HSBC Sues MF Global Over Disputed Ownership Of Physical Gold

The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold

That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk. Which in our day and age of infinite monetary interconnections, means virtually every financial entity. After all, just ask Gerald Celente what happened to his so-called gold held at MF Global, or as it is better known now: "General Unsecured Claim", which may or may not receive a pennies on the dollar equitable treatment post liquidation. What, however, was less known is that physical gold in the hands of the very same insolvent financial syndicate of daisy-chained underfunded organizations, where the premature (or overdue) end of one now means the end of all, is also just as unsafe, if not more. Which is why we read with great distress a just broken story by Bloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, 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. Essentially, this is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities? The thought alone should send shivers up the spine of all those gold "bugs" who have been warning about precisely this for years. Because the implications could be staggering.

Probably the core primary consequence of this discovery, which obviously has a factual basis, or else it would not lead to an actual lawsuit between two "reputable" firms (aka ponzi participants), is whether gold in the GLD warehouse, supervised by HSBC, is truly theirs, or has it all been hypothecated from some other broker who never really had the asset or the liquidity, and so on in what effectively can be an infinite chain of repledging one asset to countless counterparties. Because if there is on cockroach...

Suffice to say, expect either a prompt settlement in this lawsuit, or a fervent denial by all parties involved that any gold was misplaced. Because here is the punchline: each physical gold or silver bar has a unique deisgnator that should never be doubled, yet this is precisely what happened to lead to the lawsuit! In a non-banana world, there should never be any debate over who owns a given physical asset, as replicated ownership (note - not liens) effectively means someone stole the gold and was never caught... until MF Global finally expired of course.

So in other words, is this the eureka moment when everyone realizes that any gold, be it paper or physical, is either a irrelevant electronic binary claim held in some semiconductor, or at best an asset in some vault... that the brokerage next door suddenly also has claims over?

The end result is that the biggest loser is Joe Sixpack who bought the gold, and decided to keep it in a bank warehouse for "safekeeping" only to realize said gold will never be seen or heard of again.

From Bloomberg:

Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said, asking a judge to decide who the rightful owner is.
“HSBC has received conflicting instructions regarding ownership and disposition of the property,” it said. “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”
According to Fane’s letter, the five Comex gold contracts are for an average of 99 ounces of gold each.
Giddens, who is liquidating the brokerage, has transferred about 38,000 commodity accounts to other firms. Three transfers of collateral made and pending will give commodity customers more than $4 billion of their assets, according to court filings.

Click to expand...

The punchline:

The judge handling the bankruptcy said today he would deal in January with issues about distributing physical goods, such as gold and silver bars, after lawyers for some customers said they couldn’t get their share of the payouts because bars can’t be broken into pieces.

Click to expand...

...indeed there is a reason why people say gold can not be diluted.

As for our advice: move any gold out of the LBMA or CME warehouse system immediately. And only treat any GLD investment as a day trading vehicle that can and will be lost the second there is a global liquidity or solvency freeze, because that particular asset will be wiped out as easily as "C:\format C:"

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Click to expand...

Deflating the derivatives balloon

Derivatives have a bad name for many commentators, with some describing them variously as dangerous or even weapons of mass destruction. The sheer size of over-the-counter derivative markets is staggering. According to the Bank for International Settlements, OTC derivatives stood at $707 trillion at the end of June, nearly fourteen times global GDP and forty seven times that of the United States. This is not as alarming as it seems, since over 87% of this is interest-rate swaps and foreign exchange contracts, business that has a solid commercial foundation. However, with forces like these at work it is easy to understand why people think they would be de-risked if they were regulated.

Such a simplistic view ignores the linkages between a firm’s activities in unrelated markets. This seems to have led to the downfall of MF Global, the eighth-largest bankruptcy in US history. It appears that they were scuppered by perfectly legal off-balance sheet repos-to-maturity in European government debt. It also appears that segregated customer funds were used for this purpose, and not co-mingled with the firm’s funds as first supposed. While final redemption of the sovereign debt was guaranteed by both the individual sovereigns and the European Financial Stability Fund and matched to its funding, MF Global was tripped up by margin calls it was unable to meet. The use of client funds in this manner may turn out to have been perfectly legal and so they are completely lost.

As the story unfolds the result is bound to lead to increased questions about Comex operations, where MF Global was a clearing member; and when confidence is lost turnover is almost certain to decline as users of the markets make hedging and trading arrangements elsewhere. This is already happening. Barnhardt Capital, a small agency broker, was closed by its owner who stated, “I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not”. Last Monday Commodity Online ran a story about how “silver positions are being liquidated by Comex traders after the MF Global fiasco uncovered the fragility of paper assets.” This is very bad news for small traders, but it is also bad news for the large traders who require market liquidity to maintain their short positions.

You simply cannot run a position many times larger than normal dealing size when turnover is contracting, and thanks to a disaster beyond Comex’s control, liquidity is drying up. For the large commercial traders who are short of gold and silver futures this could turn out to be a very serious problem.
The good news is that we are finally witnessing the transfer of pricing-power from futures to physical markets, which at least is a vote for honesty and a step in the right direction.

Click to expand...

... Incidentally, if this indeed becomes "the next big thing", what the potential collapse of (re) hypothection means is that PBs will be unable to lend out shares anymore, in effect collapsing stock shorting as there is one giant short stock recall/forced buy in. Ironicaly the unwind of the biggest market fraud could result in the entire market pulling one last "Volkswagen"style hurrah, before all hell breaks loose.
...

Click to expand...