Last Updated : 19 December 2011 at 19:00 IST
A warning to former MF Global segregated account holders: If the news has already been more than you can bear, please do not read this post — it may really push you over the edge.
While the congressional hearings have been interesting, at times shocking, at other times even quite entertaining, Congress has yet to connect the dots. So I will do it for them.
In short, when the dots are connected, a significant portion of the $1.2 billion (some say more, some say less) of segregated account money illegally stolen by Jon Corzine’s MF Global (with the CFTC driving the get-away car) has landed in the pockets of George Soros.
Let’s go through this step-by-step:
1. Jon Corzine figured out a brilliant trade in the European debt market.
While I won’t go into the details, Corzine would have made a fortune if the trade could have been held to maturity of the debt instruments. The money was NOT lost because Corzine made a bad trade.
2. Corzine leveraged the trade to the hilt. He had the trade on with uber leverage. In fact, MF Global ended up with a $6.3 billion trade.
3. The Greek and Italian bonds tanked (rates went higher) over concern about a possible default.
The spike in rates would not have affected the final profitability of Corzine’s trade, but did put the trade on margin call after margin call. MF Global used every last penny of cash reserves to meet the margin calls, knowing that if it could survive the margin calls the trade would have made money at maturity. MF Global was unable to secure additional loans to meet the margin calls because it was leveraged to the max on the trade it .
4. MF Global illegally took segregated customer funds out of J.P. Morgan to meet margin calls in an attempt to survive the trade. It was the legislated responsibility of the U.S. government to protect this from happening.
5. MF Global’s clients (without their knowledge or permission and as an illegal manuever) became the default counterparty to MF Global’s trade. This is a fact Congress has not yet figured out.
6. MF Global puked about $1.5 billion of the trade, but it filed for bankruptcy when it was finally unable to meet further margin calls.
The remaining $4.8 billion trade was taken over by KPMG LLP, MF Global’s bankruptcy administrator in London. REMEMBER FROM POINT 5 ABOVE, MF GLOBAL’S SEGREGATED CLIENTS REMAINED A COUNTERPARTY TO THE TRADE BY DEFAULT.
7. KPMG peddled perhaps half (or more) of the trade to George Soros. The actual amount reported was $2 billion, but at a discount.
Remember, this trade was a guaranteed winner at the maturity of the bonds, so Soros was locked into a profit. Also, with his deep pockets ,Soros knew he could withstand interim margin calls if necessary.
Final point #8: MF Global’s segregated account holders became the default counterparty to Soros’ trade.
The profits that Soros has locked in represent, in large part, the segregated money previously belonging to MF Global clients that had been safe and secure (at least that is what the CFTC’s responsibility was) at J.P. Morgan.
Let me conclude by emphasizing that George Soros did nothing illegal in this manuever. The great speculator/shark simply smelled blood in the water and had the money to buy a distressed trade that was a guaranteed winner.
But in the process, the profits Soros will realize will in part (or in whole) be the segregated funds of MF Global’s clients. Technically, and legally, these funds belong to Soros because they were laundered through the complex process of rehypothication. But make no mistake about it, this is the money that previously belonged to MF Global’s clients.
So the dots are connected. MF Global’s clients (by default) became the counterparty to George Soros’ trade. MF Global’s client’ money, while illegally taken, legally became George Soros’ money.
And, Congress seemingly has no hint this money trail exists; the CFTC takes no responsibility for this ugly episode in history; and the Administration and the Fed would rather spend their time heralding the $180 billion-plus money it gave to AIG.
Source @CommodityOnline
