Friday, December 16, 2011

Corzine Continues Getting Grilled on Capitol Hill

Disgraced former New Jersey Governor Jon Corzine continues to avoid making the big gaffe that might land him in a perjury trap over testimony given on the MF Global debacle, but he's not out of the woods just yet.

Corzine thought he could turn MF Global in to a new and improved Goldman Sachs. He brought in the same kind of attitude and risk-taking that he brought at Sachs. But because MF Global didn't have the size and track record, once those risks (namely the sovereign debt in Europe) became monetized, the company didn't stand a chance and everyone wants to make sure they got their money covered. Forced to pony up additional collateral the company was left scrambling to find someone to buy them out, and it was in that process that the potential buyers found all kinds of discrepancies - most notably the fact that client funds were being used for corporate purposes.

That was the first of many red flags that sent the company into bankruptcy.

And it was Corzine who was pushing to get MF Global more heavily invested in the European sovereign debt, because he thought he could make a bunch more money there than on other less risky propositions. He and his board ignored and side stepped risk managers who pointed out the problems with the strategy.

Yet, CME Chairman Terrance Duffy contradicts Corzine's testimony:

Corzine denies knowing about the transfers of client funds, even as evidence is emerging to the contrary.
CME Group Inc. Executive Chairman Terrence Duffy told a Senate panel Tuesday that Corzine might have known about a transfer of $175 million from customer accounts earlier than that. CME Group operates exchanges on which MF Global traded. It also was responsible for auditing some of MF Global's books.

According to Duffy, an MF Global employee told a CME auditor that "Mr. Corzine was aware" of the transfer. Duffy said he referred the matter to the Justice Department and the Commodity Futures Trading Commission. Both are investigating MF Global's failure and the disappearance of the customer money.

If true, Duffy's accusation would raise the possibility that Corzine misled Congress about when he learned that client money was missing.

The transaction Duffy described wasn't necessarily illegal. Brokers such as MF Global are allowed to borrow from customer accounts temporarily in some circumstances -- to reduce their own risk, for example.

But such cases are a narrow exception. A firm couldn't use customer money to pay trading partners if its speculative trades lost value. Even in cases where borrowing clients' money was legal, the firm would have to replace it with a safe, cash-like investment such as a U.S. Treasury security.
If that can be confirmed, then Corzine's got bigger problems considering he's testified that he didn't know about any transfers and that may lead to obstruction of justice and perjury charges.

And to think that Corzine thought he might get tapped by President Obama to be Treasury Secretary. Obama's probably thanking his lucky stars he didn't make that move.

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