Saturday, March 24, 2012

MF’s Corzine Ordered Funds Moved to JP Morgan

Impossible.  Impossible in that "funds" do not "move".

This headline from a Bloomberg article that follows up on the situation between MF Global and their banker JP Morgan.  The article is mostly out of paradigm in that it reports these matters in a way that misses the basic abstract nature of our banking system.

But the Bloomberg people are not the only ones who can't get a handle on these systems, here from the article is an excerpt from a Congressional inquiry report, trying to explain these events:
“Over the course of that week, MF Global (MFGLQ)’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’ segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.
I bring attention to this government report's use of the word "segregated"; like somehow the system consists of a big vault room with different physical deposit boxes that are "segregated".  This is absurd.

Hat tip to Naked Capitalism where Yves has covered this Bloomberg story but Yves has in a way been misled by the context here and has written that the customer accounts had been "raided".  Nobody is "raiding" anything here.  The system is just a big "spreadsheet", as Warren Mosler often describes it, that keeps track of double entry accounting transactions, and depository institutions are entrusted to operate the system conservatively and with integrity.

Our banking system is not best understood by watching a Harry Potter movie and the goblins that run the Gringott's Bank in those fictional stories by J.K. Rowling.  Here's a picture of Harry and friends who have just come out of a "segregated" account that looks like it has been "raided" and the "funds" have been "moved":

This is an image from a children's movie and does not in any way represent the real world of modern banking, our system is all on computer based integrated information systems these days; which keep track of double entry, offsetting accounting transactions.

Garbage in, garbage out.


Ryan Harris said...
This comment has been removed by the author.
John Zelnicker said...

Ryan -- Is that a defense of Corzine?? It sure sounds like it and that is so far off-base as to be laughable. This has never been about bad investment decisions, it's about Corzine trying to save his butt with customers' money. Theft, plain and simple.

Ryan Harris said...

I'm not defending what he did. I just don't think it was criminal. He lost big on Euro bonds When he lost more than they had, someone was going to lose. They became insolvent. Bad risk management.

Matt Franko said...


The point I was trying to get at is their is "no such thing" as "customer money" per se. So Corzine couldnt have directed any body to "move it". We dont have the Gringotts goblins "moving funds around".

All USD balances are controlled by the banking system.

JPM/CME f-ed up and now it is they who dont want to admit it and return the BALANCES to the MFG clients...

MFG could not "send the funds" to JPM... JPM is the BANK for crying out loud. JPM had to have advanced MFG balances secured by some sort of asset that they thought MFG had/MFG said they had (know thy client!), the assets were dodgy or fleeting apparently and now JPM/CME doesnt want to credit the MFG clients bank accounts and JPM/CME have to take the hit on the other side of the transaction.

You watch they are going to try to get a federal "bail out" on this because Corzine was a Senator blah, blah, blah.

To use this poor terminology like Bloomberg/Congress/Yves have is to assist JPM/CME in the obfuscation. The sheeple are led to think it is like a Harry Potter movie.

Where are the MMT/R "semantics police" when you need them?


John Zelnicker said...

Matt -- I understand your point, I think. It was only a matter of changing numbers (or labels) on a spreadsheet. But I see it as a change in ownership of those numbers (which represent dollars) from the customers to JPM to cover a shortage or a liability that was not the customers responsibility, but the firm's. And regardless of the terminology, if Corzine gave permission for that change, he stole the money. If JPM did it without permission, then they stole it.

And I think you are right about a try for a bailout.

BTW, you always end your comments with "Resp," and I can't figure out if you mean "Responses welcome" or "Respectfully submitted". :)

Matt Franko said...

"Respectfully" John,

(At least I try, not always succcessful ;)

Mario said...

I see your point Matt regarding speadsheets, however companies can and do have different checking and savings accounts where funds can be "segregated." I don't know the details of how brokerage accounts work but I wouldn't be surprised if they are supposed to be "fire-walled" in some way and regulated and monitored, etc. In other words the funds one deposits with a broker is surely NOT deposited in the "operations" checking account(s) the firm uses to pay bills and operate daily, etc. In this way they are segregated internally and can definitely be monitored and tracked wouldn't you agree? This issue is a huge one, b/c it is the BEDROCK upon which the entire financial markets are based on....your funds are yours and you know at least WHERE they are and WHAT they are invested in, etc. Without that we have a RIDICULOUSLY real problem with the investing and trading, etc.

Matt Franko said...


I think what you point out is the point of view of the the MFG clients that have not had their balances restored...

All JPM/CME has to do is change the numbers on the MFG clients accounts to the positive, and correspondingly mark down one of their own accounts to the negative. It's the latter that they have the problem with...

So it does not help the public to understand what is really going on with these systems to use these words like "raided" or "funds moved". Or in a previous release the news described it as "the funds evaporated": Whaaaaaaaaat?

This is magical (ie Harry Potter type) thinking again coming in here.

JPM lent balances to MFG based on faulty collateral. JPM or the CME has to eat it, not the MFG clients.

If the public understood that all that need be done here is the numbers be changed on a spreadsheet to replace the balances for the MFG clients, and a bunch of people at JPM, CME and MFG be sanctioned and banished from the industry for the rest of their days, it would have a good chance of being demanded and implemented.

By correcting and entreating those in the public sphere reporting on these issues to use the correct terms and semantics, MMT/R can do a lot of good work towards edifying the public about what is really going on.


Anonymous said...

OK, then it's okay for me to go down to my local bank, pull out a gun and ask them to change their spreadsheet entries and credit my account. No crime here!

Matt Franko said...


The best way to rob a bank is to own/operate one...

Gee where have I heard that before?

Mario said...

I see your point and I agree for sure. When people realize how easy it is to make these clients whole again it would be more likely to get done. And I'm sure that JPM could sue the shit out MFG if they wanted to in this case...however I think (suspect) that JPM was probably suggesting that MFG use client funds to pay them back. I think JPM and MFG were in it together and got the CME on board as well. Boy that sure sounds like a familiar story to me!!!

I do still view it that those clients funds really are (or at least should have been) "segregated" though. It may not be in a vault of course, but it is on a separate "spreadsheet" or "electronic ledger" that is for sure. Otherwise the accounting would be impossible to maintain for the brokerage firm. They have to "differentiate" the various accounts. And if an account is debited or credited without any corresponding trade or investment taking has to wonder WTF happened to those funds!!!! Any forensic accountant could trace these funds in a heartbeat considering the entire company's books and assets and buildings are all still in tact and not burnt down in a fire or something. We have trained professionals to work on these cases. This is truly criminal the way this is shaking out. My greatest fear is that this could become the next "fad" among Wall Street and one more ridiculous risk of "investing and trading." Talk about a freaking black swan!!

Mario said...

that last comment was to Matt of course

Mario said...

OK, then it's okay for me to go down to my local bank, pull out a gun and ask them to change their spreadsheet entries and credit my account. No crime here!

exactly Anon!!! You just got how the game works....white collar crime baby. ;)

Deus.Ex.Machina said...

If the Corzine Quick Shuffle is implemented correctly, everybody, except the dealer, is sure to lose.