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MF Global, lost funds, and proper oversight

MF Global, lost funds, and proper oversight

House Agriculture Committee holds lengthy hearing on MF Global collapse. Jon Corzine, former MF Global head, testifies.

Jon Corzine, former head of the failed investment firm MF Global, was subpoenaed to appear before the House Agriculture Committee on Dec. 8. Having run MF Global when a suspected $1.2 billion worth of customer funds – including accounts of many in the agriculture sector – went missing, Corzine walked into the hearing surely knowing he’d be roughed up.

Committee members ensured that expectation was realized. But Corzine – a former New Jersey governor and senator, whose former firm is now being investigated on multiple fronts -- invited more scorn with weaves and dodges in both his opening statement and answers to questions.

In prepared testimony, Corzine said his sadness over the firm’s collapse was intense, although “of course, (it) pales in comparison to the losses and hardships that customers, employees and investors have suffered as a result of MF Global’s bankruptcy. Their plight weighs on my mind every day – every hour. And, as the chief executive officer of MF Global at the time of its bankruptcy, I apologize to all those affected.”

Even so, Corzine did not shoulder full blame and said trades at MF Global were done without his full participation. “Even when I was at MF Global, my involvement in the firm’s clearing, settlement and payment mechanisms, and accounting was limited.”

For the hearing's full slate of prepared testimonies, see here.

During his testimony, Corzine repeatedly used the word “stunned” to describe his Oct. 30 reaction to learning of “lost” customer funds. California Rep. Dennis Cardoza wanted to know Corzine’s first action following that revelation.

Corzine: “The first thing was ‘let’s get the people to recheck the figures and make sure we’ve done everything we can to appropriately confirm” the lost funds. “There was still a hunt.”

“I’d have gone to the restroom and thrown up, myself,” retorted Cardoza.

Corzine tried to distance himself even more from MF Global’s problems. While admitting to “overall responsibility for the firm” he “did not … generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business…

“I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules.”

Corzine also claimed reports that say MF Global’s risks and leverage (in the range of 40-to-one) during the lead-up to collapse are incorrect. “One of the recurrent themes in the media has been that MF Global took on too much riskduring my tenure, in particular the amount of leverage that MF Global bore at the time of itsbankruptcy. In fact, MF Global reduced leverage. In the quarter ended March 31, 2010, MFGlobal’s leverage was 37.3. During my tenure, it was consistently around 30.”

Minnesota Rep. Collin Peterson, ranking member, smacked down Corzine’s attempt to soft-peddle the amount of leverage MF Global carried. “Apparently, when you took over, the leverage was 37.5-to-1 and you got it down to 30. Somehow or another that’s a good thing? This mentality on Wall Street I don’t get.”

Corzine allowed that a leverage of “30-to-1 was a lot higher than I’d want on a sustained basis.” In the firm’s last days, he said, if the hail-Mary to “seek a strategic partnership with the FCM (Futures Commission Merchant) … had been accomplished … it would have lowered our leverage to the mid-teens to high-teens.”

What, when, how?

Did Corzine authorize a transfer of customer funds from segregated accounts?

Corzine: “I never intended to break any rules, whether segregation rules or any of the other (applicable) rules.”

Oklahoma Rep. Frank Lucas, committee chairman, asked if Corzine is aware “of any transfers, authorized or unauthorized, of funds out of customer accounts?”

Corzine again tried to wiggle off the hook, claiming distance from any such occurrence. “I’m not in a position, given a number of transactions, to know anything specifically about the movement of any specific funds. And I will repeat: I certainly would never intend to direct or have segregated funds moved.”

As for how he could have unintentionally encouraged the comingling of customer and firm funds, Corzine provided weak tea. “Someone could misinterpret ‘we’ve got to fix this’ – which I said the evening of Oct. 30” when he first learned of the “lost” funds.

What role did Corzine personally play in monitoring the segregation of MF Global’s customer funds?

“My role was primarily to bring assurance to myself on an ongoing operating basis that we had the people, policies and procedures in place to maintain that segregation,” said Corzine. “At least until those last few chaotic days, I felt comfortable we’d adhered to (that).”

Illinois Rep. Timothy Johnson then brought up Corzine’s “substantial wealth” and asked on behalf of his farming constituents, if Corzine and other MF Global executives are “willing to stand the loss with your personal fortunes and (ensure customers are) made whole?”

Corzine – worth hundreds of millions of dollars -- stammered and Johnson pounced “it’s either ‘yes’ or ‘no.’ It’s fairly simple.”

Corzine: “I don’t think this will go unresolved.”

“Assuming it does go unresolved – and it appears there’s a lot falling through the cracks – are you willing to commit … your personal fortunes to making these people whole?” repeated Johnson.

Unsurprisingly, Corzine made no such commitment.

Johnson then jumped on CFTC head Gary Gensler’s recusal from the MF Global investigation due to the “whole Goldman Sachs fraternity.” Gensler and Corzine once worked together at Goldman Sachs, whose former employees also “encompass … foreign ministers of several countries in Europe” that MF Global invested in.

If Gensler’s recusal was appropriate in recent days, wondered Johnson, “why didn’t it happen a year ago? Given your relationship and the CFTC’s oversight of your company why wasn’t recusal … pursued a lot earlier in the process?”

Corzine, who eschewed any opportunity for “speculation” throughout the hearing, again applied the tactic. “I think you’d expect I wouldn’t speculate about the internal considerations Gensler or the people at the CFTC took.”


Prior to Corzine’s grilling, the committee heard from several of those tasked with regulating the U.S. financial industries. Many were unhappy with Gary Gensler’s absence and aforementioned “non participation” in the MF Global investigation. While he traveled abroad, Gensler left it to CFTC member Jill Sommers to answer questions.

“I find it very unacceptable that Gensler is not here, that’s he’s recused himself, that he’s gone out of the country at the same time we’re faced with the eighth-largest bankruptcy in the history of the United States on a firm under his oversight, where $1.2 billion of our constituents’ money is missing,” said Georgia Rep. David Scott. Scott then brought up Gensler’s “very close personal relationship with Mr. Corzine, from when they both worked at Goldman Sachs. … It raises a great deal of suspicions.”

Further complicating matters, pointed out Connecticut Rep. Joe Courtney, was that Gensler’s decision to recuse himself “was in response to a member of the Senate who demanded he recuse himself because of allegations there was some relationship with MF Global. You can get whiplash around this place sometimes trying to keep up with competing finger-pointing going on.”

Courtney’s admonition was ignored immediately.

Echoing concerns expressed in a Dec. 1 hearing by the Senate Agriculture Committee (see here), Indiana Rep. Marlin Stutzman laid into Gensler saying “for us to get the facts to everything that has happened here, every player should be willing to step forward and share … what they know and when they knew it. … In this situation, I believe Mr. Gensler should be here, as well. … I believe (Gensler’s international travel) today is no coincidence.”

Rule 1.25

Scott said the “core of this entire investigation and the resolution of the investigation rests with the application of CFTC Rule 1.25. In that rule it clearly states you can’t comingle customers’ with business’ accounts.”

Sommers agreed but pointed out Rule 1.25 “only governs customer segregated money on the FCM side.” The rule doesn’t prohibit “a BD (broker dealer) from making investments out of their house account in foreign sovereign debt.” The rule removes “foreign sovereign as a permissible investment but allows FCMs to petition us for exemptions.”

Following a heap of questions from seemingly bewildered committee members, Peterson tried to make the regulatory set-up less confusing. “As I understand it, MF Global was an FCM for years. They charged commissions to do these trades. They had segregated money and made (more) on that.  

“This business has become increasingly competitive to the point where (none of the firms) can make money on the commissions they charge to do these trades. The way they’re making money is by investing customers (funds).

“As I understand it, one of the reasons they wanted to liberalize that is to make more money. But when they invest this money – when they put it in sovereign debt – they have to be treasury bonds into that fund to cover it so that the customer isn’t at risk.

“What happened with the FCM is they were losing money so Corzine came in and made them a broker dealer (BD). Well, the broker dealers aren’t regulated by CFTC but the SEC (Securities and Exchange Commission).

“So, that’s where the confusion is coming in. They got into the broker dealer business, began investing in sovereign debt, doing the repos and adding to their risk, leveraged themselves up somewhere between 30 and 37.5 times.

“Then, this thing moved against them and they had to come up with margins. When they couldn’t come up with the margins, the firm collapsed.

“So, there are two different things. Commissioner Sommers is trying to tell you that the CFTC doesn’t regulate the broker dealer side of this. … You need to split this between what the CFTC can do and what they can’t.”

Watch list?

California Rep. Jim Costa was concerned with other investment firms that may be on shaky footing. “Do you have any idea … if there are other potential bankruptcies out there like (MF Global)? Do you have a watch list? Do you have any idea -- under the fragile nature of the economic recovery we’re dealing with on a global basis -- if there are (potential bankruptcies) out there? Would you know if there were?"

Sommers said the CFTC has the ability “to see the futures side of the business. What we’re looking at on a daily basis are the investments of an FCM, both in their customer and if there are house or proprietary investments of the firms.”

Costa: “Okay, that’s the process. Do you have a watch list?

Sommers: “I’m sure there are firms that are close to the margins.”

Costa interrupted, “let me ask it this way: is there any concern among you and your colleagues that there may be others out there? We have farmers and ranchers and dairymen – my focus -- … and I don’t want to see the futures markets destroyed or confidence in them tremendously eroded. Again, can you actually perform the duties of a regulator or watchdog?”

“Absolutely,” replied Sommers. “In certain economic…”

An exasperated Costa again cut her off. “But you don’t even know if there’s a list.”

More than once committee members tied MF Global’s actions to the degrading of Americans’ trust in financial institutions and political leadership. And there was an underlying uneasiness and realization by the legislators that, perhaps, the underlying problems can’t be fully dealt with through the passage of new regulations.

Nebraska Rep. Jeff Fortenberry picked up the torch: “The problem is we can’t pass enough laws fast enough, create enough regulatory entities quick enough, if there is a collapse of the types of values that lead to responsibility and commitment to the common good. We simply can’t do it.”

Addressing Corzine, Wisconsin Rep. Reid Ribble had similar concerns, first bringing up the multiple agencies tasked with financial institution oversight. “Can we regulate greed, incompetence and fraud out of existence? At the end of the day, sir, we have to make a decision of how going forward we can help protect consumers and investors from having another MF Global happen.

"My fear is we’ll do what government always does: make up more rules and send more regulators. Then, in a year from now, we’ll have another example (like MF Global). I’m wondering what the real solution is. I’m trying to figure out if … no matter what we do on this side of the dais, it still will happen.”

There was a lengthy pause before Corzine answered. His answer -- while acknowledging “complex, multiple” regulators -- was hardly comforting. “Whether it is for those reasons or poor judgment or bad judgment, mistakes will continue to happen in the course of human events.”  

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