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Jon Corzine, MF Global, and Unaccountability  

In April 2007, former New Jersey governor, 'honorable', Jon Corzine had an altercation with a Garden State Parkway guardrail. A year later, he addressed a bevy of reporters at the swanky Drumthwacket mansion and expressed appreciation for “family, friends, and the fragility of life.” During his recovery period, he advocated seatbelt safety, before returning to New Jersey's budget, extracting $500 million in austerity measures from farmers, educators, and environmentalists, and hiking tolls on New Jersey roadways.

On the one-year anniversary of his accident, his chief-of-staff, Bradley I. Abelow declared,  “Corzine has returned to his former self as a thorough and exacting boss.” (Italics mine.)

Fast forward to the current MF Global flameout. Abelow shifted to Corzine’s Chief Operating Officer. And not only did Corzine ratchet up the ante on ways to really piss off farmers, but after several days of engaging in verbal dodge ball with Congress, this ‘thorough and exacting boss’ maintained his Forest Gump type cloak of secrecy regarding the stolen $1.2 billion of his customers’ segregated money.

After days of political-reality TV, we knew nothing more about its evaporation. Corzine and his stewards, Abelow and Chief Financial Officer, Henri Steenkamp, executed a perfect chorus of  ‘I don’t recalls’, ‘I didn’t intends’ and ‘the butler did its’.

For the most part, testimony from the various regulators didn’t shed additional light on the ‘missing’ funds either (everyone’s extremely sorry and deep in search mode) but they did reveal extreme, pass-the-blame incompetence, in the spirit of AIG.

Acronym alert. SEC director, Robert Cook testified that MF Global Holding Company (like AIG) had no official consolidated supervisor regulating it; one of its subsidiaries, MF Global UK Limited, fell under the UK Financial Services Authority (FSA.) The other one, MF Global Inc. (MFGI) was registered under the Commodity Futures Trade Commission (CFTC) as a FCM (futures commission merchant) and also, under the SEC as a broker-dealer. It was the Chicago Board of Options Exchange (CBOE) supposedly overseeing MFGI’s broker-dealer activities, while its futures activities fell under the CFTC, National Futures Association and the Chicago Mercantile Exchange (CME). Somewhere in the mix lurked the private self-regulatory body, the Financial Industry Regulatory Authority (FINRA). Really, how many inept regulatory bodies does it take to screw customers out of $1.2 billion?

But, here’s how we know Corzine was lying – besides the nervous body movements.

During the summer of 2011, the CBOE and FINRA told MF Global Inc. that it didn’t have enough capital behind its repo-to-maturity (RTM) positions in European sovereign bonds – the positions Corzine put on. By mid-August, the SEC got involved and met with Corzine and other MF Globalites. They then had to file a net capital deficiency notice on August 25th for $150 million.

During  the week of October, 17th – MF Global Holding had to increase capital again at MFGI - for the same positions. The next week, on October 25th, it released abysmal quarterly earnings, and got downgraded to almost junk status. The stock plummeted and customers were heading for the hills, the fastest ones getting their money out, others getting locked out. The SEC set up camp at MF Global headquarters in Manhattan on October 27th to “monitor the situation” and “engage with senior management regarding the steps that were being taken by the firm” regarding possibilities like selling the firm, selling the customer business, or selling the RTM positions.

On Sunday afternoon, October 30, a perspective buyer for MFGI’s customer business emerged: Interactive Brokers (whose judgment I question, so watch out for them). In the wee hours of Monday morning, October 31, – the ‘missing’ funds were detected.  Interactive Brokers balked. Bankruptcy proceedings begun at  9 AM.

The CME’s testimony stated that just past mid-night on October 31,st Christine Serwinski, the chief financial officer of MF Global's North American division, and Edith O’Brien, a treasurer, told Mike Procajlo, an exchange auditor that about $700 million in customer money was transferred on October 27th, 28th and possibly October 26 from the broker-dealer side of the business to ‘meeting liquidity issues.’ The CME hadn’t noticed this while reviewing the firm’s books prior to bankruptcy. Another $175  million was used by MF Global UK.

The CFTC disclosed that MF Global’s general counsel, Laurie Ferber notified them Monday evening, October 31st about “a significant shortfall in its segregated funds account”.  Neither the SEC, nor the CME had picked up on this beforehand.

As a broker-dealer registered with the SEC, MFGI was not just subject to CFTC rules, but also to the SEC's customer protection rule that prohibits use of customer funds or securities to support proprietary trading or expenses. It also prohibits customer funds or assets from being pledged as collateral for the firm’s own trades or to raise funds, plus requires a reserve account  be maintained that is bigger than their holdings – just in case.

The CFTC has a more lax rule, called Reg 1.25, weakened courtesy of MF Global, JPM Chase, and others that enables segregated customer funds to be used for investing in foreign sovereign bonds (investing – not posting as margin or acting as collateral). But as Janet Tavakoli pointed out in her excellent MF Global analysis; the ‘missing’ customer funds were not in the currency of the foreign sovereign bonds, as per the rule’s stipulation. Plus, none of the required replacement assets were held against those funds. Indeed, there is no element of Reg 1.25, the reg cited as a potential legal loophole by various media, that allows segregated customer funds to be used for risky purposes – like saving a firm from destruction long enough to sell it. Translation – the ‘missing’ funds were stolen against rules, from their rightful segregated customer accounts. Corzine claimed no knowledge of this.

But the reality is - the clock ran out on Corzine’s big bet and customer funds were the only way to keep it ticking until a potential sale of the firm could be confirmed. If the funds hadn’t been switched, the firms seeking margins would have taken losses. The motive was to optically alter the appearance of MF Global and exit, leaving the bag with someone else. You can’t have that clear a motive and no idea of how to achieve it. It’s implausible.

Let me put $1.2 billion into a perspective that the House committees didn’t. According to its second quarter SEC filing, MF Global had $3.7 billion of available liquidity.  The funds were equivalent to a third of that liquidity. That’s not a tiny figure. If you’re running a firm buckling under the weight of the bets you’re losing, you’re damn well aware of your liquidity lines – they are your life raft.

Besides that, MF Global’s net revenue for the second quarter was $206 million and for the six months ending September 30, 2011, it was $520 million. The ‘missing’ customer money was more than twice the firm’s net for the first half of their year.

To recap. Corzine was obsessed with the European sovereign bet. So, he fired his risk officer, Michael Roseman for questioning it,  and replaced him with a yes-man, Michael Stockman whose job description appeared to have included stroking Corzine's – er – ego, and to remain quiet about any trade concerns. He rides the trade through a succession of flailing earnings and intense market volatility, while meeting with regulators questioning its sustainability. He knows he’s got to pony up a chunk of capital in the summer to appease them and stick with it. And when finally, MF Global’s ratings were downgraded on October 25th, a bunch of calls transpire between him and NY Fed head and former Goldmanite, William Dudley before the firm goes bankrupt a week later, with nearly $1.2 billion in customer money ‘missing.’ 

We’re supposed to believe this ‘thorough and exacting’ man knew nothing about where it went? Or that his sense of entitlement and bravado was so big, he didn’t think it was wrong to take that money? Or that he wasn’t aware it was available? At all?

No. Not possible. And yet, over half a dozen regulatory bodies were oblivious to the fund heist. Finding Corzine guilty of a crime would be like asking them to indict themselves. The CFTC Enforcement division can refer criminal matters to the Department of Justice for prosecution. But the DOJ has punted on every Wall Street crime related to the 2008 subprime crisis. So what will probably happen –  is that Corzine may get a little fine from the Washington regulators. Legislators will move on to figuring out how to incorporate MF Global into stump speeches. Those that had their money stolen will battle it out in civil suits for years. And again, no lessons will be learned. No practices altered. No heads will roll.


References (2)

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Reader Comments (13)

'Loved this post.

Apparently these guys get paid for 'not knowing' anything!

December 19, 2011 | Unregistered CommenterNeil

Hey, it's tough to pull off 'not knowing anything' with a straight face and a full pocket.

December 19, 2011 | Registered CommenterNomi Prins


Laurie Ferber: MF Global Chief Legal Counsel, on CFTC Global Markets Advisory Committee. Where Was She?

A little more background: Ferber spent most of her career at Goldman Sachs – 21 years. And like many, English surmises that “Ferber was likely placed at MF Global in 2009 by J. Christopher Flowers, one of Global’s largest shareholders and also Goldman alum. This would have paved the way for ex-Goldman Sachs CEO Jon Corzine to take the helm in February 2010.” That was a long standing opinion heard in the halls of MF Global long before the collapse of the firm.

Last week we missed Lauri: A board member of MF Global, Chief Legal Counsel, a participant in meetings with the CFTC along with with Mrs. Corzine; author of far-reaching effort to prevent tightening up of rule 1.25, and — which has not yet been reported — Ms. Ferber currently sits on the CFTC Global Markets Advisory Committee. (Shades of Trustee Giddens sitting on the SIPC Modernization Task Force, anyone?)

December 20, 2011 | Unregistered CommenterDante

yes, there are public documents that have been released following her pushing for the weakening of ref 1.25, though again in this case, MF Global didn't even abide by the weakened version of the reg....

December 20, 2011 | Registered CommenterNomi Prins

Regulatory bodies are cover, waste of taxpayers' money. They're just like humanitarian cover stories for war. I think for example one of the funniest ones (ok, sadly) is the FDA. Ok, only 1/2 the rats died, time to test it on the human guinea pigs; ok, an acceptable number of them (only 10%) died, time to bring it to market, so the stock soars. AMA was taken over by Wall Street in early 1920' time for the pill business, bigPharma. Seriously, now doctors don't know they're quacks. At least in the old days when the old fashioned quacks did blood-letting, no one's stock went up. George Washington was killed by doctors of his day that way, so later was Lord Byron... "Quacks laugh at quacks, who once their patients bled. Thus was Byron unplugged, then much less was said."

On a more serious note, always a pleasure reading your articles, Nomi. You must have the patience of a saint. Besides them, only doctors need 'patients'.

December 20, 2011 | Unregistered CommenterMichael

Truly an outstanding and elucidating post, Ms. Prins, truly outstanding!

An additional background article, for purposes of present and recent historical context, might be found at the link below:

(Please note mention of that phantom topic never heard in the present day Corporate McMedia, the Financial Crisis Inquiry Commission.)

Thank you.

December 20, 2011 | Unregistered Commentersgt_doom

this was posted on a zeroHedge board yest & i thought it might interest people here

the link will copy [i hope] & i can't vouch for the info, but it's a clean link [i didn't pick up any spyware there], a fascinating case of bankster-based lobby loopholery, and it explains how the morgue may have ended up w/ MFGlobal's retail customers' do-re-mi...uh,..."legally"

December 20, 2011 | Unregistered Commenterslewie

Yes - regulatory bodies are an increasingly budget-intensive joke.....and SD - even with their ineptness, a smart, or rather, inclined prosecutorial element could find the illegality in bending the intent of the inadequate rules - it's just not happening...sadly.

December 21, 2011 | Registered CommenterNomi Prins

It's all too late, probably? I just hope the FEMAcamps are gulags-lite -?-

December 21, 2011 | Unregistered CommenterMichael

i guess when FMG bk'd as a securities broker under SIPC rather than as a commodities broker, the die was cast

SEC-'approved', wasn't it?

stephenHarbeck's SIPC report to judgeGlenn states the SEC phoned him @ 5:20AM on 10/31/11, requesting SIPC protection for MF's INVESTORS [rather than go thru Ch.7 (subchapter iv "Commodity Broker Liquidation") which would have offered protection to the CLIENTS/customers]

so, this is the genesis of the travesty to the clients?
the banksters were put ahead of the customers with this "type" of filing?

that is my understanding right now,
thx to you, zeroHedge, and about 20 online-others
and also thx to whom my understanding is changing about as fast as i can read what i'm finding!

December 22, 2011 | Unregistered Commenterslewie

Do you know of Ann Barnhardt?

January 7, 2012 | Unregistered Commenterheaveho

HH - I didn't, thanks for sending that link.
Slewie - apologies for the late response, I just did a segment on the Keiser report last week about that very issue - it's on the media page of this site...

January 16, 2012 | Registered CommenterNomi Prins

very interesting point you have!

August 7, 2013 | Unregistered Commenterwebber
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