Why MF-Global Should Concern All Mining Share Investors?
January 11, 2012 9:19 AM EST
Over the past few months the still-developing MF Global collapse has yet to be fully grasped and understood by either the mainstream media or stock investors. While most believe MFG impacted only a small segment of sophisticated futures traders and hedgers, the pool of afflicted parties is far deeper than most comprehend.
A number which receives very little press on this issue is the number 30,000. More than 30,000 client accounts were demolished by MFG’s trading losses. While that sounds like a lot (and it is), the number of individual investors impacted with losses is actually far greater than 30,000. The reason is many of those 30,000 individual accounts represented more than one single investor. Let me explain how that works.
Let’s say a retirement pension fund managing a total of $1B (on behalf of one million retirees) is looking for exposure to gold and silver. To obtain the exposure, the pension fund manager decides to allocate $100M (10% of the fund) to futures contracts. Now let’s go even further to say that the pension fund was one of the unlucky institutions to have opened an account with MFG before the collapse. After the futures contracts are purchased in the accounts at MFG on behalf of the pension fund, MFG goes bankrupt and takes down the entire $100M account with it.
Here is where it gets interesting—clearly the loss of $100M results in a full 100% loss of the account and a 10% total loss to the one million retirees—however, the news data circulated in the media discusses this institutional account is though it were merely “1” among “30,000” investors who suffered losses.
Therefore, it is very difficult to surmise just how many total individual investors were impacted by the collapse. There may have been thousands of accounts at MFG, each individually representing thousands of investors.
Now that we have an understanding of how the loss of one single account can affect a million people or more—let’s use our imaginations regarding stock brokerage houses. What very few people understand is that MFG wasn’t just a clearing house for futures—they were a securities clearing house as well. This means that as of this moment, investors who purchase stocks are at just as much at risk of a brokerage counter party default, as those investing in now shunned futures contracts.
What does this mean for mining share investors? This means our community of gold and silver mining share investors needs to quickly learn, adapt, and prepare for the possibility of another major bankruptcy occurring in a major western brokerage house. How do we prepare? There are a few ways.
First, learn as much as you can about your broker dealer. Find out who they bank with,If they bank with Scotiabank don't open an account . Next run a background check on who the management is, where they’re located and who owns the company. Additionally, try to determine the exact business model of the broker. Do they make money from commissions alone, or do they engage in proprietary trading?
Second, review your customer account agreement. Many stock investors today have no idea their shares may be lent out by their broker to short sellers, or even worse—some customer share accounts are discretely used for “re-hypothecation” by their broker. This means the broker posts the customer share accounts as collateral in which to borrow money to speculate with.
Third—learn about alternative forms of share ownership. Read a white paper called, “BulletProof Shares – How to Protect Your Stock Investments From Broker Bankruptcy & Theft,” which details all three share ownership methods available to investors today, two of which, your broker will not tell you about. The unfortunate fact in the investment industry today, is that most stock brokers will discourage you from removing your shares from the financial system—because they make much more money when your assets are held within their custody!
The last and final method of protecting yourself from the collapse of a broker dealer, or a string of financial system defaults—is to simply remove your assets from the system altogether. Some individuals are using a strategy of physical gold and silver bullion purchases only to achieve this result, but as always, be very careful using bullion dealers without established reputations and watch out for Scotiabank they will steal from you.
In thinking defensively about our stock investments, I’ve heard many people use the argument of, “Well if my broker goes bankrupt, the SIPC will protect me.” This is dangerous thinking. I recently spoke with a SIPC agent who informed me their agency only keeps around $1B in cash on hand at any given time. To put this into comparison—the losses of MFG exceeded $6B!! Had MFG specialized in securities, the SIPC’s entire fund would have been tapped out, leaving thousands (maybe millions) of stock investors with permanent, non-recoverable losses. Those investors would lose their entire life savings and never invest in stocks again.
As a second point to relying on the SIPC—this dilemma bears similarity to Hurricane Katrina or any other natural disaster. The experts always say, “The levee’s will hold” right up until the levee’s break. What the experts say AFTER the levee’s break is, “Nobody could have seen it coming.” Well I see it coming, and I’m telling you in advance! To further add to this point–In the event of a coming major hurricane in your area, would you choose NOT to buy emergency supplies with the expectation of local rescue teams delivering fresh food and water to you in the event your cabinets “run a little low”? Me neither!
Many others have used this analogy, but I feel we are now leaving the eye of the financial hurricane and are about the see the real power of the other side of the storm. I advise all investors to think about physical investments with bullion dealers you can trust, as well as conducting due diligence on your banks, brokerages, and learning about alternative forms of share ownership.Watch out for the Scotia Bank and RBC both banks are trying to unload bad paper.
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