The Derivative Project

Live Blog- Senate Ag Committee- Congress Has No Choice: They Must End Self-Regulation by the Brokerage Industry

Live Blog- Senate Ag Committee- Congress Has No Choice: They Must End Self-Regulation by the Brokerage Industry

An Investigative Hearing on the MF Global Bankruptcy is now taking place at the Senate Agriculture Committee
Tuesday, December 13, 2011 10:36 AM
“On October 31, 2011, MF Global Holdings Ltd. declared bankruptcy – the eighth largest bankruptcy in U.S. history. Since then, federal officials have been unable to find a significant amount of the firm’s customer’s money. It is currently estimated that up to $1.2 billion in customer funds is missing. The Senate Committee on Agriculture, Nutrition and Forestry has jurisdiction over the sort of commodity trading that MF Global was engaged in, and the hearing on December 13 will be a continuation of the Committee’s investigation into the firm’s bankruptcy.”
Farmers are now testifying about their losses and hardships by the MF Global collapse.  How do we restore the confidence in the futures markets?
Congress must move swiftly to put an end to any type of self-regulation by the brokerage industry.  This should have happened after the U.S. taxpayers were forced to give AIG counter party speculators over $180 billion dollars.  MF Global shows any trust in the markets is gone. 
There can be no second chance and there should not have been after the taking of funds by brokerage firms in the AIG fraud.
As a farmer just testified, “The ag industry cannot operate without these markets.”  “Due to the cause of this uncertainty, many farmers are not using the futures markets.  These are very dire circumstances.”
The sanctity of these markets have been destroyed. 
A farmer asked, “How were these speculative trades allowed to be part of the segregated funds?”
A farmer from Luverne, Minnesota, Mr. Tofteland, asked, “Where is the money?  If there is a debit, there is a credit.  If the segregated money was co-mingled, that is a crime.”
“These markets date back over 100 years, at the Minnesota Grain Exchange.  They are the basis for all these trades.”
Senator Klobuchar is now speaking.  “A lot of people have a hard time understanding how this works.  It is complicated.  Could you explain why you get involved in this?”
Mr. Tofteland, talk about how they use the futures market to lock in their costs.  “We reduce the risks, by locking in the prices.”  “When you do not lock in your profit, you may suffer losses.”
Senator Klobuchar asked Mr. Tofteland to talk about others in Luverne who have been affected by this?
“Yes, there are others that hedged both their hogs and feed, that have been affected.”
Senator Klobuchar:  “What will it take to restore your confidence?” 
Mr. Tofteland : “100% confidence in segregated funds.” 
Senator Klobuchar: “You are saying we have to have some rules fixed.”
Another farmer testified that the rules must be enforced, in response to Senator Klobuchar’s question, ” What must be fixed to restore your confidence.”
Senator Lugar said there is not such a thing as 100% certainty.  “Do you know about the nature of the firm of MF Global?”
“No, we had no clue.”  Mr. Hainline, why were you using MF Global?
“We trusted the system.”
“The lenders should perhaps be in the middle and put covenants on the loans.” 
It was hard for the American people to understand the use of taxpayer dollars to pay AIG counter party speculators.  The loss by these farmers of their margin accounts is understood by everyone.
Mr. Tofteland:  “We had the regulators to watch these markets, CME, SEC, FINRA.  These regulators failed. This must change.”
Senator Grassley:  “The same concern is also true of Iowans as well.  Thank you for your testimony.”
Senator Harkin:  “A futures commission merchant (FCM) can invest in repurchase agreements to maturity, note and now a variety of things.  Prior to 2000, this was limited to U.S. Treasuries or cash..  Welcome to the world of de-regulation.  Would a farmer, elevator manager ordinarily know that customer funds were invested in all these things, where the profits do not occur to the farmer?”
Senator Harkin:  “Did you know that Mr. Tofteland;  “No.”.
Senator Harkin:  “Should we go back to pre-2000?”  “This is part of the whole de-regulation era, know one really knows how this money is being used.  Every since they got rid of Glass Steagall, they say they can make a profit and become more efficient.”
Congress says just say keep de-regulating.  Does the collapse of MF Global assert that we must have strong, transparent regulation.”
“Mr. Tofteland?  Should they invest in all these things and not even let you know?” 
Mr. Tofteland:  “It is up to your committee.”
 Mr. Hainline, ” These should only be in safe instruments, if they are segregated funds.”
Senator Thune:  “Why did the regulators let MF Global get to the point of bankruptcy?”
This is the most pertinent question.
The Derivative Project assets this is the issue for Congress.  It was the cozy relationship between the regulators and the brokerage firms that allowed this collapse. It is why AIG collapsed.  It is why Madoff and Stanford were allowed to cause billions of dollars of losses.  It was why there were thousands of losses from auction rate securities.  It is why they SEC enforcement budget is so large.  It is why we have 9% unemployment.  The fox is guarding the hen house. Self-regulation is a sham.
 It is greed that must be regulated and the only way to control the greed is to end self-regulation.
Senator Klobuchar was told by the farmer what she could do.  “”100% confidence in segregated funds.”  They only way to restore confidence and to ensure these funds are safe is to have regulators that are not conflicted.
It is time to act in the common good, for society overall, not for the Wall Street profit model.
Here is a link to an article from Naked Capitalism this morning on why there must be an end to self-regulation and also an article from the Financial Times on why self-regulation must be re-examined.