By John J. Lothian

Yesterday, just before 4 p.m., an email arrived at The Price Group. MF Global 1099s would be delayed, it said. The deadline to send out the 1099s to clients, February 16, would be missed and an extension had been filed.

A short time later, I learned from sources close to the matter that no 1099s are likely to be issued by MF Global for 2011. One of the leading MF Global GMI technologists had been let go the day before, so were other senior employees. They said the online account interface Emidas was dead and the back office system GMI was going to be shut down.

The gist of the conversation was this. The trustee was told by MF Global staff they needed to send out 1099s, to which the trustee responded, no they did not. Because the firm is in bankruptcy, the trustee said, they don’t have to issue 1099s. Not only was the bankruptcy trustee not interested in sending them out, but they were letting go of the key people necessary to produce these reports.

So the message is clear to me. MF Global customers will not get 1099s, pending a change of heart by the trustee, according to sources I find very credible.

A few months back I addressed this issue with some industry colleagues. I thought it was the perfect opportunity to offer a specialized service to produce 1099s for MF Global customers.  They passed on the idea because they believed the trustee had a legal obligation to issue these reports. There would be no need, they said.

It is not the end of the world if MF Global customers have to figure out their own profits and losses for tax purposes, but it is a big headache.

You could argue that some customers may be better off calculating their own numbers, rather than depending on MF Global’s accounting. But there are some clients, those who were flat going into the October 31 bankruptcy, for whom the information should be accurate.  For those with open positions, the 1099s would at least serve as another tool to help them compute their own figures.

There may be good reason for the trustee to delay, or indeed cancel, the 1099 duties of MF Global. But in the end, it’s another insult to the customers who have endured plenty of hardship already, now 3 ½ months after it declared bankruptcy.

By Jim Ginsburg

Last week in this newsletter, Messrs. Lothian and Kharouf argued the merits of CME Group’s sale of its iconic real estate holdings at the foot of LaSalle Street.  At issue was whether CME should deploy its capital on real estate.  Mr. Lothian says “buy real estate, not sell it.”  Mr. Kharouf retorts: “CME isn’t a real estate company.”  However, if one paid close attention to CME’s earnings presentation two weeks ago, they would have discovered that CME is a real estate company and it owns some “trophy” properties other than 141 West Jackson.

A decade ago, when electronic trading truly started to replace floor trading, investors began to look at the potential of for-profit exchanges.  At that time, part of the attraction of an investment in CBOT was its ownership in the LaSalle Street building.  The $150 million property could provide meaningful downside protection to an investment in CBOT in the event the exchange could not successfully make the transition from floor-based trading to electronic trading.  Those were dangerous times for CBOT as it had not fully embraced technology.  Their direct competitor, the electronic exchange Eurex, was handing out free iPods to traders in an attempt to steal the CBOT’s treasury futures business and the Clearing Corp, CBOT’s clearing house, actually “bet the house” that Eurex would succeed.

By Jim Kharouf

In response to John Lothian’s column “A Bad Trade” on Thursday, which argued that the CME Group should not sell the iconic CBOT building in Chicago:

It is often said that futures trades are a zero-sum game, where for every winner there is a loser on the other side of a trade. Given the size and diversity of the markets, I always found this theoretically correct, but a bit overly simplistic. So too is the idea that because CME Group has reportedly found a buyer for the CBOT building’s north and south towers for $150 million to $180 million, the CME must be the loser in this transaction.

John thought the decision makers on this must have been “numbskulls” to sell such historically valuable property in a historically down market. But it’s time to look beyond Chicago.

by John J. Lothian

Word broke yesterday that the CME Group had a buyer for the historic CBOT Building and the deal would close by June.  The price of the deal was $150 to $180 million.

I just have one question.  What numbskulls would sell a building at the corner of LaSalle and Jackson in Chicago?  My apologies for name calling, but I just find this stupid.  This is the greatest location in the Chicago financial district and it’s worth more in intangibles than all the money anyone could give me for this building.

The CME Group is a money machine.  It does not need the cash.  With interest rates low, this is the time to buy real estate, not sell it.

By John J. Lothian

“John is looking out for his self-interest,” said a reader.  “John must be out money,” said another.

It is often assumed that what motivates each of us is our own self-interest.  We could not take a breath without that being true.  We have to breathe.

I am not without self-interest.  However, my self-interest in the MF Global case is the best interests of my customers.  The customer comes first.  Always.  Ever.

As a futures broker for the last 22 years (and some before that), I am a customers’ man.  That is what the position used to be called; Customers’ Man.

By Philip McBride Johnson

The debate rages over whether there should be derivatives on sporting events (like the Super Bowl). Might there be legitimate hedging needs. Let’s look at the facts.

By John J. Lothian

I believe in competition.

We need competition in regulation. Creating competition in the Self Regulatory Organization sector I believe should be part of the plan to restore customer confidence in our markets.

I started thinking about this as reports surfaced that the CME Group could be stripped of their Self Regulatory Organization status. There are some that believe, regardless of what happened or did not happen with the MF Global situation, that for-profit companies should not be SROs.  I am not judging that belief or the CME’s performance with MF Global. But I am thinking of what the future might look like and changes that could improve the perception AND performance of the industry.

By John J. Lothian

So far the number one voted-on question on FuturesCrowd.com is “The Number One Priority: Make the Customers Whole.”

I put that question on the site.  I have heard lots of people express this sentiment: that in order to restore customer’s confidence in the futures markets, those that are out money in the MF Global bankruptcy need to get the money back.  First that; then comes any changes in structure or industry plumbing in order to prevent future occurrences.

I did not suggest any particular mechanism for the clients getting their money back.  However, there is an idea that has been floated by several people and I have championed in private circles in order to accomplish this number one priority.  That idea is fronting insurance.

By John J. Lothian

When someone robs a bank and gets away with the money, they have something fungible (cash) and easily hid. While the authorities may be able to trace the serial numbers on the bills as they start to show up in circulation, there are no other official records for the physical bills to be traced.

The MF Global situation is different. Money is missing, like in a bank robbery, but the money all moved into and out of MF Global’s bank accounts where there are all kinds of physical and virtual records to trace the whereabouts and the end location of said funds.

There is a rational expectation that exchange regulators, market regulators, bank regulators, FBI investigators and Congressional investigators ought to be able to follow this chain of banking records to trace/discover where the money is. In fact, if they can’t, then this is a stinging indictment of our banking and brokerage system and God help us all.

By Jeff Bergstrom

As a media company dedicated to the financial sector, John J. Lothian & Company would not ordinarily comment on proposed legislation unrelated to the financial industry.  However, as a media company and one that is a particular fan of the First Amendment, we feel this issue is of import not only to us but to all our readers, as the potential effects of this proposed legislation will easily reach into all our lives and businesses.

On January 18, a number of websites including Wikipedia, Reddit and BoingBoing will be going “dark” in protest of the Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA) currently being considered in congress (House and Senate respectively and largely the same with some minor differences).

The legislation, on the face of it, seems reasonable.  These bills are meant to give copyright holders a means to thwart those who would steal their work via the internet.  There is no difference, in character, from downloading an album illegally and walking into a store and shoplifting that same album.

When one looks more closely, however, one can see that this legislation is deeply flawed.  Lawrence Tribe, University Professor of Constitutional Law at Harvard, has this to say (emphasis mine):

The notice-and-termination procedure of Section 103(a) runs afoul of the “prior restraint” doctrine, because it delegates to a private party the power to suppress speech without prior notice and a judicial hearing. This provision of the bill would give complaining parties the power to stop online advertisers and credit card processors from doing business with a website, merely by filing a unilateral notice accusing the site of being “dedicated to theft of U.S. property” – even if no court has actually found any infringement. The immunity provisions in the bill create an overwhelming incentive for advertisers and payment processors to comply with such a request immediately upon receipt.

In short, if someone makes a complaint against you or your website, you can find your website blocked outright and payments to you (if you collect money via your website) suspended.  You can fight it of course, but that can take weeks.  Again, there is no judicial order here or fact finding.  Merely an accusation is enough.

So, you might think, my website is not “dedicated to theft of U.S. property” so I should be in the clear.  Tribe answers this too:

Section 103(a) is also constitutionally infirm because it contains a vague and sweeping definition of a website “dedicated to theft of U.S. property.” A site would qualify under the statutory definition if it “enables or facilitates” infringement by a third party, whether or not such activity meets the requirements for secondary liability under existing law. The deliberate departure from established concepts of copyright law deprives parties of adequate guidelines or criteria to interpret the Section 103 definition.

Under these guidelines sites such as YouTube would almost certainly be shut down.  Google could likewise be held accountable because it can provide links to infringing material.  Other sites such as Wikipedia and Reddit would also face potential sanction.

It gets worse.  The act includes provisions for up to five years in prison for uploading a copyrighted song.  You may think that since you never do that it’s no big deal, but you might well have done it without knowing it.  If you video tape your daughter’s birthday party and you sing “Happy Birthday to You” and upload it to YouTube, you have violated a copyright.  Yes, that song is under copyright . And yes, YouTube would be deemed a “public performance” of that song.  If your children decide to post a video of them dancing to the latest Justin Bieber song playing in the background and upload that, they are guilty of infringement and could face criminal charges (not to mention civil ones).

Surely, you might think, the copyright holders would never come after little kids.  They only want to go after the real, big time infringers.  Unfortunately, history does not bear this out.  The Recording Industry Association of America (RIAA) and the Motion Picture Association of America (MPAA) have sued thousands of people in recent years.  The RIAA was notorious for suing a 12-year-old, a 10-year-old (who infringed when she was 7), a hospitalized teen, a 71-year-old grandfather, a dead person and some laser printers (to name a few).  Remember these lawsuits can potentially claim $150,000 per infringement (each and every song or movie uploaded/downloaded).  If you think they only go for small fish, there is a lawsuit being brought against the country of Ireland for not passing a SOPA-like law quickly enough (forget all that democracy stuff).

The entertainment industry claims they need this legislation to “save jobs.”  This claim is dubious.  Certainly media companies lose money to piracy.  How much they lose is less clear.  The RIAA claims $12.5 billion is lost annually along with 70,000 jobs.  The reality is much more difficult to determine.  The Government Accountability Office (GAO) looked in to this question and could not produce a reliable number:

While experts and literature we reviewed provided different examples of effects on the U.S. economy, most observed that despite significant efforts, it is difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole. For example, as previously discussed, OECD attempted to develop an estimate of the economic impact of counterfeiting and concluded that an acceptable overall estimate of counterfeit goods could not be developed. OECD further stated that information that can be obtained, such as data on enforcement and information developed through surveys, “has significant limitations, however, and falls far short of what is needed to develop a robust overall estimate.” One expert characterized the attempt to quantify the overall economic impact of counterfeiting as “fruitless,” while another stated that any estimate is highly suspect since this is covert trade and the numbers are all “guesstimates.”

What we do know is the tech industry is bigger than the entertainment industry.  While media companies may see some bump in profitability if this legislation passes, the chilling effect on the Internet and tech industry would almost certainly outweigh net gains elsewhere.  The chilling effect would extend further as any company running a website would need to take measures to police what content is on there.

Even if we assume a best case scenario for all the above, that this legislation would not be abused, the fact remains it is trivial for copyright infringers to sidestep these new restrictions.  The Internet is nothing if not a creative place and the crowd is smarter than the few.  Repeatedly Internet denizens have foiled ever increasing attempts to restrain them.  Attempts by industry to stop pirates has perversely managed to see them punish paying customers via restrictive mechanisms while having little to no impact on the people they are trying to stop.  Already ways of circumventing SOPA/PIPA are being considered such as dark nets, alternative DNS, or even noting that simply typing in an IP address rather than a website’s name would circumvent their efforts.

John J. Lothian & Company will not be “going dark” although we do support the intentions of the sites choosing to do this in order to bring more light to this subject.  We certainly do not condone piracy or copyright infringement and would like to see reasonable means to rein in this problem.  We merely feel the best answer to this is not a heavy handed police state but rather clever models to succeed that encourage and reward people to pay for what they want to consume.  There is ample evidence this works.  Louis C.K. recently put out a self-financed, stand-up comedy routine he did.  He sold it for $5 and it was in no way copy protected.  He simply asked people to pay for it and they did…in droves and it was a smashing success for him.  John J. Lothian & Company is also an example of a media company that is successful and growing in an environment where most media companies are struggling.

Creative solutions and more freedom are the answer.  Not Big Brother.