Koutoulas: JP Morgan Possessing MF Global Customer Funds Would Be Consistent with Their Business Practices
What is the latest news on MF Global?
James Koutoulas: The WSJ came out with a report saying that JP Morgan -- surprise, surprise -- had received more customer money right before the bankruptcy than originally reported. For people who aren't following this closely, JP Morgan was not only the largest lender to MF Global, but they were also the custodian for the customer-settled funds and they were clearing and settling MF Global's trades.
It's very similar to AIG. If you look at what Jon Corzine was doing with the shadow banking system and 30-to-1 leverage using off-balance sheet derivatives -- same stuff that got AIG into trouble in 2008, and not one thing has changed in this country. Dodd-Frank really doesn't go that far toward changing the future, and neither does the watered-down Volcker Rule.
What is it like working with Louis Freeh, the trustee in charge of securing funds for creditors?
James Koutoulas: Forgive me on this one -- I have to be a little less candid than normal, just because due to the fact that Freeh was the former director of the FBI and I don't want to ruffle any feathers -- but he's a shill for the largest creditors in this case. He has done nothing that is pro-customer from the time that he took over as trustee.
The fact is, two or three days after he was hired, the very first thing he did in court was object to the bulk transfer of 72 percent of customer property back to their rightful owners. So, basically, Louis Freeh wanted to ruin Christmas and deprive all of the customers of MF Global access to their property, part of which has apparently been stolen from them.
Good job, former Director of the FBI Freeh. I'm glad that he finally waived privilege to comply with an investigation -- three months after the fact. You would think someone who ran the FBI would have some kind of priority for wanting to see justice done in this case.
I think all that Freeh wants is to suck on the teat of JP Morgan and the other creditors who bill his $850 per hour and be as adverse to customer interests as possible -- slowing down the justice system and preventing transparency from getting into this case.
What about James Giddens, the trustee in charge of recovering customer funds?
James Koutoulas: There are two cases here. There is the MF Global Inc. case -- that was the broker-dealer and the futures commission merchant. That is the entity that actually held the customer assets. Then, there is MF Global Holdings, Ltd., which owned 45 or so affiliates around the world in all different jurisdictions, including MF Global Inc.
So, basically, Holdings benefited from the business activities of these affiliates. Freeh is the trustee for the Holdings company, and the Holdings company is trying to get as much money back for its creditors as possible, the largest of which is JP Morgan.
Giddens is tasked with being the advocate for the customers -- recovering their property and tracing funds that have improperly left the MF Global Inc. estate and clawing them back for customers.
At the beginning of this case, Freeh wasn't even involved. The first trustee hired was Giddens -- that was in the broker-dealer case. Initially, I was very adverse to him. I saw that they billed $160MM in the Lehman case; they were billing $891 an hour in this case. They didn't really have any experience in commodities.
We were very aggressive with them. We [at the Customer Commodity Coalition] lobbied the judge to let us work with the trustee and make him take our feedback on the claims process. Guess what? Giddens did it.
Giddens incorporated a lot of the feedback from myself and other industry professionals that allowed us to take his original proposal -- which was distributing about $3B in customers' money nine months after the bankruptcy -- and instead, we developed a process that got over $4B to customers six weeks after the bankruptcy.
Because of the fact that Giddens was open-minded and he worked with us, we were able to save countless businesses -- and farmers who couldn't buy seed, people's mortgages -- there are a lot of small businesses, a lot of commodity users and producers here. If they had to wait nine months to see any material money, they would be out of business. They would be filing for bankruptcy.
Giddens did the right thing, and we continue to work very closely with them. I will give them a positive shout-out.
It's posited by many that the missing funds are already safe and sound in creditor bank accounts. What are your thoughts?
James Koutoulas: I think JP Morgan from day one has been behind this. You saw what happened in the Lehman Brothers case, where they basically seized a $7B account that was supposed to be payable to Barclays after Barclays came in and bought assets.
They have a history of doing this. If you look at what they've done with overdrafts, or if you look at what they did in Jefferson County, AL, where they bankrupted one of the poorest counties in the U.S. -- causing basically sewage prices to go up 400 percent and really poor people to have to pick between food and clean water -- it's consistent with the way they run their business.
Regulators aid and abet this. If you look at the overdraft settlement, which looks like it's going to be approved, they're basically getting dinged for 11 cents on the dollar for activities that were unethical at best and probably illegal at worst.
If you are charging them 11 cents on the dollar, there is no punitive aspect to that. There is no deterrent. You are saying, "It's okay, do it. Just pay the government a tax. Nothing is stopping you the next time."
We need Glass-Steagall back. These banks have no business being in investment banking activities and off-exchange balance sheet derivatives transactions when they are supposed to be responsible for safeguarding regular Americans' money.
In 2012, that's not why they exist anymore. They exist to borrow from the Fed between 0 and 25 basis points at the Fed funds rate and then go to the seedy underbelly of London finance where they are levering up at 30 or 40-to-1 in these off-balance sheet transactions.
An article in Zero Hedge this week said that JP Morgan has over $500B in re-hypothecated securities exposure. It's a systemic problem. Re-hypothecation and incredibly high levels of leverage are what brought down the financial system in 2008. Nothing has been done to stop it.
The fact that publicly-held banks can engage in off-balance sheet transactions is ludicrous. There is a very thin distinction between what they are doing and what Enron was doing. This is permitted -- the bank lobbies have consistently gotten favorable rule changes to allow it.
Why is the MF Global case being adjudicated under SIPA and not chapter 7 bankruptcy?
James Koutoulas: From what I've read, there was a closed-door meeting on October 31, supposedly between the SEC and the CFTC. It's unclear -- there were no public records released to my knowledge relating to this meeting.
If I take my lawyer hat off and speculate as a third-party observer, to me, it looks like Gary Gensler, the chairman of the CFTC, is trying to abdicate the CFTC's role in this. I don't know if that is because he is good friends with Corzine. He later recused himself.
Really, this decision is the CFTC saying "We don't want to be a real regulator. We want to abdicate all of our power and essentially shut down our agency and maybe fold it into the SEC."
One of the things that we are asking Congress to do is to codify the existing public policy that customers get paid first no matter what. In this case, that would be paying the customers out of the MF Global Holdings estate, making them whole and getting them out of this bankruptcy process so they could get on with their lives.
Then, the creditors and banks could go on their three year bankruptcy vulture fest as is common in bankruptcy court.
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