viernes, noviembre 11, 2011



The euro crisis and emerging markets

Drought warning

With the debt crisis worsening, trouble is in store for the neighbours

Nov 12th 2011 | from the print edition.

AS THE rich world lurches from one crisis to the next, a consolation has been that emerging economies, which account for about half of world output, have been growing quickly. Even the wretched euro zone has a few racy emerging markets nearby. Turkey has on occasion rivalled China, with GDP growth of around 9% in 2010. Poland’s was the only economy in the 27-strong European Union to avoid recession in 2009.
Sadly, euro misery seems to love company. A deep recession in the currency zone would leave few countries unscathed, even in fast-growing emerging Asia. For developing economies closer to home, the euro zone’s banks may be the main route by which the suffering spreads.

These banks are under pressure to meet higher capital-ratio targets as part of a deal made last month to “save” the euro. Lenders may choose to cut loans rather than raise equity, which would dilute existing shareholders (including bank executives). Europe’s banks are owed $3.4 trillion by emerging economies, $1.3 trillion of which has been lent to eastern Europe, according to the Bank for International Settlements. Many have subsidiaries in the region. If banks choose to sacrifice foreign lending to concentrate on business at home, it could choke the supply of credit.

The current-account balance is a rough guide to which countries are most vulnerable. On that basis, Asia is generally a safer place than eastern Europe, where several countries run large current-account deficits, and so rely in part on fresh loans from big European lenders. Turkey looks at risk: the IMF puts its deficit at 10% of GDP this year. Poland has a biggish deficit, although Commerzbank’s pledge suggests its credit line to rich Europe may be more solid. Hungary is in surplus but it still has a financing hole to fill, says Gillian Edgeworth of UniCredit, because it has IMF loans to pay off and because foreign banks have been slowly withdrawing from it. Investors have been spooked by the government’s rows with its IMF rescuers and by a plan to cap repayments on Hungarians’ foreign-exchange mortgages. Greece’s banking troubles are a threat to economies in south-east Europe.

A drying up of foreign bank credit would also put downward pressure on the currencies of countries that rely on foreign capital, making it trickier for them to cut interest rates to stimulate their economies. Some emerging markets have already seen their currencies drop in recent months (see chart). A big sell-off in September, since partly reversed, was a warning of future trouble, says Stephen Jen of SLJ Macro Partners, a hedge fund.

There is an irony here. As the euro zone’s trouble spots, such as Italy, struggle against the constraints of a currency union, some developing countries (and a few rich ones, such as Japan and Switzerland) have long grappled with the problem of managing floating exchange rates. Brazil imposed a tax on the flightier sorts of foreign capital to stop the real from appreciating too much. In a similar vein Turkey initiated a range of unorthodox measures late last year to curb capital inflows and relieve the upward pressure on its currency, the lira. To cool a credit boom, the authorities forced banks to hold more cash reserves and put ceilings on property loan-to-value ratios as alternatives to raising interest rates (which might attract yet more footloose money). Turkey’s central bank also intervened in currency markets to hold down the lira.

Now a different set of problems looms. Fearful of inflation, which has risen to 7.7%, in part because of the weaker currency, the bank has recently reversed tack and sold some of its foreign-currency reserves to prop up the lira. Since its reserves are quite modest, Turkey may have to keep interest rates fairly high to defend its currency and maintain external financing, which would increase the chances of a hard landing. A cheaper currency should, in principle, boost exports and curb imports, narrow the current-account deficit and so reduce the amount of fresh borrowing needed from abroad. But the inflation that comes with higher import prices will temper the competitive gain from a cheaper lira; and euro-zone recession will hurt exports.

 Predict and compare the path of government debt with our interactive "debt dynamics" calculator
Europe’s banks are not the only source of foreign capital for Turkey, Poland and the rest. Purchases of bonds and stocks by foreign investors (“portfolio inflows”) are important, too, and have held up surprisingly well, says Ms Edgeworth. Rich-world investors have been keen on exposure to emerging markets because of low yields at home. But weakening currencies would mean losses on such investments, which could slow—or reverseportfolio flows. That in turn would further depress currencies, reinforcing a vicious cycle.

A few policymakers are alive to the risks. Mr Carney suggested European banks should be required “to meet at least part of their requirements by raising private capital” rather than being able to do so entirely by deleveraging. The IMF is also sounding warnings. Erik Berglof of the European Bank for Reconstruction and Development has called for a secondVienna Initiative”, a successful 2009 pact to keep bank loans flowing to eastern Europe. But the pressure on the euro-zone is now far greater than it was back then, so the near-abroad is less of a priority.

The Outlook For Gold: Facts And Figures

by: Robert Hallberg

November 9, 2011

Gold is in the midst of a secular bull market that has been going strong since 2000 and delivered more than a six-fold price increase. The main driver behind the rising gold price has come from investment demand.

Uncertain economic conditions, sovereign debt worries, and currency debasement are all factors that have driven investors to own gold. You may already know the basic reasons for owning gold: Currency protection, inflation hedge, store of value, and insurance against a financial meltdown. Add supply and demand imbalances and you have a strong argument for holding gold in the foreseeable future.

Late to the party as usual, the man on the street and the mainstream media seem to finally be waking to the decade-long bull market in gold. It looks like gold is entering an “awareness phase” of the bull market, with growing buzz and questions whether gold is in a bubble or if we will have soaring prices right around the corner.

The chart and analysis in the article will attempt to determine how far along we are in this gold bull market and what we can expect moving forward. The chart show worldwide demand of gold since 2001. The overall trend is up. Although, demand for gold in jewelry has been declining, investment and industry demand more than make up for declining jewelry demand.

The next chart shows overall investment demand, which has been exploding since 2001. Gold ETFs have been a popular investment vehicle since their inception around 2003. However, starting in 2010 a new trend of sellingpaper gold” and buying physical gold seems to have emerged.

More importantly, central banks are no longer selling off their gold, but rather are increasing their holdings. In 2009 central banks became net buyers of gold for the first time in over two decades. You can see the shift on the chart below. This new dynamics will completely change the landscape and drive the gold price much higher in the years to come.

China’s newfound appetite for gold is very bullish on the yellow metal. China’s gold holdings aren’t the largest by volume, but they stand out when compared to its percent of total reserves, which amounts to only 1.6% of their total reserve assets of $3 trillion.

There seems to be a lot of room to grow. Emerging opinions of Chinese economists and advisers suggest that the country’s central bank should increase its gold reserves as a hedge against the falling values of other currencies. Even the annual report by the People’s Bank of China expresses an interest of increasing its gold reserves, and the key decision-makers have already started the process of this policy change.

The official demand is only half of the story. China has been increasing its appetite for gold at a rate of 14% per year since it deregulated its markets in 2001. In addition, the government has gone as far as promoting ownership of gold for its citizens. The Chinese have turned gold bug almost overnight, and a number of investment products and checking accounts linked to gold have been popping up all over China.

Is gold a bubble?

There have been widespread talks in the mainstream media about gold being a bubble waiting to pop. Although gold has been in an 11-year-long bull market, I believe that we are still far from bubble territory. Most of the people in the world do not own gold, despite the growing buzz, and gold still only represents a fraction of the world’s total assets. The chart compares gold to other global financial assets.

We are far from the highs of 1968 or 1980, with plenty of room to the upside.

How far will gold go?

There are various tools investors can use to help determine the future price of gold. Rather than to measure the price of gold in US dollars or other fiat currencies, you can compare gold’s purchasing power against other benchmarks. One popular method is to measures how many ounces of gold it takes to buy the Dow. This ratio also indicates the market’s confidence of hard assets like gold versus paper.

There is a historical relationship where, at different points in time, gold and the Dow trade at a 1:1 or 2:1 ratio. At these points in time, gold has reached its peak in terms of purchasing power relative to other financial assets. It currently takes around 8 ounces of gold to purchase the Dow, but not too long ago, at the height of the technology bubble, it took 44 ounces. The Dow has fallen 80% in value measured in gold, and it is my belief that during this bull market this ratio will once again be 1:1 or perhaps even less.
Gold went up 24 times during the last bull market that peaked out in 1980. If a similar move is repeated, gold will end up around $6,250 per ounce. But with much greater problems in the world today than we had during the 1970s, there is a chance to gold will produce an even greater return this time around.

Investment Implications

With a high probability of rising gold prices in the foreseeable future, investments in gold bullion and smaller positions in gold ETFs and other gold derivatives should be a profitable strategy.

SPDR Gold Trust (GLD) is one of the most popular gold ETFs. The trust holds physical gold in a custodian bank, and is designed to reflect the price of gold on the market, less expenses and liabilities. Although you are subject to the risk of relying on a custodian to actually hold your gold, this ETF is a very cost-efficient instrument and an excellent trading vehicle.

The iShares Gold Trust (IAU) seeks to correspond to the day-to-day movement of the price of gold bullion. The shares are backed by gold and held at a custodian bank in New York, Toronto, London and other locations.

Market Vectors ETF Trust (GDX) attempts to replicate the NYSE Arca Gold Miners Index. GDX represents a mix of 30 small, mid tier and large capitalization gold mining companies. GDX’s holdings include some of the biggest and best producers in the industry, and they are far better positioned to withstand a downturn than many other gold mining companies.

Market Vectors Junior Gold Miners ETF (GDXJ) is made up of 72 junior gold miners. The index provides exposure to a wide range of small to medium capitalization gold mining companies globally that generates at least 50% of their revenues from gold and silver mining. Because of its holdings, GDXJ is more volatile than most other ETFs invested in precious metals. This ETF is suited for investors who wish to speculate on price movements in gold, but refrain from holding individual junior miners.

The Central Fund of Canada (CEF) is heavily invested physical gold and silver bullion. The fund currently holds over 95% of its assets in gold and silver, which makes the fund highly affected by the price movement of these two metals. This is a relatively safe and cost-efficient way to invest in gold and silver.

Disclosure: I am long GLD, GDX.

The Undeserving One Percent?

Raghuram Rajan



CHICAGO – It is amazing how the “one percentepithet, a reference to the top 1% of earners, has caught on in the United States and elsewhere in the developed world. In the United States, this 1% includes all those with a 2006 household income of at least $386,000. In the popular narrative, the 1% is thickly populated with unscrupulous corporate titans, greedy bankers, and insider-trading hedge-fund managers. Reading some progressive economists, it might seem that the answer to all of America’s current problems is to tax the 1% and redistribute to everyone else.

Of course, underlying this narrative is the view that this income is ill-gotten, made possible by Bush-era tax cuts, the broken corporate governance system, and the conflict-of-interest-ridden financial system. The 1% are not people who have earned money the hard way by making real things, so there is no harm in taking it away from them.

Clearly, this caricature is based on some truth. For instance, corporations, especially in the financial sector, reward too many executives richly despite mediocre performance. But apart from tarring too many with the same brush, there is something deeply troubling about this narrative’s reductionism.

It ignores, for example, the fact that many of the truly rich are entrepreneurs. It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists. In other words, the rich today are more likely to be working than idle.

But what might be the most important overlooked fact is that the rise in income inequality is not just at the very top, though it is most pronounced there. Academic studies suggest that the top tenth percentile of income distribution in the US, and elsewhere, is also moving farther away from the median earner. This is an inconvenient fact for the progressive economist. “We are the 90%,” sounds less dramatic than “we are the 99%.” And, for some of the protesters, it may not even be true.

Perhaps most problematic, though, is that something other than plutocrat-friendly policies is largely responsible for the growing inequality. That something is education and skills. True, not every degree is a passport to a job. Freshly-minted degree holders, especially from lower-quality programs, are finding it particularly hard to get a job nowadays, because they are competing with experienced workers who are also jobless. Nevertheless, the unemployment rate for those with degrees is one-third the unemployment rate for those without a high school diploma.

Close examination suggests that the single biggest difference between those at or above the top tenth percentile of the income distribution and those below the 50th percentile is that the former have a degree or two while the latter, typically, do not. Technological change and global competition have made it impossible for American workers to get good jobs without strong skills. As Harvard professors Claudia Golden and Larry Katz put it, in the race between technology and education, education is falling behind.

To acknowledge the fact that the broken educational and skills-building system is responsible for much of the growing inequality that ordinary people experience would, however, detract from the larger populist agenda of rallying the masses against the very rich. It has the inconvenient implication that the poor have a role in pulling themselves out of the morass.

There are no easy and quick fixes to educationevery US president since Gerald Ford in the mid-1970’s has called for educational reforms, with little effect. In contrast, blaming the undeserving 1% offers a redistributive policy agenda with immediate effects.

The US has tried quick fixes before. Income inequality grew rapidly in the last decade, but consumption inequality did not. The reason: easy credit, especially subprime mortgages, which helped those without means to keep up with the Joneses. The ending, as everyone knows, was not a happy one. The less-well-off ultimately became even worse off as they lost their jobs and homes.

The US needs to improve the quality of its workforce by developing the skills that are relevant to the jobs that its firms are creating. Several steps can be taken towards these goals, including improving community attitudes towards education, reforming schools, tying the curriculum in community colleges and vocational institutions more closely to the needs of local firms, making higher education more affordable, and finding effective ways to retrain unemployed workers.

None of this is easy or likely to produce results quickly, and some of it may require more resources. While eliminating inefficient spending, especially inefficient tax subsidies, can generate some of these funds, more tax revenues may be needed. The rich can certainly afford to pay more, but if governments increase taxes on the wealthy, they should do it with the aim of improving opportunities for all, rather than as a punitive measure to rectify an imagined wrong.
Raghuram Rajan is Professor of Finance at the Booth School of Business, University of Chicago, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

November 9, 2011 4:37 pm

China’s inflation victory comes with high price

China has slain its inflation demon for now, but in the process it has inflicted considerable damage on the broader economy and raised the spectre of a more serious growth slowdown.
China inflation
On the surface, the latest data looked every part the soft landing that Beijing has been trying to engineer. Inflation dropped sharply to 5.5 per cent year on year from 6.1 per cent a month earlier. Investment, which drives the Chinese economy, held steady with a 24.9 annual per cent increase.

But serious trouble lurks in the banking system, the private sector and, above all, the property market.

Beijing is certainly not blind to this. But doubts remain over whether its incremental approach to addressing these problems will keep the world’s second-biggest economy on track for robust growth.

With Europe’s debt crisis dragging on and the US mired in a sluggish recovery, the potential for mis-steps in China – of insufficient policy relaxation leading to a sharp drop in growth – is an unwanted risk for the global economy.

“We have already seen that the Chinese property market has a very high risk of entering into a slump.

Given that the external environment has deteriorated sharply, the People’s Bank of China needs to take out an insurance policy and ease monetary policy immediately,” said Liu Li-Gang, head of China economics with ANZ.

Wen Jiabao, China’s premier, signalled that the government was ready to shift gears last month when he declared that it was time for “pre-emptive fine tuning”. The Chinese stock market has since climbed about 10 per cent in anticipation of easier monetary policy, but so far the government has only tinkered around the margins.

China’s reluctance to loosen more aggressively is in part borne of its struggle in the past year to unwind the stimulus programme it unleashed to power the economy at the outbreak of the global financial crisis in late 2008.

A record surge in bank lending kept growth humming along near a double-digit pace, but it saddled banks with a large amount of loans that may go bad and kindled inflation, which was running at a three-year high until recently.

To wrestle the economy back under control, Beijing raised interest rates five times since October last year, increased reserve requirements nine times and also ordered banks to cap their lending below mandatory ceilings.

Faced with the blunt lending quotas, banks have rationed their credit. They have doled out loans to large state-owned enterprises, which are seen as posing negligible default risk, and all but cut off smaller private companies.

That is hardly a desirable outcome for the economy. Small- and medium-sized enterprises generate about 60 per cent of gross domestic product and 80 per cent of employment, according to the commerce ministry.

A wave of small-scale bankruptcies in Wenzhou, a hotbed of entrepreneurship in eastern China, sounded the alarm for the government. Steps to boost financing to private companies in the past month, including the creation of funding vehicles, have helped alleviate the cash crunch.

No similar help is at hand for China’s property market.

Keeping control of bubbling house prices is a must for the long-term health of the Chinese economy, but the government’s heavy-handed tactics – for example, limiting the number of purchases people can make – are showing signs of precipitating a collapse rather than a gradual deflation.

In October, normally a peak month for home buying, real estate transactions plunged 25 per cent month on month, according to the statistics bureau.

Zhang Zhiwei, an economist with Nomura, said that Beijing’s push for more publicly funded housing should help offset a slowdown in private investment, but that success was far from assured.

“The risk from the housing sector is the number one downside risk,” he said.

When Mr Wen first made his fine-tuning comments, real estate developers breathed a collective sigh of relief. But he has since said that measures aimed at reining in housing prices will remain in force despite the developers’ cries of pain – and he drove that point home after the release of the latest data.
“I particularly want to emphasise that we cannot have the slightest wavering in our real estate controls,” he said in a statement on the government’s website.

With a growth slowdown overtaking inflation as China’s big risk, such inflexibility may prove dangerous.
Copyright The Financial Times Limited 2011

11/09/2011 @ 5:51πμ

MF Global Assets Have Left The Building: How, When, Where

Francine McKenna,

When I was growing up on the South Side of Chicago, we used to see the shell game guys quite often on the “Ltrain. One smooth talking guy, three dixie cups and a garbanzo bean. (A garbanzo bean is better than a pea because it doesn’t roll off the piece of cardboard resting on his lap as the train rocks and rolls.)

Someone guesses correctly which dixie cup the bean is under and wins $20. The winner is a plant there to promote false confidence. The mark does not guess correctly. A player not in on the game will eventually get suckered.

Almost everyone wondering where the missing MF Global customer assets have gone thinks they will show up eventually.

I believe the assets are long gone.

Unlike the shell game, there is no bean under the MF Global dixie cup. The mixed bag of marketable securities taken from customer segregated accounts, used most likely to meet margin calls and satisfyimportantcustomers closing accounts during the last days, will, in my opinion, never be seen again.

Too much time has passed for anyone to still reasonably expect that the “discrepancy” is just a timing difference or a misallocation between accounts, according to several sources who prefer to remain anonymous because of the sensitivity of the situation.

All of the statements made on the record by those in a position to know point to assets taken out of the firm and now gone for good.
CFTC in bankruptcy filing October 31 according to The Financial Times: The CFTC, in a court filing, revealed MF Global’s general counsel Laurie Ferber emailed the regulator at 7.18pm Mondayhours after the bankruptcy filing – to say that it had “discovered a significant shortfall in its segregated funds account”.

Joint statement of CFTC and SEC on November 1: “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

The CME Group on November 2: “CME completed its on-site review last week. [Reportedly Monday.] At that time, the results of our review indicated that MF Global was in compliance with its segregation requirements. It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011.”
Jon Corzine, who admitted to being the architect of MF Global’s fateful proprietary trading strategy, neglected to manage some fundamental risks when making the speculative bets on European bonds for the “houseaccount, according to an industry veteran who prefers to remain anonymous given ongoing business ties to some of the firms affected.

The first risk Corzine ignored is liquidity risk – you have to stay flush long enough to see the trade to profitable maturity. It doesn’t matter if Corzine made a good trade, just whether he can live to see it make a profit.

The second risk he ignored is over-concentration.
From the bankruptcy filing: MFGI held a long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity, including Belgium, Italy, Spain, Portugal and Ireland. MF Holdings made such announcement on October 25, 2011. These countries have some of the most troubled economies that use the euro. Concerns over euro-zone sovereign debt have caused global market fluctuations in the past months and, in particular, in the past week. These concerns ultimately led last week to downgrades by various ratings agencies of MF Global’s ratings to “junkstatus.  
This sparked an increase in margin calls against MFGI, threatening overall liquidity.
According to the CFTC, MF Global held $7.3 billion of customer segregated assets as of Aug. 31. Segregated accounts are supposed to protect customers in the event the broker files for bankruptcy protection.

During the days leading up to the bankruptcy filing on October 31, several things happened that may have led to a desperation move.

Matthew Goldstein at Reuters reported that MF Global started issuing paper checks back on October 21 rather than wiring funds when non strategically important customer requested account transfers. Those checks have bounced.

MF Global executives were driven to use customer assets to provide liquidity and stave off cash demands from the counterparties to the repurchase agreements backed by the European sovereign portfolio and from large clients seeking to close accounts.

On Oct. 24, 2011 Moody’s cut MF Global’s debt rating to one notch above junk-bond status. Moody’s cited MF Global’s appetite for risk and concerns about its exposure to European government debt.

The CME conducted an audit of segregated funds on October 24. According to several published accounts, this review was completed that same day. At that time, the CME says, “MF Global was in compliance with its segregation requirements.”

On Oct. 25, 2011 MF Global held an earnings conference call to discuss results for the 2Q ending September 30. (A 10Q has not yet been filed with SEC.) During the investor call, MF Global said that it had $1.3 billion in unused credit facilities without giving a specificas ofdate for that figure.

The disclosure of the poor financial results – the largest quarterly loss ever – was pushed out early in the wake of the Moody’s downgrade on October 24. The stock dropped 48%.

On October 27, Thursday, as a result of the earnings call, Moody’s reduced MF Global two more steps to Ba2 and put it under review for more possible cuts. Bloomberg reported that the company had exhausted all of its credit lines the night before.

In a blog post October 27, Zero Hedge reminded readers, “the firm reported $710 million in cash as of June 30. Obviously all of that cash must have been burned through if the firm also not only tapped but exhausted its $1.3 billion in revolvers in the past quarter. Net result: $2 billion in cash (or about 9 times its market cap) burned in 4 months primarily due to “hedgedEuropean exposure.”

The New York Times DealBook was still not completely worried.

“To bolster its cash position, MF Global has tapped a $1.3 billion credit line at the parent company level, people briefed on the matter said Thursday evening. The firm still has financing available, including at least some of a $300 million revolving credit line in its broker-dealer subsidiary as well as bank overdrafts and letters of credit.
People close to MF Global said that as of Thursday afternoon, only a small percentage of client funds — in the low single digits — had left the firm. Most of that appeared to be clients spreading their accounts across multiple brokerage houses.
These people added that the firm had adequate liquidity and that it was not contemplating filing for bankruptcy.”

When did MF Global exploit the customer segregated accounts and why? How were the proceeds used to stem the firm’s deepening insolvency?

Based on the sequence of events described above, I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “houseaccount sometime late Wednesday or early Thursday.

I’ve given those who executed the “nuclear option” to save MF Global the benefit of the doubt. I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines. When margin calls on the repurchase agreements and account closure demands from strategically important clientsnot the bread and butter individual traders and smaller investors and money managers who got rubber checkskept coming, they hit the wall.

Why do I believe MF Global executives transferred customer assets not cash to “houseaccounts? Because missing cash would be noticed immediately. Their clients were still trading and clearing and cash was required to settle. Securities such as U.S. Treasury Bills, blue-chip equities such as CME Group stock held by many exchange members, and physical assets such as gold, warehouse receipts, and other certificates of title are less active. They would not be missed Thursday through Monday.

What did MF Global do once these assets were moved to a “houseaccount? I believe they pledged the customer assets as collateral for a short term loan.

By mid week, according to the New York Times DealBook:
Corzine had already hired the investment bank Evercore Partners to help him find a buyer for part or all of the firm. MF Global also contacted BlackRock, the giant asset manager, to help it wind down its balance sheet — including efforts to sell its holdings of European debt.”
Corzine planned to sell the company not file bankruptcy.

There was no time to monetize the assets by selling them outright. That would have made replacing them quickly, in kind, much more difficult. A privately arranged line of credit, secured by a basket of assets discounted by up to 50% due to the risk of default and the firm’s desperation, could be unwound as soon as a deal to sell the firm was struck. All the assets could go back into the customer accounts and no one would be the wiser.

Any firm willing to lend $300-400 million for a week or so against approximately $700 million of customer assets was certainly wise enough to require recourse to those assets in the event of a bankruptcy. Some of the assets, like CME stock, were sure to drop in value if the bankruptcy occurred.

When MF Global filed for bankruptcy midday on Monday October 31, 2011, the lender owned the customer assets.

My guess is the pledged assets were immediately liquidated.

No one is raising their hand to admit they’re the firm who lent MF Global several hundred million dollars, enough to get them through the weekend, based on collateral MF Global had no right to pledge. It’s not clear what the responsibility of a firm is in that situation to ask questions and confirm title.

What is clear is that the arrangement, most likely a favor called in based on very strong relationships, must have been planned in advance. When all else failed to generate enough cash on Wednesday afternoon, someone at MF Global pressed the button and set the wheels in motion.

The lender must have had the capacity to make such a loan and the ability to execute a strategy intended to leave few traces. But there are always trails to follow.

Regulators can look for records at MF Global and at the DTC of transfers of assets between customer accounts and MF Global house accounts and, then, of those same assets between MF Global and a third party. I suspect there is only one lender, since there was not enough time to arrange for more than one and the potential for exposure would be greater with more counterparties.

I don’t think the last inning lender is one of the banks with existing MF Global accounts. Everyone knew those organizations would be under immediate and heavy scrutiny.

I don’t think MF Global’s lender of last resort is Chicago’s own Citadel. Although they did a similar deal for bankrupt investment advisor Sentinel Group, inadvertently helping to perpetuate that fraud, they are being sued by the bankruptcy trustee who wants to claw back the pledged assets on behalf of the customers who were robbed.

Once burned, twice shy.

Based on a tip, I suspected another prominent market maker of supporting the desperate debtor. That firm has denied doing this transaction or even being in the business of doing such transactions.

The undercover lender may be off-shore. MF Global has operations in the UK, Singapore, and Australia. Timezone differences would have allowed transfers of customer assets to house accounts in those locations during the night any time after the CME auditors left on Monday. The MF Global foreign location could then make subsequent transfer to an offshore hedge fund once given the direction by headquarters.

The key disadvantage for MF Global was the limited window of when these transfers probably occurred – between Wednesday October 26 when credit lines were exhausted and Friday October 28. That small window is the regulators’ and investigators’ key advantage.

There are fewer transactions over a very short period to review. This was not a typical fraud that bled a company dry via thousands of paper cuts over a long period.

I don’t expect we’ll have any more sightings of these assets. I suggest the regulators get organized and get moving to figure out what comes next.