Entries Tagged as 'Refco'

Does Refco Have A Pool of FTDs?

The other day I posted about Rob Kirby’s article Failure To Deliver Or “Deliverence”? I was intrigued by this reference to Refco at the end of his article:

The authors of this ground-breaking research go on to explain how and why the brokerage Refco failed. It explains the most likely or at least offers a highly plausible explanation as to the fallout and continuing danger [another closely guarded secret of officialdom] the Refco collapse still poses to the financial system.

Matthew Goldstein reported that regarding Refco,

Judge Robert Drain issued the freeze order on Dec. 15 in a closed-door proceeding with lawyers from Milbank Tweed Hadley & McCloy, the big New York law firm that’s representing Refco’s many creditors. In a rare move, all the court filings in the action have been sealed by the court and are not available to the public. The judge also has agreed to hold all future hearings in the case out of the public eye.The secrecy surrounding the action is unusual for a civil proceeding. In court papers, lawyers from Milbank Tweed contend the secrecy is needed to prevent “irreparable harm” to the creditors and third parties. (emphasis added)

So what is it that is being kept secret? U.S. Attorney Michael Garcia in Manhattan has spoken of “$431 Million pool that gets marked to market” but would not say what it is. Is it a cess pool of Fails to Deliver (FTDs) that could cause a short squeeze of systemic proportions?

Refco Fails To Deliver Michael Garcia Matthew Goldstein Mover Mike


Refco Billions

From the International Herald Tribune,

Refco’s financial advisers are investigating the movement of $38 billion between two of the futures trader’s affiliates in the five years before its bankruptcy filing.AlixPartners is reviewing transfers of $20 billion to Refco Global Finance from Refco Capital Markets, and the shift of $18 billion in the opposite direction, according to papers filed in U.S. Bankruptcy Court in New York.

That’s Billion with a “B”!

Refco Finance

Derivatives at Refco

I’ve written a lot about Refco and its quick and shocking descent into bankruptcy, and suspected much of its demise had to do with derivatives. I don’t believe I’ve written about the extent of its derivative positions.

Now today, I read in The Independent by Janet Bush: Mad, bad and dangerous to know … or do derivatives just need a bit of loving care?

In 2005, Refco, the fourth- largest futures broker in the US, filed for bankruptcy. In February 2004, it was reported to have had $69bn in off-balance sheet derivative contracts; that figure had risen to $150bn by May 2005.(emphasis added)

The article is an excellent capsule about a subject that has some clearly worried.

Janet Bush Refco Finance

The Austrian Bank Scandal

From The Brussels Journal, Austrian Bank Scandal: When Socialists Play With Money

A bank owned by the Socialist trade union (which is close to the Socialist Party SPÖ, currently in opposition) loses billions in shady hedge deals while the union strike fund evaporates in the Caribbean and the bank gets implicated in a corruption case in Israel. Meanwhile the bank is financed by the European Investment Bank (EIB), and an Austrian Finance Ministry official (married to the Socialist ex-chief of the bank) ignores a crucial report and is appointed to the Executive Board of the European Central Bank (ECB). The Conservative Finance Minister claims to know nothing – after just having sold the Government-owned Post Office Savings Bank (PSK) to the socialist bank.

That’s BAWAG, in a very, very revealing story by Chris Gillibrand.

We know that there was a $1+ Billion loss in 2000 that was split up in six Carribean hedge funds and wriiten off by BAWAG. Somehow, some $525 Million of fake bonds were involved, but we don’t yet know how. Why was it inportant to conceal this loss. Well, according to Gillibrand, BAWAG was to acquire the Austrian Post Office Savings Bank (PSK) from the Austrian Government in November 2000. Not only did it give BAWAG

a new client base (previously many of its banking products had been sold through the network of trade union branches and membership has been declining) but it gave BAWAG a needed liquidity at that time. The Austrian Government (consisting of the People’s Party ÖVP and Jörg Haider’s party) pocketed the money from the privatisation and all were happy behind the scenes.

Now guess who comes out smelling like a rose and

declared on 23 March 2006 that “the bank’s balance sheet was now ‘clean and solid.’” He assures everyone that there are no more dead bodies in the cellar.

Ewald Nowotny

former socialist politician and vice-President of the European Investment Bank (EIB) from 1999 until 2003. He is now Honorary vice-President of the EIB. At the age of 29, he was appointed Chairman of the Board of Directors of the Austrian Post Office Savings Bank (PSK), a post he held until 1978. (emphasis added)

Just before the Refco scandal broke the EIB made loans of between €100 million and possibly €200 million. Gillibrand asks

Why such big loans so recently? On what basis did the EIB approve this financing? Did they not ask the Austrian Finance Ministry about the state of BAWAG’s finances? Why did not the Finance Ministry inform them? Surely even just the business in Israel and first news of the Caribbean scandal should have sounded alarm bells.

Did I mention Israel?

In Israel, there has been an extraordinary investment (among others) in a casino in Jericho, jointly funded by among others, the Palestine Authority, Casinos Austria and BAWAG. This was burned out during the Intifada but there appear to have been plans for another casino with the same ownership line-up in Southern Gaza! BAWAG is heavily involved in the still open corruption allegations against members of Sharon’s family.

This reads like a Ludlum novel!

BAWAG Austria Palastinian Authority Refco Finance Israel

Refco and FTDs

From The Royal Gazette, Refco failed to execute trades

Two former Refco Inc. employees said there were times the company failed to execute trades on behalf of customers because it had used the securities in client accounts to support other transactions.

“Fails to Deliver” (FTDs) are a problem and it seems Refco was right in the middle of it.

“On occasion Refco was short and could not make the delivery,” Vera Kovar, who worked on VR (Global Partners)’s transactions, said in her deposition. “If a counter-party didn’t deliver the security to us we could not deliver it because we didn’t have it.”

I have posted about FTDs here and here.

Fails to deliver Refco Mover Mike

Bloomberg on Refco’s Troubles

Bloomberg has a lengthy article about Refco, Refco’s Collapse Reveals Decades of Quarrels With Regulators. It is the best article I’ve seen that relates the fascinating history of Refco and its trading travails.

It was a firm that had a history of taking BIG positions and riding them as high or as low as they could; deciding at the end of the day which clients to award with winning trades and which the losing trades; and in 1996 deciding to loan a trader, who was into Refco for $28 Million, the money so that Refco’s capital wouldn’t be impaired.

From April to July 1996, the face value of Zahid’s (Zahid Ashraf, the Eastern Trading’s managing partner) sterling futures and options trades ballooned to $4 billion. Finally, in July 1996, Refco liquidated Eastern Trading’s account and recorded a debit balance of $28 million.Undisclosed Loss

Rather than book that $28 million as a loss, Refco Capital shifted its own money into Eastern’s depleted account, without the Dubai firm’s knowledge, according to the opinion. Bennett’s firm asked Eastern to write a promissory note committing the Dubai firm to repaying that sum to Refco. That way Refco wouldn’t have to disclose the loss to the CFTC in its capital requirement reports.

That was the start of loans to losers to cover up capital impairment issues and balooned to $430 Million. Refco had gone from a trader of its own account to a facilatator of trades and “bank” for institutional traders.

The part of the Bloomberg article that interests me (and the article hints at more to come) is the unregulated side of Refco’s business.

In the U.S., brokers of exchange-traded futures are regulated by the CFTC. Domiciled in Bermuda and operated out of New York, Refco Capital Markets brokered over-the-counter derivative and currency trades and was therefore beyond the reach of U.S. regulators.`Fertile Ground’

“These unregulated parts of the industry offer fertile ground for fraud, manipulation and other shenanigans,” says Randall Dodd, director of the Derivatives Study Center, a Washington-based research and policy group.

More revelations may be at hand. The CFTC is still conducting its investigation of Refco and its finances. The U.S. Securities and Exchange Commission is in the midst of its own, separate probe. (emphasis added)

Here you have a firm with a history of problems with regulators, playing in the unregulated derivatives market. That’s like lighting a match to see if you have gas in your tank; that’s like putting a pedophile in charge of a kindergarten; that’s like putting a practicing alcoholic in charge of the OLCC!

Refco derivatives Mover Mike

Revisit REFCO – It’s Going to Get Worse

From Herald News Daily,

Refco Inc.‘s unregulated broker-dealer unit on Friday said it owes customers about $4.16 billion, some $486 million more than previously estimated by its parent, which has sought bankruptcy protection.

In Gold Mining and Non Recourse Loans I wrote

(Jim) Sinclair talks about derivatives and points out that when you have a buyer and a seller of derivatives and the price of the asset moves, then one side is an immediate winner and the other is an immediate and equal loser.

The greatest fear in this so called market for derivatives is the forced unlocking of the positions from total offset – one side a profit and the other a loss – to one account with the profit and another with the loss and both segmented from each other. (Emphasis added)

Sinclair offers further clarification tonight on his web site saying that the MSM is starting to treat the rise in POG seriously, even suggesting that the traditional items that accompany a rising price of gold are not present, e.g. inflation and a falling dollar. They note that gold is rising in all the major currencies, demand is higher, production is falling, hedge funds have been investing, but there seems to be adequate supply in central banks. They seem to sense that there is something else at work.

The fact that these items are treated in this manner is a clear statement that media and financial officals feel it is so dangerous that the financial public must never be informed (about the OTC financial derivatives). To fully inform would cause fear concerning what these financial weapons of mass destruction are capable of doing to the entire system.This would explain why there was an effort (with REFCO) to hold the assets of one account and not pay it out as was reported last week. This would be an effort not to split the derivative spread transactions with the loss debit in one account from the agreed (either directly connected account-wise or by the wink-wink method) from the offsetting side of the derivative with the credit. A $4.16 billion failure would be quite a small incident in terms of the risk of the OTC derivative spread monster present to all the entities using them.

I imagine that the number representing the size of what appears to be defined as a derivative explosion has one way to go and that is UP! I believe we now are getting a clear indication of the cause of the instantaneous meltdown of Refco (Emphasis added)

This debacle, which is known to insiders of the derivative trade, motivated the recent move in the price of gold to $552. Those that are presently using derivatives to smooth earnings, beat the corporate tax man or hedge commodities, recognize the danger they are exposed to by a bankruptcy anywhere along the daisy chain of the over-the-counter derivative spread market. All of this represents economic madness, meaning that gold is going to blast higher.

The system can camouflage one explosion, but what happens when the daisy chain of over-the-counter derivatives pulls a few players down together? This is why a meeting was held at the New York Fed concerning interest sensitive derivatives six weeks in advance of its planned date. This is why gold blasted to $552 and will do so again.

The greatest potential risk to the global financial system is over-the-counter derivatives. Expect more debacles in 2006 and 2007.

When you consider that central banks don’t have the gold that MSM thinks they have, but have leased out (which has been sold) 15,000 to 20,000 tons of gold. When you consider the derivatives written against gold. When you consider that Barrick has a paper loss of almost $3 Billion to $4 Billion. When you consider the combined Barrick/Placer Dome is short 525 tons of gold. When you consider 525 tons of gold is how much Russia wants to add to it FOREX reserves. When you consider that all of our national treasure of gold (8000 tons) is equal to 3 to 4 months of trade deficit, well, a sane person would come to the conclusion that the system is irrepairably broken.

REFCO Derivatives Mover Mike

Refco Bankruptcy, 17 Billion?

What’s this! From the WSJ, Refco Creditors Dispute Claim
Their Funds Are Unprotected

Refco says it owes creditors, including dozens of companies that traded through those unregulated units, a total of $17 billion.

Those dozens of companies claim their funds should not be in in unregulated accounts that offer few protections in bankruptcy proceedings.

They say they should be considered customers entitled to full access to all of their money — just like any other customer of a regulated brokerage firm.

Among those making that argument are two commodity funds founded by investor Jim Rogers. Those funds have filed a lawsuit to recover more than $360 million they say should have been deposited in Refco’s regulated futures arm.

If this Refco bankruptcy escalates to $17 Billion, expect some real financial fireworks!

Refco mover mike

Who is 990N?

What’s Mine is Mine, What’s Yours is Mine!


Lawyers for collapsed futures trading giant Refco Inc. are trying to treat investors’ cash and investments as debt that doesn’t need to be immediately returned to the bankrupt firm’s customers.[…]

“Any way you look at this, many of the Refco Capital Markets clients are going to have to take some [loss] on their positions,” said an investor in Refco’s junk bonds. “There are no hard assets to be sold, and the cash from the sale of the units is going to go to pay down bondholders,” he said.

There’s never an end to outrage!

mover mike

On-The-Job Training!

On Oct. 25th I posted about Refco and quoted The Faulking Truth

In our opinion, REFCO is not the tip of the iceberg in this issue, it’s nothing more than an ice cube floating in a sea of icebergs.

I have also posted that there is not enough portfiolio management talent for 8000+ hedge funds. Financial Director in Lack of hedge fund talent risks another Refco

Experts have warned that firms are finding it difficult to recruit staff capable of coping with the demands of assurance and advisory work around the funds, posing a substantial risk to investors and hedge fund managers.

In addition,

Amin Rajan, CEO of research firm Create, which has worked extensively with KPMG on hedge fund research, said that, because the funds used such intricate techniques, it was difficult to recruit individuals with the required ability.‘There is a huge shortage of skills. There are not enough people out there who understand how the investment vehicles are used,’ Rajan said. ‘Skills will only develop as demand grows.’

Great! That’s like putting trainees in charge of a Nuclear Power Plant and giving them on-the-job training!

Refco hedge funds
mover mike

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