MF Global and HSBC case

By Bron Suchecki, on December 13th, 2011
As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:
ZH: ”is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances.”
TF: “A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system”
Here is a suggestion, read the actual Interpleader Complaint for the facts:
1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.
2. By e-mail dated October 25, 2011, MFGI notified HSBC that “MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”
3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.
4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.
5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.
6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.
7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.
Not being a lawyer, I read this as “before you went bankrupt, you said I could have my metal”, “yeah, well, you didn’t take it before I went bankrupt, so it is now part of the bankruptcy proceedings”.
So no rehypothecation or loaning, no “suing” by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.


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The Wisdom of Crowds

By Doug Gentry, on November 14th, 2011

Several years ago I wrote about prediction markets like Intrade.com. As the U.S. Presidential election cycle heats up I find I am drawn back to this special kind of bookmaking operation on the Internet. You can see a long list of Presidential election predictions on the Intrade site.

The phrase The Wisdom of Crowds is the title of a book by James Surowiecki, a staff writer for The New Yorker. In 2004 Surowiecki wrote that large groups of average individuals can predict outcomes with greater precision than smaller groups of experts. Intrade.com is a real-life, functioning demonstration of this claim.

First, a quick refresher. Anyone can start an account on the Intrade web site. You add a modest amount of money to your account using a credit card. Then you go to a specific event/market which predicts some outcome. The outcome is easy to verify, eventually. For example, there is a market for the outcome that President Obama is re-elected as president in 2012. Eventually that outcome will either be yes or no. As I write this on November 12, 2011 the prediction for this event is 52.1%. If I think it is likely that Obama will be re-elected I can buy a share in this event for $5.21. If I am right, and hold on to this share until the election I will receive $10.00 – a profit of $4.79.  If I am wrong, and hold on to the share I lose my $5.21. If events alter my prediction, I can either buy more shares for the positive outcome or sell my shares.

Here is a graph of this particular prediction and how the Intrade investors have evaluated the President’s chances.

Intrade.com - Probability of President Obama being Re-ElectedIntrade.com – Probability of President Obama being Re-Elected

You can click on the graph to see more information on this prediction. You can see that Intrade investors have gotten more pessimistic about the President’s chances over the last six months. An important thing to note is that anyone can play in this market. It is not a poll of political experts or those horrid talking heads we hear/see on broadcast media.

A Competitive Market

For my microeconomics students this is an example of a special form of a competitive market. There are many sellers (almost 2,000 to date) and an equal number of buyers. They all have approximately the same amount of information (no insider trading advantage in this case.) It is very easy to enter this market, and to leave it. There are few market imperfections – no monopoly, no obvious cartel.  If we assume, like Adam Smith did 240 years ago, that buyers and sellers will act in their own self-interest (making as much money as possible) then the market price will reach an equilibrium. That equilibrium price will change as new information arrives. For example, when Rick Perry forgets which federal agency he wants to close, some people may judge that Obama’s chances of re-election are slightly higher. They will bid the price up from $5.21 (52.1%) to something higher.

As an exercise consider Surowiecki’s claim that this large number of regular investors will more accurately predict the final outcome that a panel of experts.



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