The MF Global disaster should make one point painfully obvious. The “social contract” of the futures exchanges has been broken. The “social contract” of the financial system has been broken. Some people said that a COMEX warehouse receipt is safer than gold stored under your mattress. The MF Global disaster proved that statement false.

This story is interesting.  After the MF Global fraud/implosion/theft, trading volume on futures markets has decreased.

Some farmers and investors got robbed by the MF Global bankruptcy.  Now, people are shunning the futures exchanges.  What’s the point of using a futures exchange if you’re just going to get robbed by banksters?!

The banksters only get money by stealing it.  You can’t have a futures market, unless there’s farmers/miners/producers/investors to fleece.  People may start avoiding the futures market, knowing it’s one big scam.  Without customers to rob, the futures market would just be banksters pushing paper around.

Farmers were also robbed in 2008.  The price of food spiked in the summer.  The farmers had hedged with short futures.  After the spike in prices, the farmers got margin called out of their short hedges, even though they were planning to deliver and weren’t speculating.  By the time harvest came, prices crashed again, and the farmers were robbed.  Via hedging and fluctuating prices, the farmers wound up buying high and selling low.

In a time of hyperinflation, there’s no point hedging with short futures.  By hedging, you’re missing out on several months of price inflation.  There’s no point participating in a crooked futures market.  It’d be simpler to just write Lloyd Blankfein and Jamie Dimon a check, than participate in a corrupt futures market and corrupt financial system.

If effect, a farmer who sells a grain future is selling his product for 10%-20% less than what it’s actually worth.  That’s the inflation that occurs between the time the farmer sells the future, and the time that the farmer delivers.  If I were a farmer, I’d take the risk of lower prices, rather than financing bankster profits.

Many gold dealers buy directly from miners, completely bypassing futures exchanges.  Pretty soon, the real/cash price of gold might start diverging from the futures/CRIMEX price.  That already happened somewhat in Fall 2008.  The “official” price of gold crashed, but many dealers had no inventory.  If you want physical, you may need to start paying higher and higher premiums to the “official” price.

This story was really interesting.  Gerald Celente was robbed by Jon Corzine and MF Global!  Gerald Celente writes a lot about gold investing.  I recognized the name.  I thought he was a sophisticated and literate investor.  He was someone who advocated “Buy a future, pay cash, and get a warehouse receipt.”  He also advocated for taking actual delivery on your future and warehouse receipt, taking physical possession of the gold good delivery bar.  I bet he isn’t going to advocate for trading futures anymore!  It isn’t stupid to pay more for actual coins than for futures, if the futures market is only going to rob you!

There’s another interesting bit.  His broker was Lind-Waldock.  They were bought out by MF Global a few years before the bankruptcy.  They kept operating under the name Lind-Waldock, even though they were now part of MF Global.

Gerald Celente made another interesting point.  A few weeks before everyone else, some insiders knew that MF Global was going down.  They moved their accounts and preserved 100% of their equity, while everyone else got shafted in bankruptcy.  If you’re an average slave, by the time you hear a rumor that your broker is going bankrupt, it’s too late to take your money out.

If MF Global customers lost $1.2B, then someone else made $1.2B.  If Corzine didn’t rob his customers, then other MF Global creditors would have gotten $1.2B less in the bankruptcy.  Allegedly, most of the $1.2B went to JP Morgan Chase and the Jamie Dimon bonus fund.  That is a huge gaping hole in the investigation, “Who got the $1.2B?”  With a non-corrupt justice system, that money would be clawed back and returned to customers.  In bankruptcy, MF Global’s customers should be senior to all other creditors.

Any transaction made in the months before bankruptcy should be subject to clawback.  A common trick is “Make a big contribution to the executive pension plan before filing for bankruptcy.”  Another common trick is “Pay off preferred creditors (JP Morgan Chase) before filing for bankruptcy, leapfrogging other creditors in bankruptcy.”  Back when judges weren’t complete tools, they would claw back such payments and return them to the other creditors.

Maybe that’s why Corzine is getting off easy.  Any detailed investigation would involve investigating JP Morgan Chase.  Corzine may be prepared to spill his secrets, if he’s charged with a crime.

I once asked my discount broker if they would let me buy futures in my account.  They said they no, but advised me to use Lind-Waldock.  I never got around to opening an account, but was seriously thinking about it.  I dodged a bullet there!  For now, I’m sticking with paper gold, but eventually I’ll start with physical.  I figure I’ll buy a few ounces at a time, so that I’ll know my true robbery risk.

My discount broker claims a strong track record of honesty and integrity.  That means nothing.  At any time, any broker can pull a Corzine and rob customers.

It’s interesting to hear the details of how Gerald Celente got robbed.  I’ll use specific numbers.  Suppose that Gerald Celente owned one future for $200k and had $200k of equity in his account.  In other words, he had one fully paid future contract and was waiting for delivery.  I’m using $200k for the future instead of $160k, to keep the numbers round.  (A good delivery bar is sometimes 100oz, and gold is around $1600/oz right now.)

Corzine and MF Global raided customer funds to gamble in European bonds.  All customers are treated equally in bankruptcy, even those with no leverage in their account.  Even if you owned a fully-paid COMEX warehouse receipt, a specifically numbered bar that’s held in custody for you, you only get 60% of your assets in bankruptcy just like anyone else.  It’s like you had a safe deposit box in a bank, the bank goes bankrupt, and the contents of your safety deposit box are seized by the bankruptcy judge and split evenly among all creditors.  You could say “WTF?  That’s my bar of gold!”, but that isn’t the way corruption works.

The bankruptcy trustee ruled that every customer gets 60% of their equity.  Gerald Celente now has $120k of equity in his account instead of $200k.  However, that $120k equity is transferred out of his futures account into the bankruptcy trustee’s account!

Gerald Celente has a gold future but zero equity.  He is hit with a margin call and is forced to sell his future.  His $120k equity is tied up in bankruptcy court!  He can’t get that money until the bankruptcy trustee decides to pay it out!

Not only did Gerald Celente lose 40% of his equity, he also got margin called out of his gold future!  His liquid savings are tied up in the bankruptcy court!  If he gets his cash back in a year and buys another gold future or gold coins, the price of gold might be 50% more.  Not only did he lose his equity, but he’s also going to get robbed by inflation from now until whenever the bankruptcy trustee decides to pay him!

The social contract of the futures markets has been broken.  The clearing and settlement system is supposed to protect customers against losses.  Due to a technicality, the exchanges’ clearing fund isn’t available to reimburse MFG customers.  Technically, MF Global never defaulted on its clearing obligations, because they were raiding segregated customer funds to stay solvent!  This was internal fraud by MF Global, and not a clearing default.  Due to this loophole, the clearing and settlement system isn’t available to reimburse MF Global’s customers/victims.

Gerald Celente pointed out “There’s always a loophole that banksters can use to cheat you.  Even if they change the law, there’s always another loophole.”  What Corzine did was *ALREADY* illegal.  Even if the law is changed after MF Global, there will always be another loophole for next time.  When laws are changed, more loopholes are added than removed.  The much-touted financial “reform” law couldn’t prevent the MF Global fraud.  There’s nothing that prevents a CEO and his minions from lying to customers and regulators.  There isn’t even a credible threat of prison and loss of savings if you get caught.

Corzine’s assets are well shielded in offshore trusts, even if he is successfully sued.  Corzine han’t been indicted yet.  Even if convicted, he’ll only get a few years in jail.  In this manner, the State protects criminals.  If a disgruntled customer decided to get his own justice, he’d be charged with a crime.  True justice would be “Lock Corzine in a room with 100 MF Global victims, and the police ignore whatever happens next.”  (In a wergeld system, it is acceptable to murder someone who owes you more money than the fine for murder.  In a free market justice system, if someone owed you $10M due to criminal negligence and couldn’t pay, you could just murder them and call it even.)

If you’re a bank CEO who lost trillions of dollars speculating in mortgage bonds, you get a bailout and no criminal charges.  Bernard Madoff robbed millionaires and insiders; Madoff went to jail; Congress retroactively changed the SIPC law, partially bailing out out Madoff’s victims.  Corzine robbed farmers and individuals.  Too bad!  I can’t believe that Corzine hasn’t been indicted yet.  Corzine gets to politely testify in front of Congress, saying “I can’t recall where the money went!”,  and the Congressmen and media cover him with respect, rather that saying “Liar! Liar!”

I never understood why “I’m a stupid CEO who didn’t know what’s going on.  My subordinates lied to me.” is accepted as a valid defense.  Corzine was smart enough to fire a risk manager who objected to the big bets on European bonds.  If he’s smart enough to fire a risk manager that objects to his risky trades, then he’s smart enough to know where the money went.

It’s amusing logic.  It was urgent to spend $700B in TARP bailing out big banks (and even more secret loans from the Federal Reserve).  MF Global customers lost $1.2B, and not a penny is available for them.  It’s a clearcut double standard.  Insiders get bailed out and the little guy is SOL.

I’m actually surprised that there hasn’t been a bailout for Corzine’s victims.  If I were a bankster, I’d ask for a bailout, for no other reason than to preserve the Masquerade.  It’s worth $1.2B to prevent the complete collapse of trust in the futures markets.  I guess the banksters are so greedy that they don’t understand that.  At some point, they’re going to far.  They’re stealing too much too fast, accelerating the collapse.

Suppose there’s a “run on the gold exchanges”.  People refuse paper and demand physical.  If paper gold is levered 100x or more over physical, and if 10% of investors demand physical and delivery, the whole scam unravels.  When you have a fractional reserve system, only a small % of people need to stop participating, in order to collapse everything.

The social contract of the futures markets has been broken.  A customer is supposed to be able to make a trade, pay for it, and take delivery.  A farmer/miner is supposed to be able to short hedge, to lock in prices so he has predictable profits.  (Price volatility is created by banksters, and the banksters profit via inflation, leverage, and long futures.)  A customer in a futures market should not have default risk and counterparty risk.  The social contract of the financial system has been broken.  A bank is supposed to be a safe place to store your savings.  If you keep money in a checking account, you’re guaranteed to get robbed by inflation.

It’s too risky to use the State financial system.  Nothing prevents a CEO from stealing your savings and lying about it.  There isn’t even a credible threat of prison for banksters who get caught stealing.

Statists like to cite the “social contract” as the source of government’s legitimacy.  What happens when that alleged agreement is flagrantly and obviously broken?  I am forced at gunpoint to obey.  The other side isn’t even pretending to hold their part of the agreement they forced on me?  Once you understand the financial system and monetary system, it’s obvious that State leaders sold everyone into bankster slavery.  Once you realize how badly Congress made a mess of the financial system, you realize that those clowns don’t have any legitimacy at all.