Having spent several hours commiserating about Jon Corzine’s ordeal, I concluded that his dilemma was totally understandable. A
fter all, how many times had I wondered where I put my keys? Or, in leaving the mall, where had I parked my car?
So, it seems quite reasonable to me that the ex-Senator, ex-governor, and ex-CEO had a little problem locating $1.2 billion.
As we get older, the mind has a way of losing things. Therefore, I thought it would be appropriate to engage the insightful mind of Sherlock Holmes in order to solve this worldwide mystery.
No, not my keys, or the parked car, but the missing money.
Holmes always said you could eliminate the improbable, and even if the remainder is impossible, it is the answer.
So, I’m sure Holmes would start with what we know. IMF Global made a bet (we’ll call it an investment) with someone that a 2012 Italian sovereign debt piece of paper would appreciate in value and that the interest rate would decline.
After all, there was no way the ECB, IMF, eurozone, or anyone else would let Italy fail. Thus, it seemed to be a very secure bet, at least in the mind of Jon Corzine. In fact, so secure the ex-Goldman run-and-gun CEO bet the house. He levered at 40-to-1, but contends it was only 33-to-1.
This winning bet would put the venerable old-line firm, MF Global, up in lights once again, and take its CEO right along with it. Jon would be back in a very big way. MOTIVE: This is where it gets a little complicated, but not for Sherlock Holmes. As everyone knows, when you open a brokerage account and wish to trade on margin, you sign a margin agreement.
Margin is simply playing with borrowed money, a tactic that investment bankers, banks, countries, states, and even municipalities, just to name a few, know very well. The agreement was signed by the majority of MF Global clients, allowing the firm to hypothecate client assets.
Hypothecation states that if your investment goes against you, and more collateral is required and you cannot deliver additional capital, the firm can take your assets to satisfy their requirements.
What most people don’t realize is an important fact that Holmes discovered. He found out that rehypothecation is legal in the United States. This means the collateral, or accounts, which are under margin, can be used as collateral for the investment bankers and their transactions. In the U.S., there are percentage limitations. However, in England, no such restrictions are in force.
Along with his 40-years of dedication in the financial services industry, Bill is the President and CEO of GPSforLife, has recently authored a highly successful book entitled 44th: A Presidential Conspiracy, publishes his dynamic monthly financial newsletter MacroProfit, and faithfully continues his third decade on the radio with It’s All About Money, which can be heard weekdays on Money Radio in Phoenix and in podcast form on his website (and on smartphone apps) published at billtatro.com weekdays at 5pm Eastern. Bill can be reached via email at firstname.lastname@example.org and on Twitter @tatroshow.