NT/ MF Global fiasco, and you

[Catherine]

MF Global collapsed a few weeks ago, sending the commodities brokerage world into a tizzy and outing John Corzine as a crook to make Bernie Madoff look like a rank beginner.

“So what? I don't invest in cattle futures,” You may say. However, there is potential for a big problem facing us.

I’ve been following the repercussions of the MF Global fiasco. One of the blogs I read is by the founder of a small, independent commodities brokerage. A week or so after the MF Global implosion, this writer announced on her blog that she had closed her firm, as she could no longer guarantee to her clients that their monies and positions were safe in the futures and options markets, due to the large-corporation use of supposedly-segregated customer funds in serially re-hypothecated “investments” in European sovereign debt.

I took this with a small boulder of salt; this blogger is very knowledgeable, educational, and entertaining - but she also tends to be dramatic. However, late last week I came across serious analytical articles from other sources (including Thomson Reuters; hardly a “scandal rag” – ref’s below). The gist of it is that this multiple re-hypothecation greatly increases the exposure of US BANKS to a liquidity crisis precipitated by Eurozone sovereign defaults. The extent is _potentially_ catastrophic.

Yesterday (Dec 13), at the annual UMass Tax Update Seminar, I took the opportunity to speak on this issue with a senior VP at Salem Bank. I asked if the banking industry was worried about a liquidity crisis catalyzed by the MF Global fiasco. The response? No, they’re not “worried about it” – they expect it. There’s no way around it, it’s just a matter of timing. They also expect that the FDIC will turn on the printing presses to “make whole” the customers whose money disappears, and this VP stated that money-printing in the required quantities would lead directly to strong inflation.

I asked specifically about the safety of customer funds in smaller banks and was told that community banks, mutual banks, and credit unions are NOT allowed to make these kinds of investments. People whose funds are in these types of banks will see much less impact on their operating cash accounts than those whose funds are in big banks.

Bottom line: some kind of serious banking trouble is coming; heaven only knows when (immediately, soon, mid-2012, other?). Likely interruption in bank service of unknown extent or duration. Inflation. Potential implosion/collapse of large commercial banks.

What to do: that is completely up to you. Read the articles linked below and decide (plus new ones that just came out this week; the ones I've linked are from last week). Prudence would recommend that at least get some of your money into a small community or mutual bank, or credit union. Also, prudence would dictate that you have a stash of cash in case we see a disruption in ATM & credit clearing house service of a couple of days. Some people may want to add silver or gold to their holdings as a hedge against inflation; one could stock up on non-perishable foods/required medicines in case there are disruptions in shipping and trucking; or take other precautionary measures that make sense for you and your family.

Whether or not to inform/warn your clients is also up to you.

This is NOT a time for panic or fear (which would work against you in any event). With great good fortune, we can look back a year from now and laugh about our concerns and how silly we were. If the problem manifests but turns out to be small, you can then put your cash stash back in the bank (it's not like you would have earned any interest worth counting in the meantime) and know that you were prepared.

http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/

http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe

http://market-ticker.org/akcs-www?post=198790

My best to you all,

Catherine

Ezekiel 33:6 “But if the watchman sees the enemy coming and does not sound the alarm to warn the people, he is responsible for their captivity. They will die in their sins, but I will hold the watchman responsible for their deaths.” (NLT)

[Pacun]

Nice reading. I believe my $100 are safe in Citi bank.

[Margaret CPA in OH]

Catherine, thank you for this disturbing information and subsequent suggestions and thoughts. I think you have given your best by bringing the complexity of this recent calamity and ongoing financial shenanigans (what else could they be?) to us for more careful consideration for ourselves and clients.

My husband has a degree in economics from Wharton and rails often about the wisdom of great rewards to those who produce nothing but only move money around and devise ways to 'earn' money by such things as credit default swaps - win-win for them, lose-lose for many others. When the politicians and regulators are in collusion with bankers and money 'managers,' what hope is there for the likes of us being manipulated by them?

So this will be sobering reading over the next several days when my focus should be on more seasonal issues. I guess we all should try to keep some perspective as best we can.

Thanks again, Catherine, and enjoy your holidays and new bathroom!

[joanmcq]

I have one account with Wells Fargo, but all the rest is at my local credit union. I really don't know why an individual in the 99% would use anything else! George Bailey over Mr. Potter any day.