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Thursday, November 24, 2011

Contagion in the system

Below is Warren Pollock's Open Letter to the CME Group.
Wednesday, November 23, 2011

Open Letter to the CME
To: Terrence A Duffy, Chairman CME Group

As illustrated by the failure of MF Global, I am of the opinion that, the CME has not met its basic obligations to the marketplace as a “public fiduciary.”

Our society depends on “basic finance” to provide “utility function” such as banking, hedging, insurance, and/or capital formation. Presently, we have an “innovative system” that degrades the integrity needed for “basic finance” to perform as required in a well-structured economy.

Worse yet, our “innovative” financial system impedes the effectiveness of the greater “physical economy.” The “physical economy,” consisting of all those individuals and entities tasked with meeting actual need. The "physical economy" consists of many of your customers including farmers, manufactures and electric companies.

Our society needs people working in the "physical world" to create jobs more desperately than it needs the continuity of the CME. Must we endure another market catastrophe to figure this out?

The 2008 bailouts defined “moral hazard,” as the socialization of losses due to over-leverage. MF Global consumers are currently subsidizing losses attributable to over-leverage and “innovation.” Perhaps, small percentage moves in speculation rationalized an internal choice between corporate survival and the sanctity of customer funds. Complexity has been specifically designed, by “modern finance” to intentionally allow over-leverage leading to out sized profits and reactively-subsidized losses.

The word, “theft,” comes to mind.

I believe that, the products traded by your member firms, at the CME exchange and elsewhere, well exceed the capacity of the monetary system to cover relatively small percentage losses or speculative miscalculations. Clearing OTC derivatives on an exchange does not, and will not, correct the problem.

With repeal of Glass Steagall, and the conversion of mutual companies to publicly traded entities, meaningful regulation has proved to be politically impossible to recapture. The solution therefore resides in simplification from “innovative” towards “basic” finance.

Presently, I would urge you to make MF Global customers whole as a perquisite to market reform towards a “utility function.” More than just the continuity of the CME may be at stake.

Warren E. Pollock
What is the CME Group? (Wikipedia) - CME Group Inc. (NASDAQ: CME) owns and operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. It also owns the Dow Jones stock and financial indexes. The exchange-traded derivative contracts include futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, rare and precious metals, weather and real estate.[1]

The corporate world headquarters are in the Chicago Loop financial district The corporation was formed by the 2007 merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). On March 17, 2008, it announced its acquisition of NYMEX Holdings, Inc., parent company of the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX), which was formally completed on August 22, 2008.[2] The four exchanges now operate as designated contract markets (DCM) of the CME Group.[3]

On February 10, 2010, CME announced its purchase of 90% of Dow Jones Indexes including the Dow Jones Industrial Average.[4]

Problems in the system - Insight: Farm belt rage over MF Global could chill markets - Reuters - By Bob Burgdorfer and Philip Shishkin - CHICAGO/WASHINGTON | Mon Nov 21, 2011 - When the CME Group pledged $300 million of its own money to help former MF Global customers get their cash back faster, the exchange was likely thinking of customers like Kansas cattle rancher Tim Rietzke. Fed up and frustrated with his broker's collapse and what he sees as the CME's slow efforts to help him retrieve $30,000 in stranded capital, Rietzke says his faith in the futures industry has been shaken to its core. "I would be hedging some feeder cattle right now, but I'm not going to do it. I'm leaving them exposed to the cash market and I don't like that," Rietzke said. Rietzke may reside far from the trading pit in Chicago, but he and thousands of other ranchers and farmers across the country are at the heart of futures trading. With billions of their dollars locked up by MF Global's October 31 bankruptcy filing, they are a key voice in determining if and when the futures business regains its poise and reputation. "I have no confidence in the market, because it could happen at any other brokerage," Rietzke told Reuters from his 8,000 acre ranch near the southwest Kansas town of Coldwater......

CRISIS OF CONFIDENCE - The victims of MF Global's bankruptcy have experienced a range of emotions, from anger and betrayal over the missing funds to criticism of regulators being slow to spot problems. With billions of dollars still frozen at MF Global, the outrage has turned to the CME Group for failing to help its customers regain speedy access to their accounts. Far more than the failure of Refco six years ago, MF Global's downfall has triggered a call to arms for medium-and small-scale traders across the marketplace who say it has exposed previously obscured risks in the system -- and the fact that there's no 'white knight' to save them. "The exchange should make this right. Let them hold the bag instead of us," says cattle broker Lynn Wagnon. "We can't trust the system anymore." So far, the CME has offered $300 million to help MF Global's bankruptcy trustee make up for potential customer losses. But even that measure has been criticized. Some of the MF Global's former clients argued in a recent court filing that the guarantee was "an insufficient band-aid, at best." Some $50 million of the offer is from an emergency fund that will help make up for any customer account shortfall; the remainder is simply a "limited guarantee" to allow the trustee to return client funds more quickly. Crain's Chicago Business wrote in an editorial that the CME had suffered "a dramatic and unforgivable void in leadership." CME's shares have fallen nearly 14 percent since the day before MF Global's collapse through to Monday's close....

FOR TRADERS OR PROFIT? - And yet many traders still look to the CME Group to make it right somehow, a sentiment that dates back more than a century to the CME's roots as the Chicago Butter and Egg Board. Until its listing in 2002, the Chicago Mercantile Exchange was run as a member-owned club, providing a degree of comfort to traders that the exchange had their best interests at heart. But as big money hedge funds replaced traders as its main constituency, the CME focused on boosting profits, buying first the Chicago Board of Trade in 2007 and the New York Mercantile Exchange the following year, even as exchange members complained loudly they were being short-changed by the deals. CME executives regularly emphasize they are bound to put their "fiduciary duty" to shareholders above any loyalty to their members and Chicago, promising this year they will leave the city -- the home of many of their traders -- unless the state reverses a tax hike made earlier this year. That shift in allegiance may be fueling criticism from market participants.....

The Hound: The problem lies with these Huge Multi-National Mega-Corporations and their marriage to global governance. They are supposed to represent all interested parties. The customer/client, the employee, the community where they do business, as well as the shareholders. Instead they have only looked towards the interests of Executives at the top and the largest shareholding interests. Everyone else is screwed.

Who has control over these entities, which many have deemed "too big to fail?" Domestically, these entities have bought into every facet of our political party structure through lobbying influence and political contributions. This means that Mega-Corporate Interests take precedence over those of the American people. When these entities break the law they are rarely held accountable, especially in a punitive fashion.

In Theodore Roosevelt's autobiography (from 98 years ago) he addresses this issue in relating the Progressive Platform of the Bull-Moose party, which was formed as a splinter group from the Republican Party led by President William Taft who had succeeded Roosevelt in 1909. This was during the first Robber Baron period of this nation, when Incorporated Business growth was leading to monopolies, collusion, price fixing, anti-competitive practices, and other unregulated power through these interests, which led to such regulation as the Sherman Antitrust Act and the Clayton Antitrust Act.
Theodore Roosevelt: An Autobiography - NEW YORK: MACMILLAN, 1913 - NEW YORK: BARTLEBY.COM, 1999
"Behind the ostensible Government sits enthroned an invisible Government, owing no allegiance and acknowledging no responsibility to the people. To destroy this invisible Government, to dissolve the unholy alliance between corrupt business and corrupt politics, is the first task of the statesmanship of the day.... This country belongs to the people. Its resources, its business, its laws, its institutions, should be utilized, maintained, or altered in whatever manner will best promote the general interest." This assertion is explicit. We say directly that "the people" are absolutely to control in any way they see fit, the "business" of the country. I again challenge Mr. Wilson to...
We need to get these corporate structures back under control and number one they must adhere to the rules and regulations of this nation. Corporate Powers have a fiduciary responsibility to protect all interested parties, not just executives and shareholders. When you represent to a client/customer that their money is secure, then it damned well better be there and available.

Mr. Pollock was not invested in a Derivative contract, at the time, so his money should be secure. Everyone understands the inherent risks of Futures Commodity investments. That is not the issue. This issue is not about day traders and hedge funds. The issues involve the separation of cash accounts and contracts. If one makes a bad investment, then it is understandable that they can lose, but if their money is parked, then it should be secure.

The big issue is the purpose of these markets. These markets were initially implemented to allow  Enterprises that need to procure commodities in huge volumes over extensive periods of time to be able to smooth out waves (price fluctuations) in the market. Without a reliable market, we are all going to be left vulnerable to shocks (price fluctuations) in the market place involving short term crises leading to panics.

This is the reason why the Federal Reserve needs to be taken out of the marketplace. Their manipulations are what have caused many of these issues and they are an unelected (and basically unregulated) body.  I believe the Fed is using their recently printed up Federal Reserve Notes to manipulate the commodity markets. It is the paper precious metal markets that are driving the price of precious metals, much like the paper (derivative) markets are driving up most commodities at this time. In reality there are shortages in relation to the paper assets. As an example, right now it is hard to get a hold of U.S. Mint Walking Liberty silver ounces, because the U.S. Mint is having a hard time sourcing the metal. There are several times multiples of paper versus actual physical metals in the futures market. Listen to what they are saying about MF Global. It is (could be) basically the beginning of a cascading default in the futures market. What is a future? It is a derivative investment off of the actual physical asset, but in the end it is backed by nothing other than a guarantee of delivery. The same holds true whether for a long or short position. What if the deal is that all of these future contracts are looking to take delivery and the metal isn't there? Do you see where this is leading? It is leading to a default and a cascading effect. It can take down the CME and then it will take down the hedgefunds, which leads to the financial houses going down and who owns the financial houses? That would mean that the economy would be tied up in knots and non-functional.

We are in big trouble folks!!!

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