Talk about mangling a metaphor, huh?^*

But that’s the way I see the reports that the CFTC will be auditing all futures firms, in the hopes of preventing the theft co-mingling of funds that MF Global did under John Corzine:

Federal regulators have ordered an audit of every American futures trading firm to verify that customer money is protected, a move that comes after roughly $600 million in client funds were discovered to be missing from MF Global, the bankrupt brokerage firm once run by Jon S. Corzine.

The Commodity Futures Trading Commission, the federal regulator searching for the missing money at MF Global, will audit many of the nation’s largest futures commission merchants, according to a person briefed on the decision. Exchanges like the CME Group will examine smaller firms to ensure they are keeping customer money separate from company money, a fundamental rule on Wall Street.

The futures commission also announced on Thursday that it had formally opened an investigation into MF Global, a largely symbolic move that indicated the seriousness of the case. The agency has already issued subpoenas to MF Global and its auditor, PricewaterhouseCoopers, but the commission had to vote before announcing a full-scale investigation.

“The commission has determined it is in the public interest to confirm the existence of this particular investigation,” the agency said in a statement.

The thing here is that what MF Global did may be considered legal by regulators, as Jesse notes (BTW, he’s been on this like white on rice):

This is most likely a distortion of the principle known as ‘rehypothecation‘ in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan.

The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them.

In a way it is just making the unbalanced relationship between Wall Street and its customers official.

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.

It means that brokers can go beyond the mere provision of funding for loss, and use customer accounts to fund their own leveraged speculation under exemptions duly granted by their ‘regulators.’

(emphasis mine)

Basically, what it means is that MF Global was allowed to use customer funds as collateral, without telling the customers, and without sharing any of the profits derived from this leverage.

What is going to happen here is that no one (except perhaps Corzine, since he’s clearly a Democrat) will see any serious jail time, and there will be no change in the rules, because, after all the system must be preserved, which is pretty much a mantra of both the professional staff at the various regulatory agencies and the White House.

As to preserving the existing system, it is merely a system of rent-taking, and if we were to take it down completely, and replace it trained elephants doling out loans, we’d probably do better, because elephants, at least, work for peanuts.