France McKenna on Trustee Reports for MF Global and JP Morgan's Pinto Problem!
Welcome to Capital Account. JP Morgan's two billion dollar London Whale trading losses can be blamed on "inadequate risk management" according to one of the bank's main regulators, the officeof the comptroller of the currency (OCC), who we heard from today on Capitol Hill. No kidding? But whose job is it to police JP Morgan and the other investment banks to begin with? Well, it’s the regulators. So what does the comptroller of the currency say is the remedy? We know talk is cheap, but Wall Street screw-ups sure aren’t. We’ll talk about how and why regulations aren’t being enforced, and which dogs still refuse to bark. Francine McKenna, former auditor and writer for the Financial Times, Forbes, and American Banker to name a few.
And accounting is supposed to keep track of positions…it is supposed to “account for…” But do the latest MF Global trustee reports show how accounting has instead become a tool used to hide risk, and expand leverage in pursuit of profits? Accounting watchdog Francine McKenna is here to answer that, and what can be done about it. We discuss MF Global's use of the Repo-to-Maturity trade, and the way that customer money could have been used to meet margin calls despite clear segregation of funds. According to James Giddens' report, MF Global may have taken advantage of something referred to as “regulatory arbitrage,” in order to accomplish this. Specifically, it used an “alternative accounting” method that may have allowed the firm to dip into customer funds in order to meet overdrafts. During the month of October 2011, the amount of “Regulatory Excess” — the average amount of customer funds in excess of the regulatory requirement under the Alternative Method (but not the Net Liquidating Method) — was approximately $1 billion. Some at MF Global considered the Regulatory Excess to be a potential source of funds for intraday, or even overnight, transfers to fund the non-FCM activities of MF Global, although others were of the view that the Regulatory Excess would still have to be “locked up” for the benefit of customers.
And in what may be a sign of the times, we will tell you about the new Survivalist reality TV show where the winner gets his or her own bunker! Demetri and Lauren will give you their two-cents on today’s episode of Loose Change.