MF Global: Heed the Warning

This article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

Unfortunately, too few people remember or know of the story of MF Global Inc.

MF Global was one of the most respected primary dealers for stock, bond, and futures trading. The firm had been operating over 200 years, formerly known as Man Financial. In 2010, the company was directed by Jon Corzine, who was a senator, governor, and at one time was the CEO of Goldman Sachs. MF Global was second-to-none, and it serviced some of the wealthiest private traders and institutions.

In the fall of 2011, 38,000 accounts were adversely affected when MF Global illegally transferred $1 billion in funds out their clients’ trading accounts. MF Global used these funds to cover the company’s personal trading losses after some European bond investments went belly-up.

As with all US brokerages, client funds legally supposed to be segregated, separate from the company’s operating capital. But account segregation only works if brokerage firms actually honor it.

In December of 2014, the funds were finally recovered. During this time, customers of MF Global had to hire their own attorneys, and they waited over three stressful years to find out the fate of their money.

MF Global’ s bankruptcy is a stark reminder that brokerage accounts aren’t as safe as they appear. When investors buy a stock, they do not have direct ownership, but rather an agreement with their broker. This is why the MF Global crisis took three and half years to sort out legally.

This story foreshadows of what’s to come. Unfortunately there will be many more “MF Globals” as we run into the next liquidity crisis. Under the current dysfunctional monetary system, we are poised for a game changing crisis larger than the 2008 recession and the depression of the 1930s.

Risk free assets do not exist. There is always counterparty risk when owning tertiary wealth, property not in your physical possession. Do not hold most your wealth in your brokerage account, or even worse, your bank account. Owning primary wealth, such as silver and gold, is the best way to eliminate or minimize counterparty risk.

As the wise Solomon once said “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” Ecclesiastes 11:2

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