When I was growing up on the South Side of Chicago, we used to see the “shell game” guys quite often on the “L” train. 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 satisfy “important” customers 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 Monday – hours 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 “house” account, 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 “junk” status. 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.