Comments From Paris

“I simply do not know where the money is.” Former MF Global CEO Jon Corzine.

Current events again support the notion of a three-silo approach to money management. Cumberland has recommended and supported that concept from inception.

MF Global is the latest example of what can happen when you mix custody with advice and transactions. We witnessed this during the explosion involving Madoff. We have seen it occur in other, lesser-known firms. Now we see it writ large in this most recent sad tale.

The safety of investing in asset management is greatest when the parties are independent; when all fees and expenses are separately shown; and when the clients, consultants, and professionals can evaluate each party and process independently.

This three-silo approach simply means to separate custody: the safe-keeping and accounting of assets, from transactions; the brokerage, exchanges, and intermediary actions by which one transacts and accomplishes the purchase or sale; and the advisor, the consultant, the recommending party, or the analytical professional who offers help to the investor.

By separating all three, you diminish the risk of the types of events that we continue to read about in the media as this ongoing financial crisis unfolds. MF Global is the latest in a saga that has other names attached, such as Lehman Brothers, Madoff, Nadel, and so forth.

Since 1973, when my now-deceased founding partner, Shep Goldberg, and I created Cumberland Advisors, we sponsored the notion of a complete division of services. Cumberland does not take custody of client funds. Cumberland is not a broker dealer, and does not transact for commission. We are only a fee-for-service advisor. We only advise on separate accounts, not comingled funds.

It is this latest tragic event that requires a restatement of this basic principle. The world is such that we now confront a continuum of tragic events on a daily basis. We cannot depend on the regulators to protect us. Clearly, they can falter. We cannot depend on the rating agencies to accomplish valuations that give us comfort that there is soundness and creditworthiness. Clearly, they have failed. The nature of the world today is that one has to be self-sufficient and seek safety in the way things get structured.

In our view, separating every service, evaluating it independently, and avoiding comingled assets is one of the soundest principles. It matches diversification of risk as the type of approach that can protect investors in a world that seems to be rife with Lehmans, Madoffs, MF Globals, and others yet to be revealed.

In Paris, fear is growing among investors, bankers, and financial professionals. They recall the history of previous generations, when governments failed. They worry about an end to the grand “rapprochement” that led six decades of peace. Does the euro crisis portend that era may be drawing to a close? They watch from afar as another American firm blows up, as another Federal Reserve primary dealer joins the list of failures, alongside Countrywide and Lehman Brothers.

It is raining here. The holiday lights are dimmed by fog, just as the outlook is dimmed by uncertainty.

Cumberland Advisors
Comments from Paris
by David R. Kotok, Chairman and Chief Investment Officer

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