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Former Banker Explains Why There Will Be More MF Globals

Written by Gary North on December 16, 2011

Doug French was a banker in the boom days of Las Vegas. He saw what was going to happen: a collapse. He began saying so in 2005. He was right. The bank decided his services were no longer needed. It is gone.

He now heads the Mises Institute, a libertarian think tank. In this article, he explains how fractional reserve banking took down MF Global. It also wiped out the depositors.

He warns that these practices are widespread. There will be more collapses.

Corzine says he does not know where the money went.

Jon Corzine told the House Agriculture Committee, “I simply do not know where the money is, or why the accounts have not been reconciled to date.” The public is outraged that the former CEO of bankrupt global financial-derivatives broker and prime dealer in US Treasury securities MF Global doesn’t know where the missing $1.2 billion in client funds went.

Corzine is the member a few exclusive clubs: he is a Goldman Sachs alum, former US senator, and former New Jersey governor. After the incumbent Corzine was beat by Chris Christie in the 2009 New Jersey gubernatorial race, the MF board probably rejoiced, believing the guy to fix their problems was suddenly available. Now he’s in the club of taking a mere 20 months to create the eighth largest bankruptcy in history.

How could the firm lose this money out of customers’ accounts — customers who were not trading commodity futures on margin? How did it go “poof”? Becauyse he did not understand what he was doingh. None of the managers did. They were in way over their heads. There are a lot of managers just like him.Yet they make decisions that can blow up, threatening the banking system.

How did this collapse happen? Simple: fractional reserves. French quotes Christopher Elias.

“MF Global’s bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.”

The company’s customer agreements included the following clause:

7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.

Lesson: Read the contract. Have your lawyer read the contract.

The old bond trader Corzine thought he could juice up MF’s earnings with a little financial razzle-dazzle. Thinking outside the box (and off the balance sheet), Corzine moved $16.5 billion in assets into repos. A repo involves putting up assets as collateral, assets to be repurchased later, and borrowing money against those assets. MF used an off-balance-sheet repo called a “repo-to-maturity” where the loan and the collateral in the transaction have the same maturity. US accounting rules consider the transaction a sale and the assets can be moved off the balance sheet.

Most of these assets were bonds from Italy, Spain, Belgium, Portugal, and Ireland, all paying healthy coupon rates that would easily cover the repo interest rate and provide a nice profit. MF Global would have virtually no skin in the game (their customers provided it) and be earning a nice interest-rate spread. . . .

With the $16.5 billion in assets moved off its balance sheet, MF Global then ramped up a net-long sovereign-debt position of $6.2 billion on its balance sheet – exposure that was five times the company’s net worth.

This was leverage. The customers’ money was on the line. Quoting Elias:

“Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global’s leverage reaching 40 to 1 by the time of its collapse, it didn’t need a Eurozone default to trigger its downfall – all it needed was for these amplified costs to outstrip its asset base.”

MF Global used the customers’ money to backstop the firm’s wild speculation. This was all legal.

Customers of MF posted cash, gold, or securities as collateral to backstop their commodity futures and derivatives trading. MF would then take those customer assets to back its own trades and borrowing. Mr. Elias explains, “The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.”

Under US rules, a prime broker is allowed to rehypothecate assets to the value of 140 percent of the client’s liability to the broker. The rules are more liberal in the United Kingdom, where there is no limit and in many cases UK brokers rehypothecate 100 percent of collateral value placed in their custody.

Here is reality:

“The law also allows commodities firms like MF Global to use segregated customer funds as a source of low-cost financing for their own operations, but they are required to replace any customer assets taken from segregated accounts with supposedly ultrasafe collateral of the same value, typically United States Treasuries, municipal obligations and obligations whose payments of principal and interest are guaranteed by the government.”

How risky is it? Very. How widespread? Very.

This rehypothecation activity may be the biggest credit bubble of all time, according to Elias. J.P. Morgan alone has rehypothecated over half a trillion dollars in 2011, Morgan Stanley $410 billion, Goldman Sachs $28 billion, and the list goes on.

Americans have been told US banks have little exposure to European sovereign debt, but according to the Bank for International Settlements (BIS), US banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal, and Spain. And while Germany is considered the belle of the Continental ball, Grant’s Interest Rate Observer reports that Deutsche Bank is levered at 43:1 and the Bundesbank has doubled its leverage since 2007 when it was geared at 75:1 – these days the central bank is levered at 153:1.

There was no rescue by the government or the Federal Reserve.

French concludes: “The bigger issue is that, day by day, Mr. Corzine looks to be merely a canary in the fractional-reserve coal mine.”

Don’t be in the coal mine when the explosion takes place.

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4 thoughts on “Former Banker Explains Why There Will Be More MF Globals

  1. Luke 10:18And he said unto them, I beheld Satan as lightning fall from heaven.

    In ancient Hebrew the word for lightning is barack, the word for heaven or the

    heights is bama and to connect the words either an “a” or an “o” is used.

    2 Thessalonians 2:3 (King James Version)

    3Let no man deceive you by any means: for that day shall not come, except there

    come a falling away first, and that man of sin be revealed, the son of perdition;

    Political Correctness a term first seen in Mao’s Little Red Book, a communist engendered abomination that is instituting censorship little by little.

    “If the freedom of speech is taken away then dumb and silent we may be led, like sheep to the slaughter.”- George Washington

    Carl Marx, once wrote that, the goal of the Communists was to quote,. “enter into men’s minds and cast God down from his throne.”

    Matthew 12:31Wherefore I say unto you, All manner of sin and blasphemy shall be forgiven unto men: but the blasphemy against the Holy Ghost shall not be forgiven unto men.


    In ancient Babylon their economy was based on usury.

    “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest. Exodus 22:25

    Hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him. Ezekiel 18:13

    Usury is unlawful; expressly prohibited by GOD!

     Article 1 Section 8 of the U.S. Constitution clearly states that only the Congress can print and coin money! 

    The Federal Reserve Act of 1913 was slipped thru congress during the Christmas break with the majority of it’s members absent. 

    The Federal Reserve is self serving and privately owned in violation to the Constitution, charging interest on illegally printed money. Money printed from nothing!

    In America On June 4, 1963, a virtually unknown Presidential decree, Executive Order 11110, was signed with the authority to basically strip the Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. With the stroke of a pen, President Kennedy declared that the privately owned Federal Reserve Bank would soon be out of business. Five months later A UNITED STATES PRESIDENT, PRESIDENT JOHN F. KENNEDY was MURDERED BY COMMUNIST!

    “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest. Exodus 22:25

    Hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him. Ezekiel 18:13

    Usury is unlawful; expressly prohibited by GOD!



    In ancient Babylon their priest sacrificed babies to their gods baal, and molech.  

    In America the communist under their socialist programs have sacrificed over 50 million American babies to their god satan!

    Leviticus 20:2-5

    2Again, thou shalt say to the children of Israel , Whosoever he be of the children of Israel , or of the strangers that sojourn in Israel , that giveth any of his seed unto Molech; he shall surely be put to death: the people of the land shall stone him with stones.

    3And I will set my face against that man, and will cut him off from among his people; because he hath given of his seed unto Molech, to defile my sanctuary, and to profane my holy name.

    4And if the people of the land do any ways hide their eyes from the man, when he giveth of his seed unto Molech, and kill him not:

    5Then I will set my face against that man, and against his family, and will cut him off, and all that go a whoring after him, to commit whoredom with Molech, from among their people.


    Luke 22:35-36 Then Jesus asked them, “When I sent you without purse, bag or sandals, did you lack anything?” “Nothing,” they answered. 36 He said to them, “But now if you have a purse, take it, and also a bag; and if you don’t have a sword, sell your cloak and buy one.



    Jeremiah 50:16Cut off the sower from Babylon, and him that handleth the SICKLE in the time of harvest: for fear of the oppressing sword they shall turn every one to his people, and they shall flee every one to his own land.

    Jeremiah 50:23How is the HAMMER OF THE WHOLE EARTH CUT ASUNDER AND BROKEN! how is Babylon become a desolation among the nations!




    Jeremiah 50:14 “ Put yourselves in array against Babylon all around, All you who bend the bow; Shoot at her, spare no arrows, For she has sinned against the LORD.

    All nations compassed me about: but in the name of the LORD will I destroy them. Psalm 118:10


    “The thing that separates the American Christian from every other person on earth is the fact that he would rather die on his feet, than live on his knees!”. George Washington




  2. #1 Question: Why do we allow such hair-brained mis-use of depositors' funds to remain legal???!!!!

  3. "he explains how fractional reserve banking took down MF Global. It also wiped out the depositors."

    I have explained before, depositors are not "wiped out." Yesterday, the CME distributed $billions more so that almost all domestic MF Global customers have now received back 72% of their account value. [Bids in the market for the balances not yet returned indicate that at least half of the balance is also likely to return.] I have e-mailed Dr. North directly with a copy of my statement, showing the return of funds. Previous comments posted on "Specific Answers" give links to the official sites of the CME, the liquidating trustee, and the Customer Coalition where details are available.

  4. TheThinMan says:

    It's beginning to appear that your money is safer under your mattress or in a glass jar than invested in any manner – even a savings account with a Bank. The FDIC is becoming, if not already, a useless guarantee – when the government is broke and up to it's eyeballs in debt – how do you expect them to bail you out – oh yes – there are still reams of paper at the printing office.