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House Republicans Find Corzine Guilty Of MF Global Collapse, Missing Funds; Democrats Refuse To Endorse Findings

It appears that these days not even the Corzining of client money can happen without it being split across furiously polarized party lines. As it turns out hours ago, the Committee on House Financial Services released an advance glimpse into a report to be released in its entirety tomorrow, which puts the blame for the collapse of not only MF Global, but also the disappearance of millions in client money, right where it belongs: the firm’s then CEO Jon Corzine.

As Bloomberg summarizes, “The summary reflects conclusions reached by Republicans, who hold a majority on the panel and were in contact with Democrats during the investigation, according to Jeff Emerson, spokesman for the Financial Services Committee. The investigation included three congressional hearings, more than 50 interviews and a review of documents from MF Global, former brokerage employees and regulators, according to the summary.”

Yet that Corzine corzined millions, leaving clients scrambling in bankruptcy court in an attempt to recover what should have been segregated money from the very beginning, and also just happened to blow up one of the 21 Fed-anointed Primary Dealers, is not surprising: this has been long known by everyone. Those who need a refresher are urged to recall the Honorable’s testimony before the House… or maybe not: after all it is not as if Corzine himself could recall a whole lot. Where it gets interesting is that the former Democratic governor, and senator, not to mention primary bundler for president Obama, is, in the eyes of the members of the committee, innocent: All the democrats on the Investigations Subcommittee refused to sign off on the findings, meaning that to them, Corzine is completely innocent. That this is purely a political move is glaringly obvious. It is also abhorrent, because as long as political ideology gets in the way of pursuing and imposing justice, the Banana States of America will remain just that.

From The Committee on Financial Services:

Subcommittee Investigation Reveals Decisions by Corzine Led to MF Global Bankruptcy and Missing Customer Funds 

Full report of Financial Services Oversight and Investigations Subcommittee
to be released Thursday

WASHINGTON – Decisions by Jon Corzine to chart a radically different course for MF Global and try to turn the 230-year-old commodities broker into a full-service investment bank were the cause of the firm’s bankruptcy and failure to protect customer funds, Republican members of a congressional subcommittee will report this week.

The House Financial Services Subcommittee on Oversight and Investigations, chaired by Rep. Randy Neugebauer, will release the full results of its year-long staff investigation into the collapse of MF Global on Thursday.

“Our investigation is essentially an autopsy of how MF Global came to its ultimate demise and what can be done to prevent similar customer losses in the future,” said Chairman Neugebauer.

Corzine, a former co-chairman of Goldman Sachs who later became a U.S. senator and governor of New Jersey, resigned from MF Global on November 4, 2011, almost 20 months after becoming the firm’s Chairman and CEO.  The brokerage had declared bankruptcy four days earlier and its collapse revealed a $1.6 billion shortfall in customer funds.

“Choices made by Jon Corzine during his tenure as chairman and CEO sealed MF Global’s fate,” Chairman Neugebauer stated.   “Farmers, ranchers and other customers may never get back over $1 billion of their money as a result of his decisions. Corzine dramatically changed MF Global’s business model without fully understanding the risks associated with such a radical transformation.”

The Subcommittee’s staff investigation of MF Global involved three hearings, more than 50 witness interviews, and the review of more than 243,000 documents obtained from MF Global, its former employees, federal regulators and other sources.

“By expanding MF Global into new business lines without first returning its core commodities business to profitability, Corzine ensured that the company would face enormous resource demands and exposed it to new risks that it was ill-equipped to handle,” the subcommittee report states.

In order to generate the revenue needed to fund MF Global’s transformation, Corzine invested heavily in the sovereign debt of struggling European countries.  These investments, which carried enormous default and liquidity risks, were a “prime focus” of Corzine’s attention and he failed to develop a corporate strategy for managing the risks, the subcommittee majority staff found.

Authoritarian atmosphere

Those risks were exacerbated by an authoritarian atmosphere Corzine created at the firm where “no one could challenge his decisions,” the subcommittee report reveals.

Corzine made significant changes to MF Global’s senior management, including the hiring of Bradley Abelow, his former gubernatorial chief of staff, as the firm’s chief operating officer.

When MF Global’s chief risk officer disagreed with Corzine about the size of the company’s European bond portfolio, Corzine directed him to report to Abelow rather than to MF Global’s board of directors.  “This change effectively sidelined the most senior individual charged with monitoring the company’s risks and deprived the board of an independent assessment of the risks that Corzine’s trades posed to MF Global, its shareholders and its customers,” the report declares.

Corzine insulated trading activity from review process

In addition, the subcommittee’s report reveals that Corzine acted as MF Global’s “de facto chief trader” and insulated his trading activities from the company’s normal risk management review process.  This enabled Corzine to quickly build the company’s European bond portfolio “well in excess of prudent limits without effective resistance.”

Rather than hold the European bonds on MF Global’s books, which could expose the company to earnings volatility, Corzine chose to use these bonds as collateral in repurchase-to-maturity (RTM) transactions.  This permitted the company to book quick profits while keeping the transactions off its balance sheet.

Failure to initially disclose extent of risks

Since MF Global did not initially disclose the full extent of its European bond holdings, federal regulators and the investing public were not aware of all the risks facing the company.

The belated disclosure in October 2011 of its extensive European RTM portfolio – which amounted to 14 percent of MF Global’s total assets – combined with poor earnings news prompted credit rating agencies to downgrade the company’s credit rating to junk status.

The downgrade set off a “run on the bank” by MF Global’s investors, customers and counterparties that created a liquidity crisis during what would turn out to be the company’s final days.

Because Corzine had failed to integrate systems and controls for managing the company’s liquidity and protecting customer funds, the company could not fully assess and anticipate its liquidity needs during the crisis, nor could it coordinate its cash management, liquidity monitoring and regulatory compliance functions.

Liquidity crisis prompts withdrawal of customer funds

“As the company struggled to find additional liquidity,” the subcommittee reports, “company employees identified excess company funds held in customer accounts.  However, because they did not have an accurate accounting of the amount of customer funds the company held, they withdrew customer funds as well as company funds.”

The subcommittee notes that it will be up to prosecutors and regulators to determine whether MF Global or its employees violated laws or regulations when these withdrawals of customer funds were made.

‘Dereliction of duty’

“However, the responsibility for failing to maintain the systems and controls necessary to protect customer funds rests with Corzine,” the report maintains.  “This failure represents a dereliction of his duty as MF Global’s chairman and CEO.”

In its report, the subcommittee recommends that Congress consider legislation to impose civil liability on the officers and directors of futures commission merchants (FCMs) like MF Global who sign financial statements or authorize transfers from customer segregated accounts.  Such legislation could “restore investor confidence in the derivatives markets and ensure that an FCM does not misuse customer funds in the future,” the Subcommittee report said.

Other findings of investigation to be released

In addition to its findings that Corzine’s decisions led to MF Global’s downfall, the Subcommittee report is expected to address regulatory agencies’ failure to share critical information with each other about MF Global, failures by credit rating agencies to sufficiently review MF Global’s public filings, and concerns about the New York Federal Reserve’s decision to designate MF Global as a “primary dealer” despite the company’s troubled financial situation.

Zero Hedge

So, now the Democrats, whose former ‘claim to fame’ was excoriating bankers and Wall Street and aligning themselves with the Occupy movement, stands between John Corzine and justice.  Be sure to thank them.   NOW who’s the ‘Party of the rich?’   For those of you who are rabidly partisan Democrats that continue to believe Obama will stand up to Wall Street, you might want to consider that part of the reason Corzine is untouchable is that he was one of Obama’s biggest fundraisers: Corzine, Amid Scandal, Is Among Obama’s Top Bundlers  It is way past time for the people who are clinging to their preferred Party to wake up and realize THEY DO NOT WORK FOR YOU!  NONE OF THEM!

It is impossible to make up a fantasy tale that rivals the manifestations of the outlandish MF Global scandal. The evaporation of customer’s monies into an intentional off shore stash is tragic enough, but the indignity of allowing “no consequences” for a horrific crime against all investors is inexcusable. Jon S. Corzine is a fraudster that screams out for the gallows of justice. The manner of fleecing the public by Wall Street crooks has a clear distinction. Corzine walks while Madoff serves time. The original “Magical Mystery Tour” was a precursor of today’s reality TV shows. Corzine’s version is more a “House of Horrors”.

The following video is Frontline’s expose on Jon Corzine and MF Global.  The film features Christopher Whalen from Institutional Risk Analytics.  Mr. Whalen spells it out pretty clearly when he says that MFGlobal’s use of client funds in risky leveraged bets is ‘fraud.’  As the film shows, MFGlobal was a commodities trading firm.  Hundreds of farmers throughout the country relied upon their execution of trades in order to offset their risk of perhaps having a poor crop, or losing some of their cattle herds; they didn’t use MFGlobal to leverage their money 40:1 and use it to place bets on risky European sovereign debt.  As usual, the question remains:  why has no one been prosecuted?  There are people out there who are missing a collective $1 billion dollars.  Don’t these people deserve justice?  How about equal application of the law?  It appears that Jon Corzine and his former company cohorts are exempt from the laws that apply to the rest of us, merely because Corzine was a former executive of Goldman Sachs and a former governor….oh, and a friend and ‘trusted advisor’ to Barack Obama.   Precisely how much more will the American people stand?

Part 1

Watch Six Billion Dollar Bet on PBS. See more from FRONTLINE.

 Part 2

Watch Six Billion Dollar Bet on PBS. See more from FRONTLINE.

Frontline

This ought to be over about now.

Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. (JPM)accounts in London, according to an e-mail sent by a firm executive.

Edith O’Brien, a treasurer for the firm, said in an e-mail sent the afternoon of Oct. 28, three days before the company collapsed, that the transfer of the funds was “Per JC’s direct instructions,” according to a copy of a memo drafted by congressional investigators and obtained by Bloomberg News.

Where’s the indictment?

Corzine is entitled to the presumption of innocence but the victims of this apparent scheme are entitled to justice.  Where is it?  Six months into this we now have prima-facie evidence that Corzine ordered a transfer from customer segregated funds to meet a margin call against the firm’s proprietary trading.

If there’s an argument that this sort of transfer would be lawful I’d love to see it.

More to the point, if this sort of transfer is lawful then no person in this country can ever trade anything in a brokerage again until it is rendered unlawful and assurances are available that this conduct will result in long prison sentences and personal liability.

If you do then you are a rube, as your funds are simply there for the purpose of (legally) stealing them when, not if your brokerage finds itself underwater.

There’s a further problem:

Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was never returned to JPMorgan, the memo said.

So JP Morgan suspected the funds were stolen and drafted a letter demanding a written assurance they were not.  They never got that assurance, which means they knew the funds were impaired.

This in turn means they effectively received stolen property and thus have destroyed any argument they might have in “good faith” reception of the funds, which in turn means that all of those funds must be immediately clawed back.

We’re six months into this folks, and the customers of MFer Global still don’t have their money.  But now we have not just the belief that the company knowingly took customer funds to satisfy a margin call on their proprietary positions, we have evidence they did so.

And we further have hard evidence that JP Morgan knew the funds were taken from customer segregated accounts and were not MF Global’s to disburse.

If we do not see indictments and the clawback of those funds in the immediate future every American will have no choice but to consider the federal government to be nothing more than a bunch of felonious thugs — from the Office of the President on down.

A warning to those who think that this story being off the front page means it’s over.

It’s not.

I am getting repeated reports that farmers and other producers are turning increasingly to direct deals with the users of their products, eschewing the futures markets entirely.

These are not speculators.  These are the people who grow the corn, wheat, soybeans and other products you wish to buy in “processed” form.

This is exactly what I warned might happen, and it appears that it is.

It is an extremely dangerous trend for consumer price stability and in fact for the stability of our nation’s economy in general.

Futures markets in various forms are not new constructs.  They literally date to the East India Tea Company with spice contracts.  They are necessary lubricants for price stability and the even functioning of markets.

Some very ordinary transactions that we have all become accustomed to are at risk of disappearing entirely.  Among them are airline tickets at a known price for travel six months from now.  Reasonably-stable prices for a box of cereal are another example (corn has traded from 572 to 799 in the last year; a forty percent range over the last 12 months; soy and wheat have seen similar moves); indeed, virtually every food item in your store, from orange juice to bacon (pork bellies) is hedged off in these markets!

The move to direct transactions means that the reasonable stability we have enjoyed in these transactions, or even the ability to enter into them at all over a horizon of more than a month or two, is at risk of disappearing!

I warned when this story first broke that the danger was much more severe than being reported and that in fact the financial media was downplaying the importance of this fiasco.  It was (and is) my expectation that if there is another event of this sort the entire futures market structure for hedging these prices would be likely to collapse.

But now the cracks are becoming evident around the edges anyway.

The producers don’t have to put up with this crap and they are beginning to vote with their feet.

The unwillingness of the government, from Obama and Eric Holder on down, to demand that these funds be returned to the segregated client accounts immediately irrespective of who holds them and irrespective of how, with sorting out who goes to prison for the actions behind their loss, if anyone, at a later date is a failure that the markets appear to be taking very poorly.

If you think this story is “over” because it’s no longer front-page news, you’re wrong.  Keep your ear to the ground on this one — it is rather likely that more unpleasant surprises are going to be forthcoming in this sad saga.