On November 10, 2011, the CFTC issued an announcement that it was going to look at segregated funds at all commodity brokers (FCMs). It was widely reported that the CFTC was going to "audit" segregated funds, which sounds great, but that isn't exactly what the CFTC said.
Here's what they did say:
“Segregation of customer funds is at the core of customer protection in the commodity futures and options markets and must be maintained at all times,” said Commissioner Sommers. ... “we will do everything in our power to ensure public confidence in the markets by directing a review of clearing futures commission merchants (FCMs) to determine that segregated funds are being properly maintained in accordance with the CEA and Commission regulations.”
At first those sound like good words. "Everything in our power". Great. Unfortunately, they didn't do anything close to "everything in their power".
Most importantly, they did not do an audit. They did what they have already been doing. They did exactly what did not find the problems at MF Global.
They did not look at the actual accounts to see if the money is really there. They looked only at papers provided by the FCMs, and then concluded that numbers om the papers provided by the FCMs matched other numbers on the same papers. This will catch no one.
On January 25th, 2011, newspaper articles appeared with the conclusion. The CFTC reported that there were "no material breaches" at FCMs. This was reported widely, for example in the Wall Street Journal. Looking into the details, things are not what they seem.
The CFTC's press release of January 25th provides the details, and they are really scary stupid.
There are 120 FCMs registered with the CFTC.
First off, the CFTC did not review seg funds at all 120 of these guys. They only reviewed 14 of them. (ie less than 12% of the FCMs.) CFTC asked NFA and CME to review the other 106 FCMs.
Next, the review was not an audit. Says so right there in their press release:
" staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO), Chicago Mercantile Exchange (CME), and National Futures Association (NFA) did not conduct an audit.."
Well if none of these people conducted any audits of anything, what the heck did they do?
We don't know exactly what NFA and CME did, but CFTC DSIO tells us what they did: " DSIO staff obtained from each FCM a detailed listing of assets held in segregated and Part 30 secured accounts as reflected in the firm’s books and records. The listing of assets was compared to independent third-party source documents and reconciliations maintained at the FCM’s offices supporting the asset balances"
In other words, the FCM provided two pieces of paper, and the CFTC looked to see that the total at the bottom of one piece of paper matched the total at the bottom of the other piece of paper.
There are a couple of problems with this approach.
First, no criminal will ever fail such a review unless he is really stupid. The criminal will always provide two pieces of paper where the totals match. Madoff, for example, got this right every time, for more than 20 years.
Did any of these people read Markopolos' book? He explains this in great detail.
The folks at the CFTC didn't read Markopolos' book after the Madoff fiasco, and they didn't audit the FCMs seg funds after the MF Global fiasco! The CFTC is useless.
Second, FCMs are already required to provide daily totals of customer accounts and seg funds, so the great CFTC review actually just required the FCMs to provide a slightly larger piece of paper, with some numbers that total to the numbers the FCMs were already providing. The CFTC then looked at those totals, as they have been doing all along, and saw that they matched, as they have all along, just as they always matched at MF Global.
That's right, the CFTC did essentially nothing, and issued a press release about it. The press release says everything is fine.
I am reminded of the Jedi mind trick from Star Wars: "These are not the droids you're looking for. You can go about your business. Move along."
This insults our intelligence. How can we tolerate this?
The segregated funds at every FCM must be audited. The CFTC commissioners obviously don't see it that way. They think they can do business as usual, doing nothing, and play Jedi mind tricks on us, and keep their jobs.
I call for the resignation, in disgrace, of all present CFTC commissioners.
The Oversight and Investigations subcommittee of the Financial Services Committee of the House of Representatives is holding a hearing on Feb 2, 2012 titled “The Collapse of MF Global: Part 2”
The O&I subcommittee are the folks in congress who are supposed to oversee investigations such as the phoney baloney I've described above. Please contact these members of congress, and let them know you don't approve of what the CFTC is doing. Ask them to raise these issues with the CFTC commissioners at the upcoming hearing.
Please tell these members of congress that they should ask for the resignation in disgrace of all present CFTC commissioners.
Members of the O&I subcommittee...
|Randy Neugebauer, TX, Chairman |
Michael G. Fitzpatrick, PA, Vice Chairman
Peter T. King, NY
Michele Bachmann, MN
Stevan Pearce, NM
Bill Posey, FL
Nan A. S. Hayworth, NY
James B. Renacci, OH
Francisco "Quico" Canseco, TX
Stephen Lee Fincher, TN
|Michael E. Capuano, MA, Ranking Member |
Stephen F. Lynch, MA
Maxine Waters, CA
Joe Baca, CA
Brad Miller, NC
Keith Ellison, MN
James A. Himes, CT
John C. Carney, Jr., DE