The stunning disappearance of client funds at three commodities brokerages-Refco, MF Global and now Peregrine-over the last seven years has to be prompting many advisors to ask why a client should ever be allowed to place money in one of these institutions.
I confess ignorance when it comes to inner workings and regulations that govern commodities brokerages. But the facts are the facts and money vanished at two of the nation's largest commodities and futures firms, Refco and MF Global. In contrast, when securities firms like Bear Stearns and Lehman Brothers went under, client accounts survived.
The Refco bankruptcy was noteworthy in that it had completed an IPO and raised $583 million only a few months before it filed for bankruptcy. Going bankrupt in less than 100 days after receiving a cash infusion of $583 million is no easy feat. Apparently, the giant commodities firm, which experienced numerous regulatory investigations over several decades, managed to hide about $400 million in debt from snoozing accountants, underwriters and regulators, not to mention the private equity firm that owned Refco, Thomas H. Lee.
None of them could find $400 million in debt. Though client funds went missing for months, I believe most were recovered. And in the commodities brokerage space, that's a good story with happy ending.
Well, it is compared to MF Global, where only a small amount of missing client funds has been recovered. So far there have been numerous investigations but no criminal charges.
MF Global's CEO, Jon Corzine, who we once retained to speak at a conference, had a sterling reputation as a CEO of Goldman Sachs, but he was an unsuccessful New Jersey governor and seemed to have totally lost his bond trading touch by the time he arrived at MF Global. Even if he and other execs at the firm get off, one has to wonder how they feel reading numerous stories that imply they gambled with mid-Western farmers' livelihoods by making naked bets on European bonds.
Then today along comes Peregrine, whose CEO failed in his suicide attempt. Again, several hundred million are missing. The facts are still unfolding so I'll reserve judgment.
One can certainly argue the case that Jeremy Grantham and others make that, on a growing planet with limited resources, commodities are a very viable long-term investment. And there are viable ways to access these investments without going directly into commodities markets and buying futures or storing gold or whatever. But if you are a farmer who has little choice but to hedge crops with CFTC-regulated brokerage firms, the choices are scarce. That's sad.
But hey, three days after posting this blog, word has it that the CFTC is examining what they can do about their industry's "theft of funds" problem. And they apparently plan to spend all weekend meeting about the problem.