Tags: Feinberg | Corzine | MF | Global

Robert Feinberg: Report on MF Global Released

Friday, 16 Nov 2012 02:47 PM

By Robert Feinberg

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The House Financial Services Subcommittee on Oversight and Investigations, which is chaired by Rep. Randy Neugebauer, R-Texas, released a 100-page report on the failure of commodities-brokerage firm MF Global.

The report is necessarily incomplete, because MF Global was both a broker-dealer and a futures commission merchant. The Financial Services Committee only has jurisdiction over the broker-dealer aspect, while the futures commission merchant function, under which the most serious alleged abuses occurred, falls under the jurisdiction of the House Agriculture Committee.

Customers were divided into 36,000 futures customers and 318 securities customers, but the report points out that some of the customers consisted of cooperatives with as many as 35,000 members. The amount of losses, according to the report, was initially estimated at $770 million but ended up at $1.6 billion. For whatever reason, the Agriculture Committee chose not to participate in the investigation.

The focus of the report is on Jon Corzine, who was the CEO of MF Global and formerly served as governor of New Jersey and as a senator and member of the Senate Banking Committee.

A quote from Corzine from May 20, 2010, serves as the preface to the report: “The goal here is not to be a prop trader. … I don’t think that we will be in a risk-taking position, substantial enough to have it be the kind of thing that the rating agencies would say ‘holy cow, these guys got a different business strategy’ than what we told them we had.”

This was Corzine’s explanation of his strategy to turn MF Global into “a mini-Goldman,” a reference to Corzine’s former job as chairman of Goldman Sachs. Despite a history of significant losses and 80 regulatory actions against it, MF Global was able to secure the status of primary dealer from the Federal Reserve Bank of New York. It then proceeded to accumulate a position of $6.3 billion in highly rated European sovereign debt, and the report concluded, “Ultimately, MF Global’s belated disclosure of its extensive European RTM [repo to maturity] portfolio, its inability to meet increasing liquidity demands and its lack of internal controls led to its collapse.” RTM is a transaction that entails the funding of securities, in this case EU debt, with overnight repos that are rolled over until the underlying securities mature.

The bulk of the report consists of a rehash of material, from a series of subcommittee hearings, on the state of MF Global before and during Corzine’s leadership of the company and a timeline of the events leading up to the collapse of MF Global, followed by brief updates on the state of the liquidation, investigations and litigation.

Finally, the report presents findings and recommendations:

• Jon Corzine caused MF Global’s bankruptcy and put customer funds at risk.

• The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) failed to share critical information about MF Global.

• MF Global was not forthright with regulators or the public about the degree of its exposure to its european bond portfolio or its liquidity condition.

• Moody’s and Standard & Poor’s failed to identify the biggest risk to MF Global’s financial health.

• MF Global’s use of the “alternative method” allowed the company to use some customer funds as a source of capital for the company’s day-to-day operations.

• The New York Fed should have exercised greater caution in determining whether to designate MF Global as a primary dealer.

• Differences between Foreign and U.S. law gave rise to the potential that MF Global customers trading on foreign exchanges would experience a “shortfall” in funds.

The report does a good job of tying together material from various congressional hearings, but while its one-paragraph summary of the state of litigation states that the company and its employees are being investigated, readers already know that there is little likelihood of criminal charges being brought, and the history of civil litigation against Wall Street miscreants is not encouraging.

A detailed discussion of the recommendations of the report is beyond the scope of this article, but if one chooses to read the full discussion of the findings and recommendations one would be hard pressed to find a more tepid set of recommendations.

In a press conference accompanying the release of the report, the Committee Members stated that they have no legislative recommendations and are waiting for the industry to come up with some.

Ironically, as former colleague Chris Whalen pointed out in an article on zerohedge.com, in 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which prevents appointment of a bankruptcy receiver to bring charges against people who commit fraud, thus effectively depriving the victims of MF Global of any satisfaction through the criminal justice system.

Incidentally, Financial Services Committee Chairman Spencer Bachus, R-Ala., mispronounced Corzine’s name (Corzone), and Neugebauer has never learned how to pronounce the name of the ranking Democrat on the subcommittee, Rep. Michael Capuano, D-Mass.

So this is an interesting, but soft-hitting report. It would have been a bit more forthright to have said, this is what happened, Corzine is the culprit, and the policy making and regulatory mechanism is so unwieldy and conflicted that there isn’t much we can do about this. We express our deepest sympathy to the thousands of customers who have been harmed by yet another in a long line of financial scandals.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.

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