Yves Smith: More evidence JP Morgan stuck the knife in MF Global

I’ve been reading a lot of Naked Capitalism lately; a good source for articles about the economy and inside-the-boardroom doings.

This is an inside-the-boardroom piece about how Jamie Dimon and his personal money machine, JPMorgan Chase, put themselves first in line to skim back their personal piece of troubled MF Global in the days just before its bankruptcy.

Hint: It helps if you already have their money and won’t give it up. It helps if you’re Jamie Dimon and can act like the “law” is in your pocket.

Yves Smith begins (my emphasis and some reparagraphing):

The death of MF Global and JP Morgan’s role in its demise is starting to look like a beauty contest between Cinderalla’s ugly sisters. As much as most market savvy observers are convinced that there is no explanation for how MF Global made $1.2 billion in customer funds go poof that could exculpate the firm, JP Morgan’s conduct isn’t looking too pretty either.

Reader Michael C sent a link to a Reuters investigative piece on the MF Global collapse, and it’s a doozy. While in proper journalistic form it is careful about reaching firm conclusions on a post mortem that is still underway, the pattern it has uncovered is not surprising to those of us who are onto JP Morgan.

As many, including this blogger, have pointed out, it was JP Morgan that did in the doomed Lehman by withhold $7 billion of cash and collateral. And we’ve written how it used one of its best private clients, billionaire investor and industrialist Len Blavatnik, as a stuffee for toxic subprime debt in summer 2007, when every financial firm was desperate to offload US housing dreck.

The short form of the Reuters story is that JP Morgan, by virtue of being both a lender to MF Global as well as clearing its trades, has a big information advantage and could see how distressed the firm was. MF Global drew down the full amount of a newly-syndicated $1.3 billion credit facility, a huge warning sign. The Reuters story makes clear that JP Morgan went into “possession is 9/10ths of the law” mode

Get that? Because JPMorgan was an MF Global clearing house and also an intermediary in MF Global deals, it had (1) inside info about the state of the company (desperate for cash); and (2) was in position to hold onto that cash a little longer than normal. That had two effects — it protected JP Morgan’s exposure in case MF Global went bankrupt, and it hastened that bankruptcy.

That’s what Ms. Smith means by “stuck the knife” into MF Global. But note the side effect as well — lots of MF Global money was parked at JPMorgan. This automatically put JPM “first in line” (via the “possession” rule) when the bankruptcy clean-up crew started sorting out how to pay off MF Global’s debts and whom to reimburse first.

It’s always been a battle between the bondholders (the bigs), the investors (more bigs) — and customers (us schlubs), whose money MF Global was using to give itself a bridge loan, as the above makes clear.

Do read the rest; it’s not long and there are lots of nuts and bolts observations.

I’ll leave you with two more of Ms. Smith’s comments:

■ “JP Morgan hanging on the money had … everything to do with it trying to lower its credit exposure [to MF Global].”

■ “It’s … pretty clear that a lot of customer money is sitting at JP Morgan, but JP Morgan will argue … that it should not have to disgorge it[.]”

Tales of the Top .01%. Guys like ex-FBI director Louis Freeh, who now represents those who invested in this corpse, are just well paid errand boys, doing the bidding of the Dimon’s and Corzine’s of the world.

Who else, do you imagine, are errand runners and retainers of the very very rich? I have my suspicions.

Will Jon Corzine ever be indicted? Not on this planet, it seems.

Will MF Global customers ever see their money? From what I hear, they’re up to 72% reimbursed. Feeling safe? Me neither. Dimon sleeps well though; funny that.

GP


Gaius Publius is a professional writer living on the West Coast of the United States.

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