I have been thinking a lot about transparency lately (sad, I know), especially since Pipeline Trading's sneaky tricks and MF Global's seemingly full-scale fraudulent activities were exposed. Since the dawn of financial markets (I include energy and commodities here) people have been able to make great profits, not all of them legal. Over the years I have reported on some of these barely-legal activities, and there are many more that I cannot write about for fear of reprisals. So whenever lawmakers and regulators try to make strides toward transparency I applaud. Transparency makes investors happy, it gives them a warm and fuzzy feeling that the markets or companies they are investing in are as straight-forward as possible.
MF Global let the transparency side down for brokers and broker-dealers by using segregated customer money for prop trading. What it allegedly did was not only illegal, but immoral. Customers were harmed, the CFTC and CME's reputations for being the good guys were damaged. A slightly loony post today on Zerohedge went so far as to say that MF Global has destroyed the whole system. Written by a broker called Ann Barnhardt from Barnhardt Capital Management, the post blames everyone from Obama to the government for orchestrating a conspiracy to defraud her customers. She has closed her business and says she won't get back in until everyone in power today is either dead or deposed. Here is one alarming passage:
Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.
Hers is an extreme case, she even invokes God at one point, but it shows how pissed off people can be when their protectors let them down. But regulators and exchanges are only human, and cannot read the minds of fraudsters and tricksters. They can only sniff around the edges and try to ensure that financial firms are doing the right thing. MF Global clearly wasn't, but its timing was perhaps the key to getting away with swiping customer money. A Dealbook article in today's New York Times says that the brokerage probably used some of the money to cover trading losses. Where the rest went is thus far a mystery. The NYT said: "The firm may have used some of the cash to keep its own lenders at bay, which means the money could be sitting in an account at another firm." OK...which firm? Who are the trading partners? This is the opposite of transparency and I can see where this might royally piss off clients and counterparties.
One firm's actions post-M F Global warmed my little heart. Market maker Jefferies Group's shares got hammered when it was mentioned in the same breath as MF Global as having a preponderance of European debt on its books. Jefferies took the bold step of revealing its positions, then selling out of about half of them to mollify shareholders. Now that's what I call transparency. Unfortunately, the firm remains tarred with the MF Global brush.