Our story thus far: MF Global customers had their segregated accounts emptied — robbed is the precise term — by unknown senior management who raided all available cash to put on a leveraged Hail Mary trade on European Bank debt. The trade went against MFG before it could be pulled off, and the leverage generated both margin calls and a public discovery of the theft.
The trade would have paid off nicely if the firm had the wherewithal to meet margin calls. There are perhaps two lessons here:
1. When you put on a highly leveraged trade, its better not to purloined funds.
2. There are some people on Wall Street so fucking stupid and unethical that they need the above rule explicitly explained to them.
Regardless of the lack of intelligence or morals, there is some good news: MF Global customers are looking at a recovery somewhat better than 90% of their monies. While suffering a ~10% loss for the mistake of leaving money and stocks in your brokerage account may sound like big hit, it is much better than the initial fears of a total wipe out — a 100% loss.
The bad news? The momentum towards reforming Re-Hypothecation rules and other standard boiler plate is waning. I doubt anything will formerly change.
Investors do have an option: Don’t leave money with any firm that have their own proprietary trading. Indeed, if they needed a bailout, your cash was at risk. Keep your monies with them at your own peril. (I am obviously very biased).
I use a third party custodian — TD — that does just that and nothing else. Any of the third party brokers will work — including Schwab and Fidelity (E*Trade dabbled in derivatives and subprime, and accordingly, they are off my list).
It is hard to imagine that leaving stocks/bonds/cash in segregated accounts with a trusted custodian means those assets are at risk — the MF Global debacle never should have happened.
Then again, neither should the financial crisis have happened . . .
MF Global Customers Said to Get Offers for Their Claims
AZAM AHMED and BEN PROTESS
NYT, March 12, 2012