WARNING: The MF Global "contagion" is quietly spreading

The part of the MF Global heist that has surprised me the most is not that it happened or that the U.S. government was driving the get-away car, but that the traditional U.S. stock, mutual fund and fixed income companies and traders have taken it with almost a yawn.

I have been flabbergasted that the withdrawal window at a major U.S. bank has had a “closed sign” posted for almost two months with hardly a whimper except from commodity futures traders. This “1929″ style bank closing has occurred because segregated account holders have been denied their deposits. It has amazed me that the U.S. government has been blind (what’s new) to the fact that Jon Corzine and his band of crooks have forcibly made segregated banking account holders counterparties to leveraged bets on Italian and Greek debt without their approval or knowledge.

In the meanwhile, Congress continues insider trading with greed and no regrets while the White House readily accepts campaign contributions from bed mates on Wall Street and the “green” (alternative spelling: “Al Gore and the solar slime”) industry.

Well, stock, fund and bond friends, let your yawn be over – because the contagion is knocking at your door. I have written often in recent weeks that the breakdown in the safety of customer funds in one federally regulated category (futures) was the leak in the dike — and would eventually spread to stocks, mutual funds, banks, pension funds, annuity products, etc.

Following are two wake-up calls. The first is a series of email I have received from an contact with a reputable Wall Street dealing desk whose identify I will protect. This individual completely understands the stakes involved in this high game shoot out of “rob the poor to pay the rich.”

The second is an article yesterday from Thomson Reuters that spells out how the contagion van is parking outside your door right now.

Emails from a Wall Street contact

I’m currently a credit derivatives trader in New York, have read your book and thoroughly enjoy your blog. I’ve been following your postings on MF Global and came across an article on rehypothication (the process of reposting collateral on proprietary trades at a broker/dealer).
Rehypothication has been occurring for years in the OTC market and accounted for short falls at many hedge funds when their collateral was locked at LBIE when Lehman went bankrupt. I was unaware that custodial account collateral at an FCM could be rehypothicated, but apparently according to this article it indeed can be.

Anecdotally, the dealer community has been pushing back against CDS becoming exchange traded for years, even after the contract has been standardized, for the very reason that they can use these margins posted to them as more or less free funding.

Rehypothication is the 800lb gorilla [Editor's note: make that the 2,000 lb gorilla]. In 2007 I was with another fund that was the first 2.5bln casualty of the leveraged ponzi, dealers use your collateral for there own purposes then refuse to offer you liquidity on the collapse of the trade because they won’t face a brokerage counterparty as it was in 2008 or won’t face a yankee bank as is the case now. Counterparty exposure is about to blow the doors off of liquidity, CVA desks already massively flattening curves, only a matter of time before they start forcing desks to not accept certain counterparty names on novation. Good times.