Mike’s Financial Pocket – June 28th – Corzine Cornered!


The CFTC, or the Commodity Futures Trading Commission, has filed charges against Jon Corzine (D – NJ) relating to the failure of MF Global. As a reminder, Corzine’s company allegedly used customer money to double-down on European sovereign debt in 2011, resulting in large losses and the eventual bankruptcy of the company.

The lawsuit, filed in the United States District Court for the Southern District of New York, cites internal MF Global e-mails and recorded phone calls that shed light on the chaos surrounding the firm. In one call recorded by the firm, for example, one executive acknowledged to a colleague that the firm was “skating on the edge,” without “much ice left.”

While the agency did not accuse Mr. Corzine of authorizing the breach of customer money, it claimed that he failed to “diligently supervise” the firm and is subject to so-called control person liability, a legal provision that allows for the punishment of executives for the bad acts of lower-level employees.

Funny how a “lower-level employee” always seems to be causing trouble for Democrats, right? *Cough* IRS *Cough*

I’ve talked about MF Global before because it’s a particularly egregious case. If there is one thing a fiduciary cannot do, is take customer funds and invest it in an investment for the company. That is precisely what MF Global did. The reason they got caught is because the investment backfired as the value of European sovereign debt plummeted.

People who have been following the MF Global saga know that charges against Corzine were overdue. If the allegations are true, Corzine should pay the proverbial piper.

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I thought this was a scary post.

Half of Americans have less than three months of expenses saved up, and just a quarter have six months saved, which is the typical recommendation for emergency financial reserves, according to a report from the financial Web site Bankrate.com. The survey by Princeton Survey Research Associates International queried 1,004 adults from June 6 to 9 using landlines and cellphones.

Think about that — half of America is essentially living paycheck to paycheck. That’s absolutely frightening.

Part of what has made America the greatest country on earth is a strong middle class. With half of Americans living hand-to-mouth, so to speak, it’s easy to see that the middle class is in decline. As real incomes decline and prices for food, fuel, education, and health care skyrocket, it’s understandable why people are not able to save.

The common root cause of this? Government intervention into free markets. I talked yesterday about the folly of farm subsidies, which increase food prices. Over-regulation drives the cost of energy upward, as well as the costs of health care. But what about education costs?

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Speaking of education, it broke late yesterday that the Senate will be in recess until July, so student loan rates will not be subsidized by the federal government, unless a retroactive bill is introduced in July (which it probably will).

What the uneducated buffoons in Congress fail to realize is the subsidized student loan rates warp the market for education. Yes, in theory, lower interest rates are a good thing — for borrowers. There are several problems with subsidized loan rates, though.

First, the taxpayer is the one subsidizing the rates and taking the risk if borrowers default. Heritage points out that the true cost of subsidized student loan rates is projected at nearly $100 billion over ten years.

Second, cheap credit and money creates bubbles. All of this cheap money flows into colleges and drives up the price of education. We’ve seen it before with the Internet Bubble, the Housing Bubble, and now, the Education Bubble. Cheap credit (student loans) flows into institutions of higher learning, just like it flowed into houses in the 2000s. As more students demand (or are able to demand) college education, prices increase. It’s not that hard of a concept.

The great financial folks over at Zero Hedge have chronicled the growth of the student loan bubble, which is over a trillion dollars and is facing increasing defaults. Why? Maybe it’s because money can be borrowed cheaply, so people can take a YOLO approach to their education and study Southeast Pacific Interpretive Dance for eight years. Maybe it’s because people who shouldn’t be going to college decide to because it’s “cheap” in terms of interest rates, and then drop out with large loans and no degrees. Or maybe it’s because Obama’s laser-like focus on jobs has burnt all economic green shoots to a crisp, leaving us with a 7.6% unemployment rate and part-time jobs because of Obamacare. Or maybe it’s all of this combined.

Bottom line: government interference in the free market messes things up. The current state of the economy proves this.

As always, free markets are better markets.