An Unmitigated Disaster by Ted Butler

[neilgin1]

(what follows, i couldnt have said it better)
Oftentimes, the significance of truly historic events is not fully appreciated at the time they occur. I think we are at one of those times with the bankruptcy of MF Global. There’s no question that the news and overall circumstances of the demise of the large commodities brokerage is widely known, but the significance of the event is not yet fully understood. While I would classify the event as an unmitigated disaster on many levels, I have hope that it might result in some long-overdue and necessary changes in the commodities regulatory structure.

The disaster is that for the first time in modern financial history, the main guarantee of the clearinghouse system has completely failed its most important constituent – the customer base. The underlying promise to every participant in the futures market is that your money and open positions are safe from theft and default. This is the very glue that holds the future market together, namely, that all market participants can depend upon strict regulation and oversight to safeguard against fraud and theft. That’s what has made the US organized futures exchange system the envy of the world. Until now. For more than a week, almost all of the 50,000 commodity customers of MF Global are in limbo as to the access and status of their funds on deposit and open positions. This is unprecedented and beyond bad. For these 50,000 customers, it’s the equivalent of discovering your bank just went out of business and there is no assurance all your funds will be returned. (In the interest of full disclosure, my background is in futures, having started as a commodity broker at Merrill Lynch some 40 years ago. But I have not traded futures for years and am no way personally involved in the MF Global mess; I’m strictly an outside observer and independent analyst).

Let me cut to the chase here and pinpoint the real problem – the CME Group. I know I have continuously criticized the CME, even calling it a criminal enterprise on many occasions, but in truth I may have understated the case. Yes, I would agree that the immediate cause of the MF Global bankruptcy was MF Global itself; but what turned it into a disaster of unprecedented proportions was the CME Group. The CME Group was the front line regulator for MFG, responsible for auditing and insuring the safety of customer funds and for guaranteeing those funds in a worst case scenario. The CME failed at every turn. Not only did its auditing fail miserably, the CME failed to step up to the plate to safeguard customer funds after it was discovered that $600 million was missing. This is like a case of paying premiums for years on an insurance policy only to be denied coverage when presenting a claim for the first time. I know that the federal commodity regulator, the CFTC, has been negligent in the case of MF Global as well, but that does not mitigate the CME’s failures.

Of the twin failures by the CME in the MF Global bankruptcy, clearly of more significance is its failure to stand up and guarantee that all MFG customers would be immediately made whole by the clearinghouse system run by the CME. The clearinghouse system, a consortium of financial firms whose collective finances stand behind every trade, has been the main backstop to all futures trading for many decades. It was widely understood by all market participants that if a clearing member failed, all the other clearing members and the exchange itself would step in to guarantee customer funds and prevent contract default. The CME boasts on its web site that anywhere from $8 billion to $100 billion in protection is available in the event of a clearing member failure. If it was telling the truth, it would seem $600 million should be no problem.

Instead, we all have a very big problem, thanks to the CME Group. Our financial and credit systems are based upon trust and belief. The word credit itself comes from the Latin word “credere” or to believe. What the CME Group has done by not immediately guaranteeing all MF Global customers and positions is to undermine belief in the futures market clearing system. So important is this issue that I am at a loss to explain how the CFTC hasn’t yet mandated that the CME do the right thing. And I have been somewhat dumbfounded that the analytical community and media haven’t been all over this, but there was an article in today’s NY Times that discusses the CME’s failures for the first time. In addition, there was a well-written article on the Internet that did describe the problem and the CME’s role. Please pay particular attention to the comments submitted on both articles.

Worst of all, even MF Global customers who held no open futures positions and only cash and unencumbered assets, like registered warehouse receipts for silver, gold and other commodities, have found those assets under the control of the bankruptcy trustee. If you do own warehouse receipts on silver or other commodities that are tied up in the MF Global bankruptcy, you must run, not walk, to a securities attorney to secure your legal rights to your property. This is not a matter of what is right or wrong, as the unauthorized appropriation of private property is never correct. This is a matter of law, which sometimes is not the same as what seems right or wrong. Please don’t delay. The CME is to blame for all of this, but blame must be saved for later.

If there is any good that might come from this whole sordid affair it is that it may shine the light on what needs to be done. What needs to be done is that the CME Group must be stripped of any regulatory powers it has. As I have long contended, there is a clear conflict of interest in having a for-profit entity set its own rules and regulations, especially an entity that shows nothing but contempt for its own members at large and its customers. The CME Group spends all of its energies encouraging artificial trading schemes, like High Frequency Trading, designed to increase trading fee revenue and not on market integrity and customer protection. The CME Group has just demonstrated to the world its contempt with its failure to stand behind MF Global customers even though it promised to do so beforehand. Next time you watch the CME Group commercial that runs incessantly on financial TV that proclaims how farmers and airlines come to the exchange to hedge their price risks, please keep in mind that the CME just abandoned those farmers and airline customers who were MF Global clients.

One other small bonus that has emerged from this disaster is that the event has revealed as a lie all the nonsense that CME leaders have publicly proclaimed about the integrity of their markets. For the past few years, the smug and arrogant leaders of the CME have testified publicly before congress and the media about how the exchange’s clearinghouse system withstood and avoided the failures of the non-clearinghouse financial system as typified by AIG. CME officials trumpeted the advantages of it being a Self-Regulatory Organization (SRO), quite capable of handling regulatory matters without the need for further government regulation. Unfortunately, even high officials of the CFTC were apparently sucked in by the appearance of financial strength and integrity portrayed by the CME’s clearinghouse system of guarantees and the wisdom of letting it continue to regulate itself. That has now all been shown to be a lie. What good are guarantees if they are not honored when need be? What good is self-regulation if it leads to the wholesale abandonment of the customers’ financial interest?

Fortunately, there is a simple remedy to the calamity of distrust growing in our market system as a result of the CME’s failures. The CFTC must immediately force or persuade the CME Group to do what it has promised and should have done on its own, namely, immediately guarantee that all customers of MF Global are made whole. Let the lawyers battle it out as to who is ultimately liable after all the customers have been made whole. That the CFTC hasn’t done this yet is bizarre. If the Commission delays longer what is now clearly a primary failure at the CME will soon become primarily a CFTC problem. We need adult supervision right now. Clearly the CME Group is not up to the task. If the CFTC doesn’t take over responsibility and force the CME to do the right thing, God help us all.

Another thought in closing. The CFTC’s recent official affirmation that it is continuing its three year old silver investigation shines another spotlight on the CME. The investigation of silver by the CFTC clearly involves the CME, as the world’s leading marketplace for silver is the COMEX, owned by the CME for the past three years. Yet the CME has never said one word about the ongoing silver investigation as it has been content to hide behind the CFTC and pretend there are no allegations of a silver manipulation. I guess that is to be expected from an entity that regulates itself.


I’m purposely confining my comments to the emergency at hand. There is no change in the silver outlook. It is still a crooked market destined to go much higher in the long run. The sooner the CFTC cracks down on the CME and then addresses the silver manipulation, the sooner those higher prices will come.

Ted Butler

November 10, 2011

[beauanderos]

Not sure what the ramifications of this will be, aside from a temporary lack of resilience in precious metals to further attacks, as these 50,000 (most likely long) combatants are sidelined from the battle with frozen accounts. Not only are they out of the picture for now, but this could certainly dissuade others from wading in to the fray in their place. CME makes a mockery of the rules, and in doing so shows nothing but disdain and contempt for individual investors.

[68Camaro]

This is dated the 10th and may be old news. I believe CME group on Friday provided the bankruptcy trustee with a $250 (or $300, I heard both numbers and didn't dig further) million guarantee for any shortfall related to MFG account settlements, in the hopes the trustee would release the accounts.

[Cu Penny Hoarder]

Lots of drama in these markets. Short term noise is entertaining, but for the most part it should be ignored because it's meaningless when you look at the big picture.

All one needs to know is that the entire stock market and the fiat monetary system is a paper ponzi scheme. Every major bank and bankster are criminals.

Regarding PMs, all you need to do is buy and hold. You should be accumulating more on every significant dip. I only keep enough green rectangles on hand for necessities, to pay bills and buy more PMs.

Everyone needs to get completely out of cash instruments (ie. stocks, bonds, annuities, CDs, 401ks and IRAs). We are closing in on another MF Global event, except this time it will be the entire financial system. One day people will wake up and ALL their accounts will be frozen. Even traders sitting in cash will be sh*t out of luck when that happens.

[silverflake]

Cheers to Ted Butler for saying it like it is. I have been reading Ted Butler for almost 10 years now and frankly I should pay him a commission for getting me seriously interested in silver back when it was south of $5/ounce.

This guy knows how twisted some of these markets are but the biggest thing Ted has always said about silver (and gold), don't fool around - you don't own silver unless YOU HAVE IT IN YOUR HAND!!!!! Buy and keep physical stuff.

If any newbies (or oldies for that matter) here on these boards want some really good silver info, look up the writings of Ted Butler.
Keep stacking.

[shinnosuke]

Thanks, Ted Butler (and neil). Just one question, if you don't mind, about those higher silver prices. When?

[Sheikh_yer_Bu'Tay]

Thanks, Ted Butler (and neil). Just one question, if you don't mind, about those higher silver prices. When?

No one can answer that question with certainty. So far, world governments have been able to paper over the problem with more paper money. IMHO it will happen after the global markets hyperinflate fiat money into stratospheric Zimbabwe levels.

[68Camaro]

When? Good grief. Now! Seriously. That doesn't mean it won't be lower next week than this week, but we're in the middle of one of the greatest overall bull markets in recorded history!

We're 2x the price of mid-2010. Next year this time we'll be more or less 2x the price now. It's happening all around us - you all are just getting caught up in the daily minutia and churn. Think broadly, long-term.

[shinnosuke]

68, humor me. I figure I've got one last chance to get this right. Perhaps not even that because I don't expect the people in power to just roll over and give us peons a chance to back up the truck and take a large share of the wealth.

[68Camaro]

68, humor me. I figure I've got one last chance to get this right. Perhaps not even that because I don't expect the people in power to just roll over and give us peons a chance to back up the truck and take a large share of the wealth.

I hear you. I'm not trying to yank your chain (too much), and sorry if it came across that way. But it really is impossible to properly time these things. So, in the end, I can't advise you - no one can. You have to do what works for you. The best overall advice IMHO is to dollar cost average when buying physical. And don't beat yourself up when you buy at what APPEARS to be a local high. The presumption is that it will eventually go higher, no matter (within reason, and that includes now) the price you paid.

I have NO idea if silver is going to drop below $30 again. It might well do so. It might go to $15. I truly have no idea. The charts suggest that it might, but then again the fundamentals may trump the charts. I'm personally betting on fundamentals over charts in the long term. In the short term, when is best to buy? I don't know, but you know that I bought a LOT a few weeks ago. It seemed right. And if it subsequently goes to $25 or $20 I have to NOT beat myself up too much. What I have - I bought some at $8, and some at $17 and I some in the $20s, and some in the $30s, and yes I did also buy a fair amount in the $40s. So buying again at $30 and change seemed too good to pass up. So I did. And I'm still buying, though back to bottom-feeding.

[shinnosuke]

68, humor me. I figure I've got one last chance to get this right. Perhaps not even that because I don't expect the people in power to just roll over and give us peons a chance to back up the truck and take a large share of the wealth.

I hear you. I'm not trying to yank your chain (too much), and sorry if it came across that way. But it really is impossible to properly time these things. So, in the end, I can't advise you - no one can. You have to do what works for you. The best overall advice IMHO is to dollar cost average when buying physical. And don't beat yourself up when you buy at what APPEARS to be a local high. The presumption is that it will eventually go higher, no matter (within reason, and that includes now) the price you paid.

I have NO idea if silver is going to drop below $30 again. It might well do so. It might go to $15. I truly have no idea. The charts suggest that it might, but then again the fundamentals may trump the charts. I'm personally betting on fundamentals over charts in the long term. In the short term, when is best to buy? I don't know, but you know that I bought a LOT a few weeks ago. It seemed right. And if it subsequently goes to $25 or $20 I have to NOT beat myself up too much. What I have - I bought some at $8, and some at $17 and I some in the $20s, and some in the $30s, and yes I did also buy a fair amount in the $40s. So buying again at $30 and change seemed too good to pass up. So I did. And I'm still buying, though back to bottom-feeding.

It's all good. Thanks for the camaraderie.

[68Camaro]

Well, after all the above, I did just get an email warning heads-up from one of the commentors I follow that I need to digest later tonight, and it ties in enough with a few other random bits I've heard previously that it is giving me pause. More later, but this guy says there is going to be a major purposeful PM market take-down by the 22nd. And of course there is the issue of CME raising margins again during this same period. No idea if it is even remotely related to what JFF has noted in his "imminent" thread - that usually pertains to technicals, whereas this rumor is of a specific cause/effect for a purpose. More later - I've got things going on for a couple more hours, so it'll be later in the evening before I get back to this. I don't like to operate off of rumors, but this may be a rumor with backing.

[68Camaro]

And back on-topic, the huge thing that may be surfacing out of the MFG debacle is not MFG itself, as bad as that is, but that rumors are circulating that MFG's practices weren't any, or much, different than those practiced by other firms now. If so, the resulting crisis of confidence in the futures market, and in brokers of all types, would be HUGE, and cause/create a ripple that could take the whole market down. I think that is what Neil and others have been getting at, but something else I heard today made that come together for me. (Sometimes I'm a bit slow. )

[shinnosuke]

And back on-topic, the huge thing that may be surfacing out of the MFG debacle is not MFG itself, as bad as that is, but that rumors are circulating that MFG's practices weren't any, or much, different than those practiced by other firms now. If so, the resulting crisis of confidence in the futures market, and in brokers of all types, would be HUGE, and cause/create a ripple that could take the whole market down. I think that is what Neil and others have been getting at, but something else I heard today made that come together for me. (Sometimes I'm a bit slow. )

So what else did you hear?

[68Camaro]

A trader said in an interview that other firms were doing the same thing. Scared the crap out of me.

[shinnosuke]

Ah, OK.

I thought it was something bad like Chelsea Clinton was going to become an investigative reporter for NBC, or some other nightmarish fantasy that could never happen in a million years in this brave, fair land of ours.

[HPMBTT]

68, humor me. I figure I've got one last chance to get this right. Perhaps not even that because I don't expect the people in power to just roll over and give us peons a chance to back up the truck and take a large share of the wealth.

I hear you. I'm not trying to yank your chain (too much), and sorry if it came across that way. But it really is impossible to properly time these things. So, in the end, I can't advise you - no one can. You have to do what works for you. The best overall advice IMHO is to dollar cost average when buying physical. And don't beat yourself up when you buy at what APPEARS to be a local high. The presumption is that it will eventually go higher, no matter (within reason, and that includes now) the price you paid.

I have NO idea if silver is going to drop below $30 again. It might well do so. It might go to $15. I truly have no idea. The charts suggest that it might, but then again the fundamentals may trump the charts. I'm personally betting on fundamentals over charts in the long term. In the short term, when is best to buy? I don't know, but you know that I bought a LOT a few weeks ago. It seemed right. And if it subsequently goes to $25 or $20 I have to NOT beat myself up too much. What I have - I bought some at $8, and some at $17 and I some in the $20s, and some in the $30s, and yes I did also buy a fair amount in the $40s. So buying again at $30 and change seemed too good to pass up. So I did. And I'm still buying, though back to bottom-feeding.

I read this article a couple of days ago...anyway, this is exactly what I'm doing. I got in early, and then I just kept buying on each dip (and in the process, also upset a couple folks at the coin clubs when I kept out-bidding them). Luckily, I only bought one batch when silver was $44; everything else was purchased as low as $10.00, $17, $23 etc .
Note to everyone: JUST KEEP BUYING (especially on the dips). Sooner or later, things have to break through to higher levels. And even if they don't, I would much rather be in hard tangible assets (ie silver, lead etc) then in fiat. Naturally, take care of the basics first (beans,bullets,bandaids) and then spend the few extra FRN's remaining on tangibles.

[HPMBTT]

Well, after all the above, I did just get an email warning heads-up from one of the commentors I follow that I need to digest later tonight, and it ties in enough with a few other random bits I've heard previously that it is giving me pause. More later, but this guy says there is going to be a major purposeful PM market take-down by the 22nd. And of course there is the issue of CME raising margins again during this same period. No idea if it is even remotely related to what JFF has noted in his "imminent" thread - that usually pertains to technicals, whereas this rumor is of a specific cause/effect for a purpose. More later - I've got things going on for a couple more hours, so it'll be later in the evening before I get back to this. I don't like to operate off of rumors, but this may be a rumor with backing.

Sounds great to me if they take down the price to lower levels (ie $20-$26). I'll be backing up the track and buying as much as I can with both hands. Bring it on!

[68Camaro]

Ah, OK.

I thought it was something bad like Chelsea Clinton was going to become an investigative reporter for NBC, or some other nightmarish fantasy that could never happen in a million years in this brave, fair land of ours.

That's ridiculous... Oh, but the way you said it, you made me go check, and... egads! It happened!! The world is upside-down!

[68Camaro]

Well, after all the above, I did just get an email warning heads-up from one of the commentors I follow that I need to digest later tonight, and it ties in enough with a few other random bits I've heard previously that it is giving me pause. More later, but this guy says there is going to be a major purposeful PM market take-down by the 22nd. And of course there is the issue of CME raising margins again during this same period. No idea if it is even remotely related to what JFF has noted in his "imminent" thread - that usually pertains to technicals, whereas this rumor is of a specific cause/effect for a purpose. More later - I've got things going on for a couple more hours, so it'll be later in the evening before I get back to this. I don't like to operate off of rumors, but this may be a rumor with backing."Truth is so obscure in these times, and falsehood so established, that, unless we love the truth, we cannot know it." Blaise Pascal, 1660.

....

And back on-topic, the huge thing that may be surfacing out of the MFG debacle is not MFG itself, as bad as that is, but that rumors are circulating that MFG's practices weren't any, or much, different than those practiced by other firms now. If so, the resulting crisis of confidence in the futures market, and in brokers of all types, would be HUGE, and cause/create a ripple that could take the whole market down. I think that is what Neil and others have been getting at, but something else I heard today made that come together for me. (Sometimes I'm a bit slow. )

Well, I'm completely shot and undecided. I have two completely opposite signs - a technical analysis from a respected gold guy that says that we not only hit the local bottom but that all the technical signs are pointing to us being at the start of the next big push, to $2000+ in gold, and says silver is also in a solid position. On the other hand, I get this from "Rantin' Andy Hoffman" -

hearing from reliable sources the BANKING CRIMINALS are going to take gold to 1575 and silver to 28 level for expiration on 22nd...just another attack amongst many...and the new COT says it all...

I had heard a similar thing a couple weeks ago from another source (would have to look for it) who (rather than call it Banking Criminals) said that some unknown powers were planning to damage JPMC by slamming JPMC on the wrong side of a major play. They will encourage the price run-up, and when JPMC shorts big, they will let it run down, doing what they can to cause JPMC to force it down, then at an appropriate point they will buy and demand delivery of physical.

Of course both could be true. Could be a big dip, followed by the rest of a run-up.

[68Camaro]

Well, after all the above, I did just get an email warning heads-up from one of the commentors I follow that I need to digest later tonight, and it ties in enough with a few other random bits I've heard previously that it is giving me pause. More later, but this guy says there is going to be a major purposeful PM market take-down by the 22nd. And of course there is the issue of CME raising margins again during this same period. No idea if it is even remotely related to what JFF has noted in his "imminent" thread - that usually pertains to technicals, whereas this rumor is of a specific cause/effect for a purpose. More later - I've got things going on for a couple more hours, so it'll be later in the evening before I get back to this. I don't like to operate off of rumors, but this may be a rumor with backing."Truth is so obscure in these times, and falsehood so established, that, unless we love the truth, we cannot know it." Blaise Pascal, 1660.

....

And back on-topic, the huge thing that may be surfacing out of the MFG debacle is not MFG itself, as bad as that is, but that rumors are circulating that MFG's practices weren't any, or much, different than those practiced by other firms now. If so, the resulting crisis of confidence in the futures market, and in brokers of all types, would be HUGE, and cause/create a ripple that could take the whole market down. I think that is what Neil and others have been getting at, but something else I heard today made that come together for me. (Sometimes I'm a bit slow. )

Well, I'm completely shot and undecided. I have two completely opposite signs - a technical analysis from a respected gold guy that says that we not only hit the local bottom but that all the technical signs are pointing to us being at the start of the next big push, to $2000+ in gold, and says silver is also in a solid position. On the other hand, I get this from "Rantin' Andy Hoffman" -

hearing from reliable sources the BANKING CRIMINALS are going to take gold to 1575 and silver to 28 level for expiration on 22nd...just another attack amongst many...and the new COT says it all...

I had heard a similar thing a couple weeks ago from another source (would have to look for it) who (rather than call it Banking Criminals) said that some unknown powers were planning to damage JPMC by slamming JPMC on the wrong side of a major play. They will encourage the price run-up, and when JPMC shorts big, they will let it run down, doing what they can to cause JPMC to force it down, then at an appropriate point they will buy and demand delivery of physical.

Of course both could be true. Could be a big dip, followed by the rest of a run-up.

Well, it's looking like the take-down is real, and in action. I decided not to act on it, so will have to watch from the sidelines, apart from picking up some more physical as I'm able.