September 30, 2016
By: Gordon Haave, Managing Director Agora Trust Ltd.
It was the financial crime of the decade. A connected politician stole hundreds of millions of dollars to cover his own trading losses, and, as expected, he was never charged with a crime. This was the story of Jon Corzine and MF Global.
In its carnage, the MF Global debacle teaches us how to protect our assets during the next financial crises, and make no mistake, there will be one.
MF Global, (formerly known as Man Financial) was a major derivatives, foreign exchange, and commodities brokerage. By definition, a broker is someone who buys and sells for others. That’s what MF Global did for years. However, the 90’s and 2000’s showed the financial industry that the real money was to be made not in brokerage, but by using political capital as well as knowledge of what your customers were doing to trade your own assets.
Goldman Sachs and others did it successfully for years, and it was with this in mind that MF Global hired former Goldman Sachs CEO and former New Jersey Governor and Senator Jon Corzine to run the firm.
The way a brokerage firm works, customer assets are segregated from company assets. That is, your money in a brokerage firm remains YOUR money, as opposed to your money in a bank, which is the bank’s money to which you have a claim.
Against this backdrop Corzine made massive leveraged bets with company money on the sovereign debt of European countries that the market, as a whole, thought might default. As those bets started to go bad, MF Global got hit with margin calls. Rather than liquidate the positions, Corzine and Co. simply took customer cash to meet the margin calls.
Eventually the scheme collapsed and MF Global declared bankruptcy. Of course, Corzine got away with it (although most customers did ultimately receive their money back).
How can we use this story to protect our funds during the next crises?
Banking crises are a fixture of the modern easy-money Fed. Able to borrow at near zero percent, banks are always more than willing to lend more and more money to riskier and riskier borrowers.
Why not? The bankers take all of the gains and the taxpayers bear all of the losses.
The problem is that each successive boom and bust cycle creates a larger and larger global banking crises.
As outlined by the Bank for International Settlements, in its most recent Annual Report (http://www.bis.org/publ/arpdf/ar2015_ec.pdf):
“Rather than just reflecting the current weakness, they may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates.”
In short, low rates beget lower rates.
The B.I.S. went on to say:
“In some jurisdictions, monetary policy is already testing its outer limits, to the point of stretching the boundaries of the unthinkable.”
We know the next crises will come. It’s the natural bi-product of the Fed’s free-printing ways.
The question for you is: Where can you put your money so that it’s safe?
The answer is: In a brokerage rather than a bank; and invested rather than in cash.
Let me explain:
Why a Brokerage and Not a Bank?
A brokerage account and a bank account are fundamentally different. In a bank account, you deposit your money in a bank. That money is now THE BANKS PROPERTY. Your deposit is simply their liability. Your money is now just an accounting entry on their balance sheet. The bank then takes THEIR money and lends is out. The bank’s ability to repay its debt to you rests on its ability to be paid back by those it’s lent money to. In today’s world of course, it also depends on the bank’s ability to not lose all of its money gambling on derivatives and other exotic financial instruments.
A brokerage account, on the other hand, is a completely different animal. In a brokerage account, customer accounts are completely segregated from the broker accounts by law. The broker isn’t taking your money and lending it to anyone. It is truly sitting in a separate account with your name on it.
For example, when Lehman Brothers collapsed, brokerage customers received 100% of their money back, because it was segregated and totally separate from Lehman’s own finances.
This is why, while you have heard the phrase “a run on the banks”, you’ve never heard “a run on the brokerages”.
MF Global WAS able to use customer funds, but we will show you how to prevent that from happening to you.
Why Investments Rather Than In Cash?
It is not enough to simply have your assets in a brokerage account. Your assets need to be fully invested, but not in cash. Despite laws requiring segregated accounts, sometimes these laws are ignored.
At MF Global, Corzine needed cash. Even though it was against the law to do so, the fact was that the money was sitting there and Corzine couldn’t resist the temptation to steal it. However, all that was available to him was customer cash – not customer investments. There is no way for a broker to access customer stocks or mutual funds.
What if you want to be in cash? There are plenty of ways to have the next best thing to cash. There are literally thousands of money market and short term bond funds that mimic cash while allowing you to own shares in your name so that the next Jon Corzine that comes along can’t take your cash to fund his gambling.
- Keep your money in a brokerage rather than a bank
- Investments over cash
It’s not about IF there will be another financial crisis, but WHEN and HOW BIG. Having and amassing wealth is a heavy responsibility, but it doesn’t have to be so risky. We have relationships with numerous offshore brokers who can help you keep your assets safe through the next downturn.
If it’s worth the effort to lock you door when you leave your home, then it’s worth the effort to move your assets to a safe place. Some common sense precautions can go a long way. Take that ounce of prevention, and contact us today by clicking on Bobby Casey or Gordon Haave. It’s worth a pound of cure.