MF Global, Corzine, and Gensler

In what appears might be the beginning of a new scandal, the head of the Commodities Futures Trading Commission is being called into question.

MF Global, a commodities trading firm, went belly up after leading Democrat politician Jon Corzine (US Senator, Governor, and first choice to be the next Treasury Secretary) literally bet the company on the European countries’ sovereign debt. That was a huge bankruptcy and cost over 1000 people their long time jobs, but by itself is more an embarrassment than a scandal.

Gary Gensler, a Wharton graduate, spent 18 years at Goldman Sachs, joining just a few years before Corzine. Both rose to senior levels. Gensler left to become a senior Treasury official in the Clinton administration; short after Corzine was forced out and ran for the US Senate being vacated by a then retiring Frank Lautenberg.

The collapse of MF Global has become a scandal because $1.2B of customer funds are missing. Forensic accounting will find out what happened to them, but what ever happened is against long standing rules. Corzine is trying to position himself legally to stay out of jail, although that may prove difficult depending on what happened. Even in the legal MF Global operated in, $1.2B isn’t pocket change.

Gensler testified that his relationship with Goldman wasn’t important because he hadn’t worked with Corzine for 14 years. However, it seems more recently that he has had several meetings with Corzine, including with the CFTC staff, and was a guest lecturer at a course Corzine taught at Princeton November of last year.

Gensler recused himself from the CFTC investigation, ostensibly on Nov 3, 4 days after the bankruptcy filing. However, the issues will be around what happened before that, while a potential criminal investigation is involved. It is already messy, just not getting the press outside of the financial sector it deserves. That is unlikely to remain the case unless the $1.2B is found in tact in someone’s mattress.

Should The Fed’s System Open Market Account Holdings Be Subtracted From The US Government’s Public Debt?

Changing the topic slightly while waiting for Tin’s response, I have a question: Should the Fed’s System Open Market Account Holdings be subtracted from the US government’s public debt?

While everyone was following the debt ceiling debates, that includes money the government owes itself; sort of borrowing from your own 401k. The part that really counts is the part that is owed to other parties. Under President Bush that went from $3.3T to $6.3T over 8 years, about $3T. Under President Obama that has gone from $6.3T to $10T in 32 months, about $3.7T. However, Federal Reserve Balances which had been trivial soared to $850B in the last 4 months of the Bush administration, and with QE2 are now at $1.6T, and additional $750B.

Should these amounts be subtracted from the publicly held debt since in all probability the Federal Reserve will hold them indefinitely; in effect having printed money to replace bonds issued.

In effect that means President Bush’s administration would have increased publicly held debt $2.2T and President Obama’s administration would have increased it $3T so far. However, since a $2.7T increase in the debt ceiling has been approved and virtually all new borrowing has been publicly held for the last few years, that would imply the debt will increase to $12.7T ($11.1T net reserve holdings), a total of $$6.4T ($5.7T net of reserve balances) under President Obama. Of course, a QE3 would increase the reserve balances further.

Since the bonds the Fed holds are unlikely to ever be net sold, the Fed is part of the federal government, and the interest over expenses is returned to the federal government, shouldn’t this be deducted from the public debt?

Note: this doesn’t include the approximately $1T held by the Fed in Fanne Mae/Freddie Mac debt and mortgage backed securities.

Summary:

Date	Debt	Publicly Held	Net Reserves
1/2001	$5.7T	$3.3T	$3.3T
1/2009	$10.6T	$6.3T	$5.5T
8/2011	$14.6T	$10,0T	$8.4T
1/2013 est	$16.3T	$12.7T	$11.1T

Israeli and US Governments Start Posturing Prior to UN Vote for Palestinian Statehood

This NY Times article discusses the issues: http://www.nytimes.com/2011/04/21/world/middleeast/21prexy.html?_r=1&nl=todaysheadlines&emc=tha2

The story in short:

• A new Israeli government under Benjamin Netanyahu took office in March 2009, just months after the new Obama administration took office. The new Israeli government had and it’s heart of conservative coalition although including members of the more liberal major party.
• At the same time at the start of his administration, President Obama began overtures to various countries in the Arab world. Part of those overtures included distancing his policies for the US from Israel’s own policies. This strained relations between the Israeli and US governments.
• A variety of pensions and competing objectives stalled any Israeli-Palestinian negotiations. Even when they occurred, they were between the Palestinian government on the West Bank and Israel and did not include the Hamas forces running Gaza.
• The Arab Spring so the collapse of a pro-US government in Egypt. There was a common misunderstanding in the US of how this may affect US-Egyptian relations. Some felt that Egyptian leader Hosni Mubarak wasn’t liked and that his pro-US stance course the US not to be liked; others understood and beyond economic issues one of the reasons the buyer wasn’t liked but Egyptian population was because of his pro-US stance.
• The collapse of the Egyptian government has already started to allow increased trafficking of military weapons to Hamas forces in Gaza and to hostilities in the area.
• This September the UN is widely thought to approve a resolution recognizing Palestinian statehood. This will almost certainly be opposed by both the US and Israeli governments increasing tensions and highlighting differences between them and other governments in the Middle East.
• As pointed out in the article, relations remain strained to the point that President Obama met with Israeli President Yitzhak Rabin rather than Prime Minister Netanyahu. At the same time, the Republican House leadership invited Netanyahu to make a speech before Congress.
• This now seems to have created a new tension between the Obama administration any Israeli government about who will propose a new peace plan to restart Israeli-Palestinian negotiations with the intent to present a plan prior to the expected UN resolution.