Tuesday, October 16, 2012
“In August 2011, encouraged by friends who I thought knew much more about these sorts of things than I do, I opened a small account to trade options and futures. The account was with MF Global. You probably know the rest of the story.”
In short, MF Global went bankrupt on October 31, 2011. The immediate cause of the bankruptcy was that its president, former New Jersey senator and Goldman-Sachs chairman Jon Corzine, had made a leveraged bet with the company’s assets, including segregated client funds, on Eurozone sovereign debt. When Corzine’s bet headed south at the end of October, it forced the company into bankruptcy.
This is not an isolated situation. Nestmann discusses various practices employed by US banks, brokerages and lending facilities: re-hypothecation, hyper-hypothecation and segregation requirements (or lack thereof).
Americans can’t count on the Federal Deposit Insurance Commission (FDIC) to bail them out if a bank goes under. The FDIC’s Deposit Insurance Fund has a balance a little under $12 billion to cover about $10 trillion in customer deposits. That amounts to about 1.2% of funds on deposit.
It gets worse: The 25 largest US banks have total deposits of $8.3 trillion. That sum exceeds the amount of money on hand for the FDIC by many times, and it doesn’t include the enormous portfolios of derivatives these banks hold. US courts have ruled that creditors of US financial institutions, which include counterparties holding the opposite side of these derivative contracts, have the right to collect ahead of any obligation of the financial institution to its customers. The “gross notional value” of those derivatives for these 25 banks comes to an almost unbelievable $249 trillion.
“Given this reality, I think you can understand why I’m trying to minimize the money that I keep in segregated accounts or otherwise on someone’s balance sheet. Instead, I’m investing it in physical gold and silver,” writes Nestmann.
Posted by Unknown at 12:18 PM