November 19th, 2011
Econintersect: The following is the introduction to a letter sent by a real CEO of a real brokerage firm specializing in agricultural commodities.
“Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,
It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.
The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. Follow up:
The letter, which has been posted on the company website in two parts, pulls no punches in stating Ann Barnhart’s case. She says that the MF Global collapse, and the circumstances of that collapse, have changed what had been a “flawlessly” working system into a massive game of “Russian Roulette.”
Here is another excerpt:
Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.
I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.
1. Econintersect does not think that the MF Global collapse was brought on by the “Marxist Obama regime,” although the administration is complicit in not having pushed for stronger regulation after the deregulatory binge of the last 30 plus years.
2. Barnhart has chosen to make a very narrow political statement that totally ignores the very public history of deregulation that has created the current environment. She has critically damaged her credibility by allowing her political passions to blind her to decades of bi-partisan involvement in the creation of the monster she describes.
3. All that being said, Barnhardt is not alone in thinking that systemic defects exist. Guest author Russ Winter has a GEI Investing Blog article tonight that uses the same “tip of the iceberg” analogy that Barnhardt uses in discussing the serious implications of the MF Global case.