BarroMetrics Views: The Loss of Trust
In my other life, I owned a legal practice in NSW, Australia. One strict tenet of legal ethics was a solicitor (attorney) was prohibited of touching one penny of client funds that were deposited in his trust account. Breach that tenet, and the solicitor committed a crime. In effect, trust funds were funds in a segregated account.
Fast forward to MFGlobal. Jon Ccorzine placed a losing trade on Italian and Greek Bonds; and when MFGlobal received a margin call, funds were ‘temporarily’ taken from the client segregated account – segregated funds that were eventually lost.
It’s a recognised legal principle that segregated fund are a client’s property. The ‘trustee’ of those funds can deal with them only with the consent of the client; dealing with these funds without the necessary consent is theft – period. And yet, the CFTC found there was no criminal intent in the taking of the US$1.6B from the segregated account to MF Global’s trading account (??!!). Excuse me, if I had moved money from my trust account to a trading account, I have no doubt, the NSW Courts would have found a criminal intent.
Now let’s turn to Cyprus.
The depositor funds sitting in the Cypriot banks belong to the depositors – depositors who at no stage agreed to participate in the banking adventures in Greece. The placed their funds in a bank believing these funds to be safe. The Troika imposed an ’emergency tax’; and, call it what you will, this was theft of a segregated account, pure and simple. What is frightening is the suggestion by Jeroen Dijsselbloem that Cyprus is the new model for bailouts. Of course, he has since backed away from that comment. Cyprus is a ‘one-off’ – does the Troika mean ‘one-off like Greece’?
For me, Jeroen Dijsselbloem floated a trial balloon; and when that met with a market response that ‘Blind Freddy’ would have seen coming, he retracted. But, you can expect to see more such expropriations in future bailouts.
What is being tried here is that the belief in the practice that if you repeat the ‘one-offs’ often enough, the markets will accept the model. For what it is worth, the Troika is on the thin edge of the wedge. With trust severely damaged, if not destroyed, the risk of contagion has risen dramatically.
Interestingly the US stock market fails to see the danger. Sell-offs in Europe have so far been met by US buying. This myopia merely raises the probability of tsunami once reality sets in.