Martin Armstrong
MF Global was allowed to take customer funds for their own use and this has been allowed by the regulators who are bought and paid for and have NEVER prevented a damn thing. MF Global plowed money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase later. Repos are a common way for firms to generate money but are not normally off-balance sheet and are instead treated as "financing" under accountancy rules. In this case, MF Global used the version of an off-balance-sheet repo called a "repo-to-maturity." The repo-to-maturity involved borrowing billions of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the loan itself. Since the collateral and the loans matured simultaneously, MF Global was entitled to treat the transaction as a "sale" under US GAAP. This is how MF Global moved $16.5 billion off its balance sheet hiding its bets on Italy, Spain, Belgium, Portugal and Ireland.
Backed by the European Financial Stability Facility (EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds would remain default free whilst yields would continue to grow. Ultimately, however, it proved to be MF Global’s downfall as margin calls and its high level of leverage sucked out capital from the firm. For more information on the repo used by MF Global please see Business Law Currents MF Global – Slayed by the Grim Repo?
MF Global has exposed also the leverage employed by NY firms. In order to lose $1.2 billion of its clients’ money in the acquisition of a sovereign debt position of $6.3 billion, which was more than five times the firm’s net worth, it exploits another loophole between UK and US brokerage rules on the use of client’s funds known as "re-hypothecation". In other words, the borrower pledges collateral to secure a debt but he retains the title and the creditor technically has only a "hypothetical" control of the title to the assets. The creditor may seize possession ONLY if the borrower defaults.
Here is the legal loophole between the US and the UK. In the U.S., this legal right takes the form of a lien upon a specific asset while in the UK this is a floating legal charge. A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership (LLP), which "floats" until conversion into a fixed charge or specific lien, at which point the charge attaches to specific assets. The conversion (called crystallization) can be triggered by a number of events. This it has become an implied term in debentures (in English law) that a cessation of the company's right to deal with the assets in the ordinary course of business will lead to an automatic crystallization. This is normally expressed in terms of a typical loan agreement where the seizure of assets takes place upon default by the charger is a trigger for crystallization. Such defaults typically include non-payment, invalidity of any of the lending or security documents or the launch of insolvency proceedings. Under UK law, a floating legal charge can only be granted by companies and cannot be sustained by an individual person or a partnership for in such cases that entails a specific lien on assets. 14
This floating legal charge is known as "one of equity's most brilliant creations" and takes effect ONLY in the absence of LAW. The Judiciary Act of 1789 that created the US district courts states clearly: "SEC. 16. And be it further enacted, That suits in equity shall not be sustained in either of the courts of the United States, in any case where plain, adequate and complete remedy may be had at law." You cannot eliminate the law of a statute by resorting to equity, yet this has become a treasonous standard practice in America. This is at the heart of judicial corruption and tyranny.
In other words, Americans harmed by MF Global taking their assets would have had more rights in Britain than in New York. In practice, as the charger has power to dispose of assets under a floating legal charge, this is only of any consequence in relation to disposals after the charge has crystallized. Since in the United States they NEVER disclose that they are using client’s money, under EQUITY there was no legal right to the "re-hypothecation" of client’s funds since it was not disclosed and the client did not relinquish title to the assets and did not even lease them for such use.
MF Global exploited a loophole between US and UK law that is criminal. A mutual fund/hedge fund is legally different from a broker-dealer. There you invest in the fund and receive shares. You have now relinquished the title to the assets and thus "re-hypothecation" is expected for the fund manager is not managing your specific money differently from another. However, when you open an account at the brokerage house or bank that account is your and you did NOT relinquish title to the assets. Since they also do not disclose they are using your assets for their own trading, you certainly did not give up your title and therefore they legally cannot engage in "re-hypothecation" of your assets for their benefit. If any lawyer tells you different, get a new lawyer. NEVER EVER use a law firm from the same city in which you are filing a suit. He will blow smoke up your ass and "imply" how he knows the judge, the prosecutor, or whatever as if they were friends and that inside position will benefit you in some way. That is a sales pitch that is bogus for it works in the opposite manner. Because of those very relationships and the fact that the practice of the lawyer is in that town, his business relationships long-term are more important to him than you one-time case. He will never piss off the judge because he has to be before him on other cases. So NEVER use a firm from the same city. It is a disaste
MF Global was allowed to take customer funds for their own use and this has been allowed by the regulators who are bought and paid for and have NEVER prevented a damn thing. MF Global plowed money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase later. Repos are a common way for firms to generate money but are not normally off-balance sheet and are instead treated as "financing" under accountancy rules. In this case, MF Global used the version of an off-balance-sheet repo called a "repo-to-maturity." The repo-to-maturity involved borrowing billions of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the loan itself. Since the collateral and the loans matured simultaneously, MF Global was entitled to treat the transaction as a "sale" under US GAAP. This is how MF Global moved $16.5 billion off its balance sheet hiding its bets on Italy, Spain, Belgium, Portugal and Ireland.
Backed by the European Financial Stability Facility (EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds would remain default free whilst yields would continue to grow. Ultimately, however, it proved to be MF Global’s downfall as margin calls and its high level of leverage sucked out capital from the firm. For more information on the repo used by MF Global please see Business Law Currents MF Global – Slayed by the Grim Repo?
MF Global has exposed also the leverage employed by NY firms. In order to lose $1.2 billion of its clients’ money in the acquisition of a sovereign debt position of $6.3 billion, which was more than five times the firm’s net worth, it exploits another loophole between UK and US brokerage rules on the use of client’s funds known as "re-hypothecation". In other words, the borrower pledges collateral to secure a debt but he retains the title and the creditor technically has only a "hypothetical" control of the title to the assets. The creditor may seize possession ONLY if the borrower defaults.
Here is the legal loophole between the US and the UK. In the U.S., this legal right takes the form of a lien upon a specific asset while in the UK this is a floating legal charge. A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership (LLP), which "floats" until conversion into a fixed charge or specific lien, at which point the charge attaches to specific assets. The conversion (called crystallization) can be triggered by a number of events. This it has become an implied term in debentures (in English law) that a cessation of the company's right to deal with the assets in the ordinary course of business will lead to an automatic crystallization. This is normally expressed in terms of a typical loan agreement where the seizure of assets takes place upon default by the charger is a trigger for crystallization. Such defaults typically include non-payment, invalidity of any of the lending or security documents or the launch of insolvency proceedings. Under UK law, a floating legal charge can only be granted by companies and cannot be sustained by an individual person or a partnership for in such cases that entails a specific lien on assets. 14
This floating legal charge is known as "one of equity's most brilliant creations" and takes effect ONLY in the absence of LAW. The Judiciary Act of 1789 that created the US district courts states clearly: "SEC. 16. And be it further enacted, That suits in equity shall not be sustained in either of the courts of the United States, in any case where plain, adequate and complete remedy may be had at law." You cannot eliminate the law of a statute by resorting to equity, yet this has become a treasonous standard practice in America. This is at the heart of judicial corruption and tyranny.
In other words, Americans harmed by MF Global taking their assets would have had more rights in Britain than in New York. In practice, as the charger has power to dispose of assets under a floating legal charge, this is only of any consequence in relation to disposals after the charge has crystallized. Since in the United States they NEVER disclose that they are using client’s money, under EQUITY there was no legal right to the "re-hypothecation" of client’s funds since it was not disclosed and the client did not relinquish title to the assets and did not even lease them for such use.
MF Global exploited a loophole between US and UK law that is criminal. A mutual fund/hedge fund is legally different from a broker-dealer. There you invest in the fund and receive shares. You have now relinquished the title to the assets and thus "re-hypothecation" is expected for the fund manager is not managing your specific money differently from another. However, when you open an account at the brokerage house or bank that account is your and you did NOT relinquish title to the assets. Since they also do not disclose they are using your assets for their own trading, you certainly did not give up your title and therefore they legally cannot engage in "re-hypothecation" of your assets for their benefit. If any lawyer tells you different, get a new lawyer. NEVER EVER use a law firm from the same city in which you are filing a suit. He will blow smoke up your ass and "imply" how he knows the judge, the prosecutor, or whatever as if they were friends and that inside position will benefit you in some way. That is a sales pitch that is bogus for it works in the opposite manner. Because of those very relationships and the fact that the practice of the lawyer is in that town, his business relationships long-term are more important to him than you one-time case. He will never piss off the judge because he has to be before him on other cases. So NEVER use a firm from the same city. It is a disaste
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