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.

Corzine; MF Global Executives Testify Before Congress Again Today

It's another day of testimony before Congress for disgraced former New Jersey Governor Jon Corzine and several top MF Global executives. They'll again have to state that they have no idea where nearly $1.2 billion in customer money went. They'll claim that they aren't responsible for the accounting of the monies, despite being in a position to not only be responsible for the company policies, but are fiduciaries for their clients and made the decisions that sank MF Global in the first place.

Bradley Abelow, MF Global's president and chief operating officer, and Henri Steenkamp, the chief financial officer, are also scheduled to testify to the Senate Agriculture Committee.

All three say they don't know where the money is, according to prepared remarks and Corzine's previous testimony to a House panel last week. Nor do they take responsibility for authorizing the movement of money out of customer accounts.

Depending on the circumstances, transferring money from customers' accounts could violate securities laws and, in some cases, could amount to a crime. Federal authorities have begun criminal investigations. And regulators are looking into whether the firm broke securities rules.

MF Global collapsed into the eighth-largest bankruptcy in U.S. history on Oct. 31 after a disastrous bet on European debt. Corzine stepped down as CEO on Nov. 4.

Corzine told the House Agriculture Committee last week that he didn't know what happened to the money. He said he didn't become aware of the shortfall until Oct. 30, one day before the firm filed for bankruptcy protection.

In his prepared testimony, Steenkamp says he had no direct involvement in the transfer of funds.

"Direct involvement with operational matters such as bank accounts or fund transfers has never been part of my duties," Steenkamp says.

Abelow says he cannot explain what happened to the money without having access to MF Global documents, which a trustee now controls.

They'll try to distance themselves from the scandal, but that's frankly impossible to do. They are going to do their best to avoid falling into a perjury trap, so the amount of information that they can shed on the inner workings at MF Global in the runup to the collapse will be at a minimum.

Anything they say can and will be used against them in what is likely to be a series of criminal and civil suits, but so too is the fact that they simply claim ignorance, being outside the loop of those responsible for the transactions that led to the missing $1.2 billion.

Corzine, despite his attempts to fall on his sword, continues to claim that he isn't a responsible party in the missing money. Is it possible that some underling undertook the illegal actions that led to the missing money? Absolutely. However, it was a policy initiated by Corzine to expand trading on sovereign debt that pushed MF Global to the brink. Corzine took the risks, removed those involved in managing risks and were warning about the downside, and pushed ahead despite the sovereign debt risks increasing MF Global's exposure.

Trustee Liquidating Failed MF Global Finds $1.2 Billion Shortfall

MF Global's problems have doubled. The trustee liquidating the company's assets has found that the shortfall is $1.2 billion, which is double the estimates that had been floating around for the past couple of weeks since the financial firm announced its bankruptcy.

The court-appointed trustee overseeing the liquidation of MF Global’s brokerage now estimates that the shortfall in the firm’s customer funds could be more than $1.2 billion, double previous estimates.

Regulators currently suspect that MF Global improperly used customer money for its own purposes in the days before filing for Chapter 11 protection, according to people briefed on the matter.

The decision to release the updated figure on Monday came after authorities concluded that much of the customer money had left the firm, these people said.

By MF Global’s estimates to regulators, roughly $600 million in customer money was missing. But as forensic accountants pored over MF Global’s books in recent weeks, they began to question those estimates.

By Sunday, the accountants from Deloitte and Ernst & Young had discovered an even larger gap in customer funds.

The trustee, James W. Giddens, held a four-hour conference call on Sunday evening with staffers in New York City and Chicago before deciding to publicly reveal the new number, according to a spokesman, Kent Jarrell. Officials from the Commodity Futures Trading Commission and the CME Group, MF Global’s primary exchange, were consulted on Sunday night.

Turns out that the initial estimates were far closer to the amounts actually missing; yet even the $950 million initially estimated fell several hundred million short of the tally.

This is yet another discrepancy that MF Global officials and Jon Corzine have to address. Where did all the client money go? Two possibilities: One is that company used the money to meet trading partners’ demands for extra cash, which could come back (but that would require seeing some kind of paper trail). The other is that it was used to cover trading losses, which would be unrecoverable. Both would appear to be actionable for sanctions, and the latter is criminal.

The company's books are a shambles, and it appears that there was no kind of accounting controls or oversight, despite regulators being on hand to view the books just days before the company imploded when the sale of the company prior to bankruptcy imploded.

Investigators Continue Searching For $600+ Million Missing From MF Global Accounts

Investigators have a tall task ahead of them in trying to piece together all the illegalities at Jon Corzine's MF Global financial firm. They're still trying to figure out where more than $600 million in money went, and the condition of the company's books is atrocious. It also isn't the first time that the firm was sanctioned for violations of various securities laws and rules:

On Friday, the bankruptcy trustee overseeing the liquidation announced that nearly all 1,066 of the company's employees were losing their jobs, although as many as 200 could stay to oversee the dissolution of the company. MF Global says the disarray in its financials is due to hasty unwinding of positions as its massive bets on European sovereign debt began to collapse, but it has a long history of regulatory violations pertaining to risk and records management.

Over roughly the past decade, MF Global was sanctioned half a dozen times and fined a total of $12 million, including a $10 million fine levied in 2009 for "significant supervision violations" that occurred during the five years prior, according to CFTC enforcement archives. One 2008 infraction alone cost $141 million in trading losses on wheat futures.

"They're going to have to figure out what did people know and when did they know it," Elson says. MF Global had undergone a routine audit only days before its bankruptcy filing and nothing was found to be amiss. "Why was this not caught, and if it had been caught, what would have been the consequences?" he says.

Clients might have to steel themselves for a long wait and the possibility of a loss of funds. Elson points out that sorting out the fallout from the collapse of Lehman Bros. was a protracted process and says this could follow a similar timeline. A worst-case scenario would be customers losing what were supposed to be safe investments and triggering a crisis of confidence that spreads to other trading firms.

That no one seems to know where the money went is a bad sign for everyone involved. Accounts are frozen and no one can really proceed until the money is accounted for. This isn't just about aggressively interpreting securities laws; it's about illegality within the company and a complete and utter disregard for one of the fundamental rules in the financial sector - never commingling client funds with those of the financial firm.

MF Global already admitted as much; but the condition of the books is so bad that it's going to take investigators time to figure out who knew what and when, and how much money is involved.

Corzine remains on the hook since it was his decision to push the firm into taking positions on European sovereign debt that pushed the company into insolvency and the firm lacked the credit to back its positions. Bradley Abelow, who was Corzine's Chief of Staff while Corzine was New Jersey governor, was the firm's COO and should have done a better job managing the company's risk. However, Abelow wasn't a key player in determining the firm's trading policy.

Thus far, all of the company's broker-dealers have been fired, but some may be hired back to help wind down the accounts.

As far as the firm's clients and creditors are concerned, there's a huge mess waiting to happen. Some creditors are claiming that JP Morgan Chase tried to cut to the head of the line; Chase is MF Global's largest creditor and proffered a $8 million emergency loan on the day of the bankruptcy. Expect lots of lawsuits as the creditors try to jockey for position to recover some value from the firm.

What's Wrong With the Financial/Banking Industry

What's wrong with the finance industry? They're sitting on money they can't or wont lend:

Ordinarily, in a more robust environment, an influx of deposits would be used to finance new businesses, expansion plans and home purchases. But in today’s fragile economy, the bulk of the new money is doing little to spur growth. Of the $41.8 billion of deposits that Wells Fargo collected in the third quarter, for example, only about $8.2 billion was earmarked to finance new loans.

Normally, banks earn healthy profits by taking in deposits and then investing them or lending them out at substantially higher interest rates than what they pay savers. But that traditional banking model has broken down.

Today, banks are paying savers almost nothing for their deposits. As it turns out, the banks are not minting money on those piles of cash. Lending levels have not bounced back from only a few years ago and the loans going out are not keeping pace with the deposits rushing in.

What’s more, the profitability of each new loan has shrunk. Because the Federal Reserve effectively sets the floor off which banks price their lending rates, its decision to lower interest rates to near zero means the banks earn less money on the deposits they lend out.

The banks are also earning less on the deposits left over to invest. They typically park that money overnight at the Fed for a pittance, or invest it in ultra-safe securities, like bonds backed by the government. But with interest rates so low, the yields on those investments have been crushed.

In other words, what bankers call the spread is being squeezed — they are making less money on each dollar they hold. “It’s very hard for us to take deposits and make any meaningful spread,” said William D. Parent, Hyde Park’s chief executive.

Yet, they're sitting on piles of cash and aren't lending (because the demand isn't there, or aren't particularly qualified, or a combination of other economic factors).

With the banks sitting on so much cash, they should be opening the doors to new investments via loans, but that hasn't happened. That's a big problem. The banks are still worried about risk on loans so what do they do instead? They're pushing more fees on people putting money in the banks - hoping that will spur what exactly? Oh wait - it ups the bottom line, when they need to be spurring investment and getting the ball rolling again.

French Trader Accused Of Causing Market Meltdown In Custody

A rogue trader who cost France's Societe Generale bank more than $7 billion by making bad stock market bets was taken into custody on Saturday for questioning, judicial officials said.

Financial police in Paris were to question Jerome Kerviel as part of a probe into Societe Generale's announcement Thursday that the 31-year-old trader had put tens of billions of dollars at risk in one of history's biggest frauds, judicial officials said. They spoke on condition of anonymity because the investigation is ongoing.

Skeptics from Kerviel's neighbors to France's prime minister have questioned whether a single futures trader could have managed such large sums. Adding to the mystery, the bank said Kerviel may not have made any personal gain from his unauthorized trades.

The bank said it discovered the fraud last weekend and unwound the trader's losing bets starting Monday, when world markets tumbled. Some analysts have questioned whether Societe Generale exacerbated the fall and indirectly led to the U.S. Federal Reserve's subsequent decision to cut rates.

This one individual is accused of putting billions of dollars at risk in fraudulent transactions, and could take down one of France's largest financial houses - Societe Generale. The news spread through markets around the world, and caused serious trepidation and the markets tanked in reaction. News of the investigation may also have caused the US Federal Reserve to drop the federal funds rate by 3/4 of a point - to spur banks to loan to each other and stabilize the situation further. The Fed might have dropped rates by a smaller amount but for the news from Societe Generale.