When a big firm like MF Global goes under, taking investors’ funds with it, the investors will probably not get paid. The people of the other side of derivatives (futures) contracts will.
Recently Bank of America transferred a bunch of derivatives into their banking arm. “A bunch” means somewhere around $80 trillion worth.
Now pay very careful attention, because part of the bankruptcy “reform” law in 2005 placed derivative claims in front of depositors in a business failure – including a bank failure.
What JP Morgan is claiming in the MF Global case is that the derivative trade (which is exactly what a “Repo to Maturity” trade is – it’s a derivative) is entitled to preference in the case of MF Global over those who had cash there for safekeeping either as a margin deposit or just as free cash as you would hold free cash in a bank.
This means that the Big Boys are placed at the front of the line. You, a small guy, will be way in the back. You are going to get nothing.
But what if you pull your money out before the bankruptcy? Sorry, Charlie!
If a major bank blows up this very same claim, supported in existing Bankruptcy Law with the changes signed by George Bush in 2005, will be used to steal the entirety of your bank account, and if you detect the impending blowup shortly before it happens — say, 90 days before — you’re still exposed to the risk through clawback!
Clawback is where creditors are given the right to get money back from investors who saw what was coming and cashed out.
Here is the problem.
A cascade failure of several large banks would easily result in loss claims that would exceed the entire US GDP; for obvious reasons virtually none of that would actually be paid or recovered and in the case of you, the average person, your reasonable expectation of recovery in such an event is zero.
My assessment is this: Congress will not let depositors at FDIC-insured banks lose their place at the front of the line. But in an account not insured by the FDIC, your money is at risk.