Saturday, December 3, 2011

Is Your Money Safe at Your Brokerage Firm?

Ann Barnhardt of Barnhardt Capital Management last week advised clients that her firm was liquidating all customer brokerage and options accounts as a result of the Chicago Mercantile Exchange response to the collapse of MF Global. In a series of letters published on her web site, Barnhardt states that the system “is no longer functioning with integrity and is suicidally risk-laden”. She wrote in part:
Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg

. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system....
Is there truth to what Barnhardt is saying? Listen to this video clip from the very angry Gerald Celente, who lost money in the MF Global debacle because he had a futures account with Lind-Walldack, which was owned by MF. He thinks so.

The truth of the matter is, though, that when a commodities broker or stock brokerage firm goes down, especially when potential fraud is involved, in most cases it is going to be a very long time before customers are going to get  their money back. A friend of mine, decades ago, had money in a SIPIC insured stock brokerage account at a firm that went bankrupt. He had fully paid for stock with the firm, nothing else. He couldn't get his stock for months, nor would SIPIC allow him to sell the stock.

The problem in these situations is that when exchanges and insurers like SIPIC come in, they don't know what is real and what could potentially be a fake account, so they aren't going to pay anything out immediately. They just freeze everything and sort things out from there at their own bureaucratic pace. That's standard operating procedure. If Celente and other Lind-Walldack customers don't eventually get their money back that will be an outrage, but I suspect they eventually will---though market moves in the positions they hold could produce serious havoc with the value of the accounts.

The real evil bastard in the MF case is former-Goldman Sachs CEO and big time bankster Jon Corzine, who was Chairman and CEO of MF Global since March 2010 and who apparently used supposedly segregated client money to back-up his losing trades.

Barnhardt is incorrect when she writes that a new " risk exposure precedent"  has been set. In complex cases, and perhaps many non-complex cases, this is how liquidations have been conducted for decades on Wall Street---and I am emphasize, especially when fraud is suspected.

As for Barnhardt's charge that there is massive industry exposure to European sovereign junk debt, that could very well be the case, but that is not going to be handled at the commodity exchange level. The central bank inflators will take care of that, and that is exactly why Treasury Secretary Geithner is headed over to Europe next week. There are conspiracies that go on, but the Chicago Merc is not halting payouts to accounts in the MF Global collapse because of fear of setting payout precedent in the event of a eurozone crash, they fear paying out money to an account that might not be justified and might be a potential Corzine wiggle maneuver, as I said, I suspect that, once the mess is sorted out, Celente and other legitimate account holders will likely be paid out.

 The lesson here is to take delivery of anything, such as stock certificates, that are fully paid for and diversify your accounts so that you don't have all your funds at one firm. If a firm ever goes down where you have an account, you are likely not going to have access to your funds for a very long time.

I would never keep more than 10% of my money/assets, ever, at anyone bank or other financial institution. It is never the prudent thing to do, funny things can happen, but it is especially dangerous now to keep all your money in just one or two accounts when sometimes desperate banksters roam the planet.


  1. Corzine didn't found MF Global. MF was spun off from E.D. & F. Man first as Man Financial and later renamed MF Global.

  2. Would it be possible to get Frank Shostak to comment on MF? He was with that firm until about a year ago.

  3. @SeanO

    Thanks for the correction. Corzine was appointed CEO and Chairman of MF Global in March 2010.

  4. Robert, how does one take delivery of stock certificates? Is this something that is easy to do (i.e. through the broker's web interface), or will this require hours on the phone with clueless reps?

    Like most people, I have a single brokerage account that holds most of my net worth. It's with Fidelity, which, to my concern, Celente referred to as "Infidelity" in his interview with Lew.

  5. Your Owners destroyed the commodity trading deliberately...They did not approve of their newly counterfeited money propping up commodity prices so they destroyed the entire market with the help of their insider terrorist Corzine.


    "Given that no one will ever clean up the system short of complete collapse, here's what you can do to insulate yourself as best as possible. Make sure your brokerage accounts are with non-bank brokers who don't do much in the prime broker area. Charles Schwab and Fidelity would be my suggestion. Second, move as much of your paper (cash) wealth as possible into gold and silver that either you safekeep yourself or you know damn well is not being hypothecated or used in some fractional scheme, like GLD, SLV, Kitco, Monex, etc. If you're worried about gold, please read this commentary from the CEO of Seabridge Gold, who succinctly explains what happened over the last two weeks and why gold actually doing what it's supposed to be doing:"

  7. "I would never keep more than 10% of my money/assets, ever, at anyone bank or other financial institution"

    Do you use one financial advisor or many ?