Goldman Sachs's Gensler and MF Global Bankruptcy

We have been following Gary Gensler's progress as Chairman of the CFTC where he has been tasked with helping to create the rules for regulating bank derivatives. Because of Gensler's former ties with Goldman Sachs, it seems as though Gensler has a conflict of interest in dealing with the bankruptcy of MF Global which was run by another Goldman Sachs guy, Jon Corzine. Even though Gensler has said he would recuse himself from direct participaction with MF Global, there is still the appearance of conflict and reason to be wary.

Jesse's Cafe American blog offers some difficulties that the CFTC faces in resolving other conflicts and cites MFGFacts.

The MF Global Bankruptcy Filing: Did the Regulators Sell Out the Public for JP Morgan?
By Jesse - Jesse's Cafe Americain

What seems fairly obvious is that the law calls for MF Global to file a Chapter 7 bankruptcy in which customers are given seniority to creditors, rather than a Chapter 11 non-broker bankruptcy in which the customer interests are not upheld. The rationale for Chapter 11 has always seems to be contrived to favor a particular creditor bank.

Prior CFTC rulings and 'Rule 190' seems to have dealt with this in the past. Statements by various CFTC commissioners of late also seem to suggest that customers absolutely have a senior claim to any assets.

Why then did the SEC, with Gary Gensler's purported assent, seem to ignore the precedent and their own rules and cut a deal in a secret meeting to favor the Banks, specifically JP Morgan?

The personal involvement of Gary Gensler seems a little ambiguous based on the facts at hand, but it is obvious that the bankruptcy filing is being mishandled, and the SEC and CFTC are doing too little to represent the interests of the customers.

Obviously this should be more explicitly addressed and the customers need to be relieved of this travesty of justice.

President Obama may speak brave words in his speeches, but the actions of his Administration show that there is little teeth in their supposed championing of the public interest over the powerful interests of Wall Street. Actions speak louder than words.

MFGFacts
CFTC Warnings When Bankruptcy Codes Conflict: And a Still Secret Meeting

Last week we witnessed lawyers dueling in the bankruptcy court on the details of exactly what code of law supports customer priority in liquidation of the parts of MF Global Holdings, and gosh!….is the Holdings is even a broker ? Why are lawyers debating these questions at this late date?

First we’ll cover what started the fight and then move onto the genesis of why it has come to this so far into the proceedings. Do stick with the story as it might sound like legal minutiae, but does have everything to do with recovery of customer funds.

It started with the Sapere Wealth Management, LLC assertions (among others) that the MF Global estate must be administered under 17 C.F.R paragraph 190. Remember paragraph 190 as you will hear more about this in the next weeks. Applying this clause of the bankruptcy code to the liquidation of MF Global Holdings would assure customer priority in the liquidation of MFGH, which is also claimed to have taken customer assets out of MFGI, the commodity brokerage unit of the Holdings company, MFGH — before and after the bankruptcy.

That all customer property as defined in paragraph 190 of the code, must be returned to commodity customers free and clear of other claims is also supported by others parties, including the CFTC. The CFTC, however, also asserts that existing principles of law are available to ensure this, but first the court needs to make “antecedent determinations.” In other words, the CFTC legal team is playing the adult and indicating that we already have the laws on the books to deal with this once the court figures out what laws it wants to use.

So why is the question if MFGH is even a broker so important? Again, the key paragraph 190, which legally secures customer priority and distributions can only be applied to a brokerage Chapter 7 bankruptcy, which is used for brokerage bankruptcies, but was not used for MFGH, which is the holding company of MFGI. MFGH was filed as a Chapter 11 bankruptcy. This Bankruptcy Code is used for non-broker entities, seeking re-organization.

Also, and to use the words of the Sapere plea to the court, “A decision by the court that 17 C.F.R §190 applied to MFGH’s estate can, among other things, obviate the need for titan law firms representing MFGH and MFGI, respectively, to engage in battles with one another funded by “other people’s money,” i.e., at substantial costs to the estates of MFGH and MFGI.”

The ability to use many millions of customer funds locked in the estate to pay trustees and their “titan” law firms representing MFGH and MFGI is possible because the bankruptcy was filed as a Chapter 11 for the Holdings and Chapter 11 SIPC filing for MFGI, the commodity brokerage, and not under Chapter 7 for both.

As regular readers know, from the start of this sorry saga, MFGFacts.com has focused on the questions around why a Chapter 11 SIPC bankruptcy with almost non-existent securities accounts when neither SIPC nor Chapter 11 address brokerage liquidations. Additionally, Chapter 11 is the choice when a restructuring is planed, which is not so with MFGH.

Read the rest of the article here