government... require that customer funds at a futures commission merchant be wholly segregated from company funds. The missing customer funds demonstrate a gross negligence of duty on the part of the regulatory agencies. If customers do not get protection in the current situation, how will they feel protected by any amount of regulation going forward?

Hold individuals at MF Global accountable
Someone at MF Global committed fraud. Customer funds were illegally comingled with company funds, and this action was both deliberate on the part of the perpetrator and overlooked by internal controls. Unless these people are identified and prosecuted, the integrity of the system will be at risk. Furthermore, John Corzine, who is widely known to have directed the high-risk bets that brought down the company, must face some sort of legal punishment. Proving he directed the use of customer funds may be difficult, but there is no doubt he was at the helm when the fraud occurred. The CFTC and CME have clear mandates to impose fines for this failure of duty.

Hold regulatory agencies accountable
The failure of the CFTC to ensure proper adherence to their own regulations requiring the segregation of customer funds amounts to nothing less than gross negligence. Understanding where the failure of duty took place, correcting that failure, and even prosecuting those who neglected duty, will also be quite important to the reestablishment of faith in the market system.

Reinstate Glass-Steagal
The Banking Act of 1933, commonly known as the Glass-Steagal Act, should be reinstated in its original form and under its original name. Only in this manner can the mistake of its repeal be made apparent to future generations. Separating proprietary trading from customer funds on the institutional level is the only way to ensure that fraud of the sort seen at MF Global does not occur again. The Glass-Steagal Act protected retail customers perfectly for 67 years, and the fact that a major financial collapse, as well as multiple instances of fraud, occurred within a decade of its repeal is no small coincidence.

The bottom line is that our leaders need to step up to the plate and preserve the integrity of the marketplace. Our authorities spent $2,000 billion to shore up their buddies who blew up the banking system, a move about which to this day the necessity is debatable. Restoring grace to the commodity markets would cost all of $0.6 billion. To drop the ball here would only further the general impression that our country is being run by thugs rather than statesmen.


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