ICE

[parsley]

Institutions make rules to grab wealth. Kings
routinely tithed you into poverty; governments
declared war on you, formally and killed you.
And in the good old days Wil, I'd don my horned
helmet, hop a boat, and slice your cousins to bits
as I dragged you out the door by your hair.

But wait, there's hope. Rule of law slows down
the institutions. The Internet retards governments
because now the world can read, and be
honest, you'd volunteer. pars

[parsley]

#4


While Jon Corzine's resume may have made him
look like a tremendous asset for a company like
MF Global (OTC: MFGLQ), he was
unquestionably the wrong man for the job. The
spectacular implosion of the firm was almost
inevitable from the day that he agreed to take
over as its CEO.

In many ways Jon Corzine had reached the
pinnacles of business and politics. He rose from
Goldman Sachs' bond desk to lead the division
and eventually the company. After Goldman, he
was elected both a U.S. senator and a state
governor. However, at almost every turn
Corzine's sky-high ambitions slammed headfirst
into brick walls.

At Goldman Sachs, Corzine's bullheadedness,
particularly with regards to Goldman's initial
public offering, put him at odds with other key
players in Goldman's hierarchy, including Henry
"Hank" Paulson, who would later become the
U.S. Treasury Secretary. Corzine eventually got
his way and Goldman hit the public markets, but
his crusade cost him his job.

After Goldman, Corzine "won" a spot on the U.S.
Senate by personally financing the most
expensive senatorial campaign in history, but his
policies were so far left that they hit a brick wall
with the largely Republican-run Senate during his
term. Corzine spent tens of millions more of his
own money to win the New Jersey gubernatorial
election in 2005. He found himself battling the
back-alley deal culture that often dominates
Garden State politics, enduring a scandal
involving the president of New Jersey's largest
union, presiding over a government shutdown,
and ending up on the receiving end of the first
and only attempted recall of a New Jersey
governor. 

Ultimately, Corzine lost his first re-election bid in
a fractious contest with Republican Chris
Christie.

When longtime friend J. Christopher Flowers
called Corzine to discuss the top job at MF
Global, the decision was a quick and easy one.
The money was nothing to sneeze at, particularly
the share of J.C. Flowers & Co.'s profits that
Flowers offered up by making Corzine an
operating partner. More importantly for Corzine,
though, the MF Global job offered a much-
needed shot at redemption.

A former Corzine senate staffer told us that the
senator's staff strongly encouraged him to not run
for governor in New Jersey. But it was of no use.
Corzine, he told us, is drawn to "charity cases
and disasters" and he plowed his way into the
Garden State's gubernatorial battlefield anyway.

Since Corzine was being paid millions to run MF
Global, it's hard to think of it as a charity case --
but it was certainly a disaster. Though the broker
had a history that stretched back hundreds of
years, it had never really found its legs as a
stand-alone public company after being spun off
from Man Group. A trading scandal shortly after
the IPO sent the company reeling, and while a
confidence-boosting investment from Chris
Flowers helped temporarily, the global financial
crisis and an increasingly challenging
environment for brokers battered the company
relentlessly.

Corzine joined at the end of MF Global's fiscal
fourth quarter -- a quarter in which it lost $89
million, its fifth straight quarterly loss. And with
the company levered at 37-to-1, it had the
definite potential to quickly turn from disaster into
outright catastrophe.

In his first quarterly conference call, Corzine
emphatically declared that the company's "fiscal
2010 performance … [was] completely
unacceptable." He continued, "Going forward
these are not the kinds of results that MF Global
management will tolerate nor should its
shareholders." During the same call, Corzine
subtly hinted at his key thrust for MF Global -- a
thrust that would eventually be its undoing --
when he said that he would have the company
"extend [its] client facilitation efforts to include
principal risk-taking across most product lines."

It wasn't until two quarters later, though, that
Corzine referred to the push as an effort to turn
MF Global into a "full-service global investment
bank."

In theory, it was brilliant. By itself, the broker
business was under pressure and unlikely to
suddenly turn around and become wildly
profitable. Looking back to the fiscal year that
ended in March 2007 -- the last full year that MF
Global reported a profit -- the company's
operating earnings as a percentage of revenue
was roughly 8%. But at Corzine's former
employer, Goldman Sachs, operating profits were
more than 25% of revenue for roughly the same
period.

There was much work to do, but MF Global's
brokerage business provided a perfect foundation
to build an investment bank around. 

The brokerage operations that it knew so well
could provide a base of business. Plus, it put the
company in many of the right places and in touch
with many of the right people to expand the
company in multiple new, more profitable
directions.

If Chris Flowers was every bit the image of a
Wall Street investment banker, Jon Corzine was
none of it. Born in a small town in Illinois, his
father was a farmer and part-time insurance
salesman and his mother was an elementary
school teacher. The family lived modestly and his
parents never had a credit card.
Corzine went to public school and spent his high
school years focused on football and basketball.
He learned well-worn middle class lessons like
"You've got to work for everything you do," and
"When you get beat, you've got to get up." He
went to the state college and married his high-
school sweetheart.

Even after rising to the top rungs of finance and
politics, Corzine never fit the mold. He was
known for his thick beard and fuzzy sweaters,
both anomalies in the clean-shaven, pinstripe-
suit culture of Wall Street. One former staffer
from Corzine's senate days said it wasn't
unheard of to see the senator in shoes with holes
in them.

In conversations with those that worked with him,
"friendly" and "approachable" are words that
came up often. Former MF Global trader Michael
Fitzgerald, who joined the firm in 2007, said that
while he'd seen former CEO Bernard Dan "once
or twice," Corzine was very present and regularly
engaging employees. Another former MF Global
employee said that Corzine knew a lot of lower-
level people by name and was constantly
"walking around, smiling, and saying hello to
people."

But while much of Corzine's upbringing and
comportment may have made him an unlikely
financial master of the universe, financial risk-
taking may have simply run in his blood. The
driving force behind Corzine's father's aversion to
financial risk was the fact that Corzine's
grandfather had levered up his personal balance
sheet ahead of the Great Depression, at one
point owning 2,500 acres of farmland and a bank.
When the downturn hit, the family lost everything.

All signs point to Jon inheriting his grandfather's
drive for success through risk-taking. In The
Partnership, author Charles Ellis describes
Corzine as "a strongly intuitive risk taker and a
relentless trader." In William Cohan's Money and
Power, Cohan notes that at Goldman, Mark
Winkelman was appointed as co-head of fixed
income "to tame some of Corzine's more
reckless trading instincts." Meanwhile, a former
Goldman Sachs partner that worked with Corzine
noted, "Everything to him, if it was a position, if it
was a hundred, he liked it better at two hundred
and he liked three hundred better than two
hundred."

In fact, at Goldman there may have been deep
concerns even as the partnership at Goldman
tapped Corzine to run the entire company. In
Money and Power, Cohan writes, "The fact
remained that Goldman had selected as its new
leader the very person who had just presided
over a complete meltdown in Goldman's fixed-
income business and who, as a result, never fully
had the trust and faith of the firm's investment
bankers."

As if his thirst for risk wasn't troubling enough,
Corzine coupled that with a juggernaut's drive to
get his way when he thought he was right. As
former Goldman Sachs Vice Chairman Bob Hurst
put it, "It's not that he always thinks that he's
right; it's that he knows that he's right. That's
dangerous." A senate staffer that spoke on
background echoed that sentiment, saying that
when it came to challenging Corzine, "You're not
going to talk him out of it if the numbers are on
his side."

Corzine displayed this bullheadedness a great
many times throughout his career. He was
pushed out of Goldman Sachs in part because of
his unrelenting push for a Goldman IPO. But it
wasn't just that effort. 

When he decided that Goldman needed to grow
through a merger, he plowed ahead with
unilateral meetings with potential merger
partners, leaving Goldman's executive committee
out of the process. When participating in the
coordinated bailout of hedge fund disaster Long-
Term Capital Management, he put $300 million
of Goldman's capital on the line even though he'd
been authorized to commit only $250 million.
Politically, Corzine's "damn the torpedoes"
approach was seen early on in the cash-blitz
approach to his senate campaign. 

While he was governor of New Jersey, Corzine
presided over the state's first-ever government
shutdown, which he ordered as a gambit to get
the state's legislature to agree to his proposed
budget, and, in particular, an increase in the
state's sales tax.

Corzine's hardheaded nature had serious
personal consequences as well. He and his wife
split in 2002 and she later lamented that his
quest for political power had caused him to leave
his family behind. And in the wake of a
devastating auto accident that left the governor in
critical condition, his chief of staff tacitly
acknowledged that Corzine often didn't wear his
seatbelt and added, "Those of you who know
Governor Corzine know that he's not always
amenable to suggestion."

In hindsight, it's hard to overstate how wrong Jon
Corzine was for the CEO role at MF Global. MF
Global was a company in turmoil. There was a
void in stable leadership, a void in clear direction,
and, thanks to the merger with Refco and the
significant turnover in the years that followed, an
undoubted void in stable culture of any sort, let
alone risk management. A former MF Global
employee described the company as operating
out of "silos" that were essentially "different
groups with different cultures." Former MF Global
trader Mike Fitzgerald similarly described it as
"individual fiefdoms," though he noted that it's not
necessarily an unusual thing for an older
commodities trading firm.

What MF Global needed was a conservative,
plotting CEO, perhaps an executive seasoned in
turnarounds or restructurings. With the bottom
line under water, leverage at extreme levels, and
the market already looking askance at the firm,
there was little room for error.

What MF Global got was a growth-obsessed risk
taker who was generally unwilling to build any
sort of consensus before barreling ahead with
whatever course of action he thought was best.
At Goldman Sachs, the approach earned him the
ire of Hank Paulson and other powerful partners
at the firm. At MF Global, it was tantamount to
allowing a known arsonist run wild in a munitions
shed.

The way that Corzine approached the strategic
transition was immediately revealing. While
turning a brokerage into a "full-service global
investment bank" could mean many things --
adding advisory services, asset management,
prime brokerage, etc. -- Corzine made the initial
push in principal transactions. That is the slice of
a "full-service investment bank" that could
potentially produce profits the quickest -- but was
also by far the riskiest.

A story from a former MF Global insider is telling:
A younger trader made an error in entering a
trade and caught it a short time later. Traders
focused on executing trades are generally taught
early on to cut an error short immediately
whether the error is in their favor or not. In this
case the error was in MF Global's favor and
Corzine found out about it. He told the young
trader to "let it ride."

Meanwhile, Corzine set to work recreating the
employee base to support his approach. Many of
the existing traders were uncomfortable with the
idea of taking on principal positions and so
Corzine started bringing in a new batch of traders
-- through selective hires as well as a freshly
instituted training program -- that would be more
willing to take on risk. He also hired a young,
hotshot hedge-fund punter to build out the
company's principal strategies desk.

The upper levels of the executive suite saw
wholesale change as well. In the fall of 2010,
Bradley Abelow -- who worked under Corzine at
Goldman and was later his chief of staff while he
was the governor of New Jersey -- was brought
in as the company's chief operating officer. Chief
Risk Officer Michael Roseman, who reportedly
questioned Corzine's approach at times, was
replaced by Michael Stockman in January of
2011. Stockman was previously the North
American chief risk officer for UBS (NYSE: UBS  
) , the Swiss investment bank that absorbed
some of the worst losses during the financial
crisis. 

Two months later, the well-seasoned chief
financial officer of the company, Randy
MacDonald, was moved elsewhere in the
company and the young, less experienced Chief
Accounting Officer Henri Steenkamp was
promoted.

In the fiscal fourth-quarter earnings conference
call, Corzine hailed the changes as "upgrading in
those areas where we recognize the opportunity
to align staff to strategy." That's a nifty way to
put it, but what Corzine was really doing was
building a management team that would let him
do whatever he wanted -- particularly when it
came to risky trading decisions.

With a close relationship that reached back to
their days at Goldman, it'd be no stretch to call
Abelow a Corzine crony. The woes of Stockman's
previous employer suggest that he may have a
pretty liberal interpretation of controlling risk. And
besides, Stockman's position was set up so that
he reported to Abelow. And as for Steenkamp,
while he may have been a competent candidate
for CFO, what's a 34-year-old going to say to the
former chairman -- and, at one time, CFO -- of
Goldman Sachs?

With Corzine molding the decision makers at MF
Global in his own image, it appeared increasingly
unlikely that there would be anybody at the
company that would challenge Corzine's views.
This may not have been anything new for
Corzine. In Money and Power, William Cohan
writes that Corzine's second in command, Hank
Paulson, "believed Corzine surrounded himself
with his cronies, who told him what he wanted to
hear."

That left only the board to pull the reins on
Corzine. Corzine happened to be a board  
member himself and J.C. Flowers controlled a
second board seat through David Schamis. As
for the rest of the directors, Corzine showed his
willingness to play hardball with them, at one
point threatening to resign if the board didn't go
along with his strategy. 

In testimony in front of the House Committee on
Agriculture, Corzine described the incident as
"offering" to resign if the board had lost
confidence in him, but surely a savvy player like
Corzine understood the crippling market reaction
that would have followed if he had suddenly left
the company.

Even as Corzine was installing an executive team
that was unlikely to challenge him, in many ways
there appeared to be less reason for anybody to
want to challenge him. In his first quarter as
CEO, the company reported a small profit. The
company would go on to produce profits on an
operating basis for four of the first five quarters
that he was at the helm. 

On the balance sheet, total leverage was reduced
from 37-to-1 when Corzine started to 30-to-1 by
the end of June 2011. In early 2011, the
company was also named a Federal Reserve
primary dealer, a huge coup for the company that
would potentially open up new business lines as
well as major new customer relationships.

But if things were starting to look better from the
outside, there were turbulent waters churning
beneath the surface. Behind the scenes, the
"relentless trader" in Jon Corzine came out. The
principal trading specialist he'd hired had left, and
it appeared that Corzine gave himself the
unspoken anointing of "CEO trader" as he built a
massive trading position that would eventually
lead to the complete undoing of MF Global.

[parsley]

#5


#5

When he got up on the morning of Oct. 25, Jon
Corzine knew he had a tough day ahead of him. 

Beginning at 7:30 a.m. Eastern time he would be
presiding over a conference call to discuss MF
Global's results for the second fiscal quarter
ending Sept. 30. The numbers weren't good, and
on the previous day credit ratings agency
Moody's had downgraded the broker to one
notch above junk status and warned that the
rating was under review for a possible additional
downgrade. 

Part of Moody's rationale pertained to a huge
trade involving the government bonds of five
troubled European nations -- a trade Corzine
himself had "strongly advocated" and that he was
now managing personally.

Eight days prior, The Wall Street Journal
reported that one of the firm's regulators, the
Financial Industry Regulatory Authority, insisted
in August on an increase in the amount of capital
at MF Global's U.S. broker-dealer subsidiary
specifically in relation to that very trade. As
Corzine later recounted in Congress, "Some of
MF Global's counterparties decided to reduce
their exposure to the company, requiring some
adjustment in our financing." 

Corzine didn't know it yet, but the article had
sealed the firm's fate; the attention it received set
in motion a series of events that would end two
weeks later in a bankruptcy filing.

FINRA was also demanding that MF Global
include a specific disclosure concerning the
European sovereign debt trade, known as "repo-
to-maturity," in the earnings press release that
would go out just before the start of the call. The
disclosure figured prominently in the release and
included a table breaking down the $6.3 billion
exposure between five countries: Italy, Spain,
Belgium, Portugal, and Ireland.

With the table indicating Italy as the largest
country exposure -- half the total amount -- the
timing of the release was awful. The European
sovereign debt crisis had been the primary focus
of markets worldwide through much of the
summer. In the early hours of Oct. 25, while New
York was asleep, six hours ahead in Rome talks
between Silvio Berlusconi and his coalition
government partners failed to produce an
agreement. The Italian government was veering
toward collapse.

Although MF Global's public filings contained
detailed information on the positions and their
risk, no one had really paid it much attention until
The Wall Street Journal published their article.
With increasing urgency, investors were asking
themselves what exactly a repo-to-maturity was,
and how much could MF Global lose on them?

Brought in to turn MF Global around, Corzine was
now under immense pressure, and he knew he
could expect some probing questions on the call.
If he could just ride out the trade until its last
maturity in December 2012! At maturity, the
bonds MF Global bought and simultaneously
used as collateral would be redeemed at par and
any unrealized losses due to fluctuating bond
prices would revert to zero. Corzine was not
unaccustomed to pushing high-stakes situations
to the limit; he had pulled through two similar
ones at Goldman Sachs (NYSE: GS  ) .

In 1986, Corzine had been called back to duty on
a trading desk to take on the responsibility for
managing a massive bet in the U.S. Treasury
bond market which threatened to saddle
Goldman Sachs with $150 million in losses (this
was back when $150 million was real money and
Goldman was a much smaller firm). After five
agonizing and intense months -- during which
Corzine reported to the management committee
every other day -- the trade began to move his
way and he ended up turning a $10 million profit.

In 1994, Goldman had a horrendous year. The
firm's proprietary traders -- for which Corzine was
responsible as co-head of fixed income -- had
made a huge bet on interest rates and they were
mowed down when the Fed unexpectedly raised
rates in a series of hikes. Corzine and the other
co-head, Mark Winkelman, had sanctioned the
trade, which racked up hundreds of millions of
dollars in losses over a period stretching several
months. Many of Goldman's partners became
genuinely concerned about the longevity of their
capital account, to a point where 40 partners left
at the end of 1994 -- much more than normal
attrition.

Despite this, even Stephen Friedman, the senior
partner of the firm, couldn't get Corzine to reduce
the size of the positions. Corzine was confident
and refused to countenance any doubt. "The
worse it appears, the better the reality," he said.
"The probability is strong that if we hang on, and
even increase our position, this can be a real
winner."

In one respect, however, Corzine's present
situation was very different from those he had
experienced at Goldman Sachs. Back in 1994,
Corzine was only required to justify his positions
to a senior partner (Goldman was still a private
partnership then). Facing the scrutiny of the
public markets -- including analysts, institutional
shareholders, and regulators -- was a different
ballgame altogether, with a very different set of
rules. He certainly wasn't used to people telling
him what to divulge and when.

While media accounts often suggest MF Global's
trade is "complex" or "sophisticated," the basic
idea behind a repo-to-maturity transaction is very
simple. It's comparable to buying a rental
property in order to pocket the excess of the
rental income over the cost of the mortgage. With
a repo-to-maturity, MF Global borrowed money
in order to buy European bonds and put the
bonds up as collateral on the loan (just as a
house is collateral on its mortgage). The point of
the trade was to collect the difference between
the yield on the bonds and the borrowing rate.

Repo-to-maturity refers to the fact that the term
of the loan coincides with the maturity of the
bond, at which time MF Global receives the face
value of the bond, which it uses to repay its loan.
In a textbook version of this trade, with no risk of
default on the bond and a secure loan, the profits
you earn are riskless. Of course, the textbook
version assumes you'll still be alive to complete
the transaction at maturity. In the real world, for a
financial firm to stay alive means paying careful
attention to all manner of things that may have
nothing whatsoever to do with the trade itself.

The trade itself was far from risk-free. Corzine
was heavily focused on the possibility that one or
several peripheral European countries would
default on their bonds and he was satisfied that
this was well mitigated by the European Financial
Stability Fund, or EFSF. Never mind that the
EFSF had offered no specific guarantees backing
Italian or Belgian debt, or that many investors
were questioning the size of the EFSF,
particularly in regard to Italy, which has the
world's third-largest government bond market.

During the earnings call, Corzine told analysts
that "the structure of the [European sovereign
debt repo-to-maturity] essentially eliminates
market risk," reasoning that any unrealized loss
on the bonds would vanish at maturity once the
bonds were redeemed at their par value.

If we return to our housing analogy, let's imagine
you've arranged at the outset of your housing
investment to sell the property at a pre-arranged
price. The sale will occur simultaneously with the
end of the tenancy and that of your loan.

In the meantime, you can have the house
reappraised as often as you like in order to
establish its value based on current transaction
values in your neighborhood (for a trading book,
that process is known as "marking-to-market").
Remember, however, that you have already
contracted to sell the house at a set price at the
end of your ownership period. Provided your
buyer is reliable, you needn't concern yourself
with any of the fluctuations in the value of the
house between the time of its purchase and the
sale.

Corzine's reassurance didn't satisfy the analysts
who were listening closely; they wanted hard
numbers to make their own assessment. "Henri,
are you able to break out the 0.7 million [loss in
the principal trading activity] between market-
making losses and maybe mark-to-market
writedowns related to the European sovereign
portfolio?" asked Howard Chen of Credit Suisse,
addressing the question to MF Global's CFO,
Henri Steenkamp.

"There is zero [loss] related to the European
sovereign portfolio," Corzine interjected. These
were his trades and no one was following them
closer than he was.
The analysts already had the breakdown of the
trades by country and by maturity, and Corzine
had spent quite a bit of time describing the trades
and their risks during his prepared remarks. "Why
are we discussing this?" he must have thought to
himself, "These positions haven't moved and
even if they had, the losses would vanish at
maturity."

The analysts weren't letting up. Roger Freeman
of Barclays Capital followed Howard Chen.
Among other points, Roger wanted to know what
kind of haircut banks were currently requiring on
the same bonds (the haircut is the discount
between the face value of the bonds and the
amount they are willing to lend). Corzine and
Steenkamp found themselves quoting prices for
specific European sovereign issues. It's
completely unheard of for the executive
management of a broker-dealer to know the
prices of individual bonds in the firm's inventory.

Instead of quelling concerns, each new question
was drawing more attention to the trades and
raising newones. This was just what Corzine
wanted to avoid: He understood the risks
attached to this European sovereign debt
exposure and he was managing the positions
personally -- that should have been the end of it
as far as he was concerned. Corzine felt the
trades had become a distraction, that they had
"clouded [investors'] perceptions with respect to
our other progress."

You'll have to stick around
In a very narrow sense, Corzine was right: A
default on those bonds remains unlikely and
market risk would have had no impact if MF
Global had been there to collect at maturity. The
trade would almost certainly have been profitable;
unfortunately, the size of the trade itself created
a material risk that the firm would never see the
maturity date. In the context of a wider set of
risks -- earnings volatility, a credit downgrade,
and liquidity risk, to name but three -- he was
dangerously wrong.
Years earlier, Corzine displayed the same rigid,
compartmentalized thinking under eerily similar
circumstances. While he was head of the fixed
income division at Goldman Sachs, he was eager
to put a large position in farm credit bonds and
sought approval from the two co-senior partners
of the firm, Robert Rubin and Stephen Friedman,
explaining that the expected return was attractive
and the risk of default was virtually nil as the
bonds had the implicit backing of the U.S.
government. The issuer was Farmer Mac, a new
government agency that has a similar function to
that of Fannie Mae and Freddie Mac for
agricultural and rural properties.
Impossible or just highly unlikely?
Rubin and Friedman challenged Corzine, asking
him what would happen in a crisis scenario in
which the government declined to stand behind
Farmer Mac. In his autobiography, In an
Uncertain World, Rubin recounts:
"That's silly." Corzine replied. It was
inconceivable to him that the government would
not honor its moral obligation, and in a sense he
was right. But Steve and I didn't want Goldman
Sachs to cease to exist after 130 years because
something that we agreed was virtually
inconceivable actually happened ... the decision
to limit the risk was right.

No outright bond default was required to destroy
MF Global. Corzine was considering the risks of
the trade -- such as default risk -- as if each one
were self-contained. In his prepared statement to
the House Committee on Agriculture on Dec. 8 --
over a month after the bankruptcy -- he had the
gall to remark that "as of today, none of the
foreign debt securities that MF Global used in the
RTM trades has defaulted or been restructured" -
- as if that somehow mattered! He couldn't
imagine that less-prominent risks could band
together and produce the same result, with
regulatory risk, business risk, and earnings risk
combining to force a rating downgrade, thereby
creating liquidity issues. Worse still, MF Global
was holding a dangerous combustible perfect for
igniting that process: leverage.

MF Global was leveraged to a level that Corzine
himself had recognized as imprudent. In October
2010, just prior to his joining the firm, he told
FinancialTimes in a video interview, "We have to
be disciplined; we can't go running 30:1 leverage
ratios on our balance sheet." In fact, that ratio
was rarely below30:1 during Corzine's tenure. At
30:1, a 3.5% impairment in the value of a
financial firm's assets is all it takes to wipe out
shareholders' equity.
Leverage has other effects beyond magnifying a
firm's losses; it also contributes to raising the risk
of a credit rating downgrade. Ratings agency
Moody's had told MF Global that it needed to
manage its leverage ratio down into the 20-times
range in order for it to keep its Baa2 rating, which
was on negative watch and had been throughout
Corzine's tenure.
When you're at risk of a downgrade, a Baa2
rating isn't a great place to start from, either. 

It's "medium grade, may possess some
speculative characteristics," and "Ba" is below-
investment grade, i.e., junk status. If you're a
soap manufacturer, a rating downgrade doesn't
harm your activity per se; if your business is
money, on the other hand, peoples' perception of
your ability to repay your obligations is like the
oxygen level of your franchise. The lower it
drops, the more difficult it becomes to operate;
below a certain level, it's terminal. 

Under those circumstances, it behooved MF
Global to manage its relationship with the ratings
agencies with exceptional care and consideration
-- they were certainly more important than any
client. As the former senior partner of Goldman
Sachs, it must have been difficult to swallow the
fact that MF Global did business at the pleasure
of Moody's and Standard & Poor's.

MF Global had a solid-looking risk management
organization -- on paper. Its hierarchy of different
risk committees overseeing every flavor of risk
(market, credit, liquidity, operational, etc.)
resembles the one at Goldman Sachs, which is
the gold standard for risk management on Wall
Street. However, Corzine -- who "strongly
endorsed" the trade -- was outside that hierarchy
since he reported to the board exclusively.
Although he discussed the trade with the board
and with MF Global employees, as CEO, there
was little chance he would receive open or
adequate feedback from people whose reporting
lines all ended on his doorstep. Corzine was, in
effect, negotiating position limits directly with the
board.

In 2010, Michael Roseman, at the time the firm's
chief risk officer, actually presented Jon Corzine
with several sobering potential scenarios in the
event of a credit rating downgrade. Corzine
rebuffed him, dismissing the most pessimistic
scenarios as unrealistic -- perhaps even
impossible. In January 2011, 

Roseman was informed that the chief risk officer
role was being handed to someone else; he left
MF Global in March after a handover period.

On Oct. 25, trading volume in MF Global shares
surged more than 10 times from the previous
day's volume. By 4 p.m., the stock had lost 48%
of its value. Two days later, Moody's and Fitch
Ratings administered the death blow by
downgrading MF Global to junk status. The
company's fate was no longer in Corzine's
hands, as the downgrade triggered margins calls
and requests for customer redemptions, sparking
a classic run on the broker. Five days later, on
Oct. 31, MF Global filed for bankruptcy in the
U.S. Bankruptcy Court for the Southern District of
New York. 

Jon Corzine had been CEO for 587 days.

[RidgeRunner]

on a positive note...I got my money back from them today. Just in time for xmas.

[parsley]

#6
" the emperor showed them the label sewn inside
his worn-out suit. 'Goldman,' they said
admiringly. 'They are the finest of weavers. We
were wrong to doubt him.'"
-- "Emperor Corzine's Goldman clothes,"
Financial Times, Nov. 2, 2011

Global(OTC: MFGLQ) is a unique event in the
annals of American corporate history: To my
knowledge, it's the first time a CEO
singlehandedly bankrupted his firm through
actions that the board of directors was not only
knowledgeable of, but had indeed expressly
sanctioned. "That takes some talent!" quipped
Roderick Hills, a former chairman of the SEC,
when I put this to him -- and the deeper you dig,
the more surreal things become. I looked at
three groups that had an oversight role with
regard to MF Global and how they performed in
this farce. Only one came out of the review
unscathed.

If the opening premise wasn't enough for you, let
me add that I've never seen a board with more
financial experience -- all of the directors had
worked in finance. 

David Gelber, in particular, had been the chief
operating officer of ICAP -- the world's largest
inter-dealer broker -- as well as COO of HSBC
Global Markets, on top of having held senior
trading positions in foreign exchange and
derivatives at Citibank and HSBC.

Overseer No. 1: The board
Let's imagine that you're in charge of hiring a
senior trader who will be responsible for a new
proprietary trading desk that is a key part of your
firm's turnaround strategy. You're doing this in
the context of extremely challenging markets in
the aftermath of the worst financial crisis since
the Great Depression.

A headhunter you sometimes work with thinks
she's got a great candidate. "In fact," she says,
"you'd be lucky to get him."
"There is one thing, though," she continues,
"Nothing serious, mind you. It's just that he hasn't
worked in finance for over a decade and the last
time he held day-to-day trading responsibilities
was almost a quarter of a century ago."

Relevant vs. non-relevant
Once you set aside the very impressive title of
former senior partner of Goldman Sachs, and
focus on specific, relevant information, the
proposition above reveals itself in all its glorious
absurdity, a choice that could only be the product
of collective madness or extreme desperation.
And yet, that's exactly the choice that the MF
Global Board of Directors made.

The board hired Jon Corzine for the job and
almost immediately gave him the authority to
make gazillion-dollar trades. I'm not referring here
to the official hiring of Corzine as CEO, but to his
unofficial hiring as senior trader when the board
allowed him to become directly involved in the
firm's proprietary trading in addition to his
executive responsibilities. Doing so, they violated
a cardinal principle in risk management:
Segregation of duties.

Breaking the first rule
Nick Leeson bankrupted Barings Bank in 1995
because he could settle his own trades, but in
this case, Jon Corzine didn't exploit the situation
to conceal any activity -- on the contrary: The
European sovereign debt trades were disclosed
to the board, and to analysts, accountants, and
shareholders. Instead, it enabled him to "strongly
advocate the [European sovereign debt] trading
strategy" -- his words -- at the board level.

As CEO, Corzine reported exclusively to the
board, so he was outside the established risk
management hierarchy. Normally, a trader would
need to justify any limit request at multiple levels
as it escalates through the organization. Although
Corzine did have to go through the charade of
having the chief risk officer formally request
increased position limits for the European
sovereign debt trade, he was effectively
negotiating directly with his board. Once that was
the case, no amount of risk committees or
sophisticated analytics could help.

Are you now ready to step deeper down into the
rabbit hole with Jon Corzine? It turns out that he
was in an almost identical situation earlier in his
career at Goldman Sachs.

As I mentioned in the previous chapter, 1994 was
a traumatic year for Goldman Sachs. As the Fed
executed a series of interest rate hikes beginning
in December 1993, Goldman's fixed income
division -- of which Corzine was the co-head --
produced losses totaling hundreds of millions of
dollars over a period that stretched from the
beginning of the year through the summer. 

The losses had a devastating effect on morale
and partners were gravely concerned as they
watched Goldman's losing positions deteriorate
month after month the wealth they had
accumulated in their capital account. Forty
partners left Goldman at the end of 1994 -- a
much higher number than the normal attrition
rate.

Fool me once
One of the reasons 1994 was so painful was that
Corzine did not order the positions reduced
quickly enough, and one of the reasons for that
was that he had two roles: co-chief financial
officer and co-head of fixed income.

 I can do no better than this former Goldman
partner who described the problem (the quote is
from Bill Cohan's superb book, Money and
Power: How Goldman Sachs Came to Rule the
World):
He [Jon Corzine] wasn't independent. You just
really need independent control functions and it
is just critical that you have that to run any kind
of trading business. You need to have people on
the control side and the compliance side to
independently mark the books, to go head to
head with the traders, to have a totally
independent career track. And you need to look
at everything in terms of size.

That lesson applies no less to MF Global in 2011
than it did to Goldman Sachs in 1994.
The evidence is all over his bond sheets
Does all this sound too bizarre to be true? We
know for certain that Corzine was MF Global's
CEO and there is plentiful evidence of his trading
role. The Wall Street Journal reported that he
used to walk out of management meetings to
check the markets and that he himself placed
orders on occasion, based on a list of prices left
with an assistant. One trader I spoke to said that,
in contrast to the former CEO, Corzine "loved to
prowl the trading floor every day he was here." 

On Oct. 25, Corzine stated openly in his last
earnings call, "Our [European sovereign debt]
positions and the judgment about risk mitigation
steps are my personal responsibility and a prime
focus of my attention."

Another design flaw in the reporting lines
contributed to marginalizing the chief risk officer,
and with him, the risk function. 

According to the most recent 10-K report, "the
Chief Risk Officer ("CRO"), who reports to our
President and Chief Operating Officer, is
delegated certain authorities from the Board."
Given the structure, logic would dictate that the
CRO at minimum report to the board of directors
or a board committee rather than the president
and COO. In this case, the president and COO
happened to be Bradley Abelow, a former
Goldman Sachs partner who was the treasurer
and then the chief of staff in the New Jersey
statehouse while Corzine was governor.

It's certainly possible to identify other
weaknesses within MF Global, but I prefer to
repeat the two most important points: First, other
than Jon Corzine himself, the board of directors
bears the heaviest responsibility in MF Global's
failure. Second, the board's gravest mistake --
other than hiring Corzine in the first place -- was
to ignore a cardinal rule of risk management: the
segregation of duties. Once they allowed Corzine
to wear two hats as an executive and a trader,
the odds of the firm failing increased
exponentially.

Overseer No. 2: Regulators
For now, we'll ignore the role of the regulators in
regard to the issue of segregation of funds --
we'll be addressing this later in the series.
Instead, we'll focus on regulators' performance in
monitoring the firm and its risks.

MF Global is a situation in which I'm impressed
by regulators' actions -- and that's not often the
case. Back in mid-March, the Securities and
Exchange Commission sent a letter to the broker
asking them to defend their accounting treatment
of repo-to-maturity transactions and explain the
impact on their financial ratios (including
leverage) for the fiscal year ending on March 31,
2010. John Corzine had come onboard only a
week prior to that date and the only RTM
transactions the broker had on were backed by
U.S. Treasuries. This suggests MF Global may
already have been using aggressive accounting
in "de-recognizing" (i.e., removing) assets from
their balance sheet through that mechanism.

De-recognizing assets for fun and profit
This favorable accounting treatment may have
been part of the attraction of these particular
transactions for Jon Corzine as an easy way to
make some large bets without increasing the
stated leverage of the balance sheet. 

Here's how it works: It's possible -- under certain
conditions -- to treat the repo-to-maturity
transaction as if you were selling the bonds to
someone even though all you're doing is putting
up bonds as collateral on a loan. If you retain the
market risk, the default risk, and the credit risk
(and a few others), you own the bonds -- full
stop. Your house is collateral on your mortgage;
do you say you've sold the house to the bank
and remove it from your personal balance sheet?

To address the very distortion this treatment
creates, the Financial Industry Regulatory
Authority (FINRA, a self-regulatory body) asked
MF Global in June to boost the amount of capital
at its U.S. broker–dealer in recognition of its
exposure to its European sovereign debt trades
(which didn't figure on the broker's balance
sheet). Around mid-August, FINRA informed the
broker they would have to comply and make a
public filing to disclose it.

They disclosed the capital increase in an 8-K
filing on Sept. 1. Then The Wall Street Journal
picked up the story of the capital increase on
Oct. 17, and the death march began.

Ask and you shall receive
Investors and analysts could have asked
themselves the same questions that FINRA must
have asked itself: What is a repo-to-maturity?
What is the size of the positions? What are the
risks involved? The answers to all of these
questions and more are available in considerable
detail in the company's filings, particularly the 10-
K report for the year ending on March 31, 2011.
In terms of transparency, this was the furthest
thing from a rogue trading scandal.

In this case, FINRA could have saved itself the
time and effort if MF Global had no possibility of
using repos to mask leverage. A change in the
rule -- had it already been in place -- might have
saved MF Global from itself by constraining its
ability to put on proprietary positions in that size. 

Consider that once you add the $6.3 billion
European sovereign debt exposure back to the
firm's stated assets, the leverage ratio rises from
an already-high 30:1 to 35:1. DespiteAIG (NYSE:
AIG  ) , Bear Stearns, Fannie Mae, and Lehman
Brothers, we continue to see some financial
executives who are unwilling (or incapable) to
exercise due caution in the use of leverage.

Overseer No. 3: Credit ratings agencies
Ratings agencies aren't regulators, but they
certainly have an oversight function due to their
official status in the financial landscape. How did
the two most influential agencies, Moody's
(NYSE: MCO  ) andStandard & Poor's, perform?
The answer: Not well.

To their credit, Standard & Poor's (a unit of
McGraw-Hill (NYSE: MHP  ) ) did point out in an
April report on brokers that MF Global had a
"material exposure" to European sovereign debt;
unfortunately, the report said it was "concentrated
in higher quality issuers." At least the part about
the "material exposure" is right.

Standard & Poor's didn't, however, update its
warning in the Industry Report Card of Aug. 31.
By that time, MF Global had provided a sensitivity
analysis specifically for the European sovereign
debt positions which showed that an increase of
10 basis points in bond yields would produce a
$10.7 million loss (a basis point is one-hundredth
of a percentage point). 

This was almost identical to the equivalent figure
for U.S. government and federal agency
obligations ($10.6 million). But Spanish and
Italian bond yields are a lot more volatile than
U.S. ones. The higher the yield rises, the higher
the losses you suffer on your bonds (bond yield
and price are inversely related). Year-to-date, the
yield on the Italian two-year bond has ranged
between 2.3% and 7.9% -- a difference of 565
basis points. In comparison, the U.S. two-year
bond yield has stayed within a range of 70 basis
points.

Proprietary trading has a bright future behind it
Even the S&P update on Oct. 26 -- which placed
MF Global on "CreditWatch with negative
implications" -- still stated that the European
sovereign debt trades were client-related. The
ratings agency still hadn't understood that the
trades were entirely proprietary -- a massive bet
using the firm's own capital. 

The report even refers to MF Global's "plans for
future proprietary trading activity" -- perhaps they
meant funeral plans?

In an email, I asked the analyst who authored
the report to explain on what basis he had written
that. He referred me to the media relations
manager for financial institution ratings who
would only state that "we stand by our published
statements." Personally, when I find out that I've
written things that are demonstrably false, I
prefer to retract them.

S&P waited until Oct. 31 -- the day MF Global
filed for bankruptcy -- to downgrade MF Global.
As far as Moody's goes, I could find no evidence
of any warning or even mention of MF Global's
European sovereign debt positions at any time
prior to the first downgrade on Oct. 24. By its
own admission, Moody's understood the
magnitude of the firm's European sovereign debt
exposure only in the weeks leading up to the
bankruptcy and only after discussions with
company executives.

Moody's doublespeak
Al Bush, the Moody's analyst who covered MF
Global, said in November that MF Global's public
disclosure was "ambiguous and continues to be"
and stated that "we were surprised to find out
that they had a large off-balance-sheet
proprietary position in sovereigns." I can certainly
understand how an analyst that follows the
company might be surprised -- if they had
neglected to read the company's annual report.
Those comments are a bald-faced attempt at
whitewashing. 

As I described earlier, MF Global's disclosures
were clear, 
comprehensive, and frequent. Bush did not reply
to an email asking him how to reconcile his
surprise with a set of specific disclosures I
referred him to.

In any case, the "ambiguous disclosure" defense
doesn't hold water. Even if MF Global's
disclosures were ambiguous, the size of the
positions alone should have compelled the
analyst to address any ambiguity with the
management.

[parsley]

As farmers, we can learn from a failed process;
and push for changes so deja-boys doesn't bite
us in the ass. Business farmers are pro-active,
and take time to understand the fine print that
affect them. Futures trading us a good tool. We
have be aware of how a good tool gets tooled
around with. Next segment coming up Am I the
only one who finds this riveting? Pars.

[cottonpicken]

No your not Bonnie,glad you sank your teeth into it.

My conclusion is disintergation of confidence.

Blow back?unknown to me

(my spelling is so bad my spell check doensnt work)

[cottonpicken]

See the vaccum?

See the opportunity?

Farmer owned ,government insurance deposit
quarantee,corporate governance,lean mean killin
machine,clearing trades with 100% quaratees,giant
globes of liquidity looking for this home,gladly paying
a percentage for confidence in a grown up country of
WESTERN CANADA

[parsley]

Why, Clyde, I may have packed a lunchkit of ripe
ulterior-motive fruit, just ready for plucking. pars

[parsley]

$1.2 Billion Vanishes From MF Global
In late October, the market suddenly realized that
the emperor had no clothes at MF Global (OTC:
MFGLQ). And as revelers all over the U.S. gutted
pumpkins in preparation for Halloween, the
centuries-old brokerage was financially gutted as
counterparties stepped away.
On Halloween, MF Global became a ghost itself,
but the week prior to the bankruptcy filing was
utter chaos for the company. As one former MF
Global employee recounted, CEO Jon Corzine
faced the distress head-on, pacing the trading
floor and directing his troops in hopes of finding a
way to save the company after the massive bet
on European debt that he championed effectively
doomed it.
Even as internal levers were pulled, MF Global
hired investment bankers from Evercore (NYSE: 
EVR  ) to work on finding a buyer with deep
enough pockets to save the flagging broker. Most
major financial companies thumbed their noses
at the possibility of buying it -- they figured they
could swoop in and pick over the pieces post-
failure. However, heading into the weekend it
looked like a deal would come together.
Electronic-exchange-focused broker Interactive
Brokers (Nasdaq: IBKR  ) was at the table, and
the talks looked promising. As an MF Global
employee that was present for those final days
recounted, "We all thought there was going to be
a deal and we were going to be saved."
But at the eleventh hour, disaster struck. It was
found that futures customer funds -- money
which is legally required to be carefully set aside
and clearly accounted for -- were missing. Initial
media reports suggested as much as $1 billion
was unaccounted for, but the number was quickly
dropped to $700 million, then $600 million. But
as far as the Interactive Brokers deal was
concerned, the exact amount of the shortfall
didn't matter one whit -- what was very clear was
that a lot of client money had vanished. Buying
MF Global was suddenly akin to buying real
estate on Three Mile Island in late March of
1979. The deal was quashed and MF Global was
left with no other choice than to file for
bankruptcy.
Following the bankruptcy filing, it would take
James Giddens -- the bankruptcy trustee of MF
Global's broker subsidiary -- a full three weeks of
working through the company's books to offer an
"official" estimate of the shortfall. On Nov. 21, he
announced that "$1.2 billion or more" had
disappeared from the segregated customer
accounts.
Sacrosanct
Whether we're talking about a bank, an equities
broker, or a futures broker like MF Global, it's
clearly bad when deposited customer money
goes missing. However, there are safety valves
for bank depositors and stock market investors.
The Federal Deposit Insurance Corp. protects
banking customers to the tune of $250,000.
Meanwhile, the Securities Investor Protection
Corp. steps in with up to $500,000 per customer
to help equity investors when a stock broker fails
and doesn't have adequate funds to make its
customers whole.
There is no such insurance backstop for futures
customers. What the futures industry has relied
on instead are "segregated accounts" that put
customer money in a safe side-pot that is legally
off-limits for the broker to use to directly fund its
operations or back its own proprietary trading
positions.
Ask futures customers about segregated
accounts, and nine times out of 10 they'll tell you
that those accounts are sacrosanct.
Where's the money, Corzine?
The possibility that Jon Corzine authorized the
customer funds to be pulled out of segregated
accounts to plug holes in the company's balance
sheet is in some ways a very logical scenario. As
we've detailed in this report, Corzine created an
atmosphere where serious challenges to his
power and decisions were basically nil. In the
turbulent scrum that took place as they tried to
save the company, it seems even less likely that
a Corzine directive would be denied.
This scenario would provide a tidy denouement
for those of us breathlessly waiting for resolution.
Corzine would be criminally culpable, civil suits
could plunder his personal assets, and
prosecutors could fit him for a new kind of striped
suit and send him on a long vacation with Bernie
Madoff.
This would also likely work out well for regulators,
including MF Global's primary self-regulatory
organization, CME Group (NYSE: CME  ) . If
Corzine acted criminally, it may let those
regulators off the hook to some extent. It doesn't
necessarily take a regulatory failure for somebody
to act criminally. After all, robbery is illegal, but if
a thief is bent on robbing a bank, he or she will
do it anyway.
This seems to be the scenario that the CME is
pushing -- according to congressional testimony
from CME Chairman Terry Duffy and a timeline of
events released by the CME, not only were there
potentially prohibited loans made from customer
accounts, but Corzine may have known about the
loans. However, at the time of this writing, the
CME's account was uncorroborated and the
details were under wraps on who from MF Global
was talking about Corzine's knowledge of the
loans and what exactly was said.
And while there are those who think it
inconceivable that Corzine would have acted
illegally, times of extreme stress can often drive
people to do things that they wouldn't otherwise
dream of doing.
Or not...
As cleanly as the Corzine-as-criminal scenario
would wrap up the MF Global case, there are
good reasons to doubt that that's how it went
down. Corzine was a wealthy and well-connected
man, which promised him a perfectly comfortable
life even if MF Global failed. And unless the
former senator was willing to add perjury to his
rap sheet, if he had criminally authorized the use
of client funds, there's no way he would have
said the opposite during multiple testimonies in
front of Congress.
It's important to remember, too, that in a large,
global organization -- financial or not -- the CEO
is responsible for setting up the right systems
and effectively delegating responsibilities.
This leaves open the very real possibility that,
without his knowledge, somebody at a level well
below Corzine made the decision to funnel client
funds to the company's balance sheet in a
desperate attempt to keep the ship from sinking.
This doesn't necessarily let Corzine off the hook,
though. As noted above, it's a major part of the
CEO's job to put the proper systems in place. In
fact, regulations implemented through Sarbanes-
Oxley -- a bill that Corzine co-wrote while he was
a senator -- require that the CEO and CFO sign
off on the effectiveness of the controls over
financial reporting. For instance, for fiscal 2011,
both Corzine and MF Global CFO Henri
Steenkamp signed off on the fact that they had:
Designed such disclosure controls and
procedures, or caused such disclosure controls
and procedures to be designed under our
supervision, to ensure that material information
relating to the Registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities.
If those proper "controls and procedures" were in
place, a breach of segregated client funds should
have set off loud, blaring, obnoxious alarms that
would have alerted management to that breach.
If it turns out that those proper controls weren't in
place, Corzine and Steenkamp could face both
civil and criminal charges.
It's also possible that the proper procedures were
in place, but an employee was simply determined
to illegally circumvent those systems -- perhaps
in some misguided belief that it would help save
the company and curry favor with Corzine or
other members of management.
Flabbergasted!
Of course there's also the possibility that
malfeasance isn't present here at all. Multiple
former MF Global employees that we spoke to
think that the missing money may simply be the
result of a bookkeeping error. They believe it's
unlikely that there was deliberate wrongdoing
involved, particularly on the part of Corzine.
Former MF Global trader Mike Fitzgerald
emphatically stated that he'd be "nothing less
than flabbergasted" if it turned out Corzine did
something nefarious. Even TV stock jock Jim
Cramer -- who was a former Goldmanite himself -
- stepped up to defend Corzine on CNBC, saying
Corzine is "not a bad man."
To be sure, in the best of days the accounting
and bookkeeping for a global brokerage firm is
complex. And these were anything but the best of
days for MF Global as it scrambled to pull out of
a tailspin. News reports have quoted people
close to the situation as describing MF Global's
books as "a disaster." In testimony before the
House Agriculture Committee, Corzine spoke to
the chaos that reigned in the final days before
the bankruptcy, and suggested that the amount
of money that was shifted around could make
things very difficult to pick through.
And yet the longer the process drags on, the less
likely the "bookkeeping error" scenario seems.
With forensic accountants and FBI investigators
working with former MF Global employees to
untangle the books, it seems highly unlikely that
an accounting misstep -- or even a series of
missteps -- would take more than a month to
ferret out. Furthermore, while the CME's timeline
shows that the missing funds were initially
thought to be an accounting mishap, it notes that
by the early-morning hours of Oct. 31, MF Global
reported to them that "the deficiency is real."
Flight of the red herring: Rule 1.25
In the wake of MF Global's collapse and, in
particular, the revelation of the missing customer
funds, a lot of focus -- particularly from
lawmakers in Congress -- has been put on the
Commodity Exchange Act's rule 1.25, which
dictates the way in which futures brokers can
invest customer funds. Much of the focus
appears to stem from confusion over what
exactly the rule means.
First of all, from a big-picture perspective, it's not
unusual at all for a financial company to earn
income for itself by investing customer funds. The
entire banking business model is built on
redeploying deposits in interest-earning
investments, including mortgage loans. Equities
brokers such as Charles Schwab (Nasdaq: 
SCHW  ) can also invest customer cash balances
to earn interest income. Even payroll giant ADP 
(NYSE: ADP  ) invests customer funds during the
short interval between when the client gives them
the money and when it has to go out to tax
authorities or the client's employees.
For futures brokers like MF Global, it is likewise
permitted for them to invest customer funds to
earn interest income. Rule 1.25 simply details
what types of investments are kosher. The only
reason that 1.25 should be an issue in the MF
Global case is if there was reason to believe that
overly loose parameters in the rule had
something to do with the missing client funds. At
the time of this writing, there has been no solid
evidence that client funds had anything to do with
the repo-to-maturity trade that led to the
company's collapse, or that the missing customer
funds have anything to do with overly risky
investments that were permitted under 1.25.
In fact, it seems that the only reason that 1.25 is
a hot topic among lawmakers -- besides their
lack of understanding of what the rule is -- is that
there was some appearance of fishy dealings
around proposed changes to the rule prior to MF
Global's collapse. Corzine and other high-level
executives at MF Global had met with regulators
from the Commodity Futures Trading
Commission to push back on changes that would
cut back on what was allowed under rule 1.25.
Today, those meetings look sketchy in light of MF
Global's collapse, but MF Global was one of
several futures brokers that was campaigning
against the rule change. Plus, just because
Corzine was pushing back on the rule change
doesn't necessarily mean that there was
something underhanded going on -- in fact, it
could be said that he wouldn't be doing his job
as CEO if he didn't advocate for the company
when regulations threatened to crimp the
business.
Not that the CFTC has been helpful in clearing
up the misunderstanding around rule 1.25. In a
very desperate-seeming move after MF Global's
collapse, the regulator passed the "MF Global
rule" which went ahead with the previously
considered changes and curtailed futures brokers'
ability to invest in sovereign debt or borrow
money from customer accounts via repurchase
transactions. We believe that it will eventually be
revealed that what was permitted under rule 1.25
was not the cause of MF Global's missing funds,
which will also show that the CFTC's rush to
implement the "MF Global rule" was a cheap ploy
to save face and make it look like the regulator
was doing something in response to MF Global's
collapse.
And all of the rest
In our conversations with MF Global customers,
former employees, regulators, lawyers, and other
experts, it seemed at times that there were as
many theories about the missing money as there
are sweaters in Jon Corzine's closet. Some were
simply variations of the scenarios presented
above. Others were far more creative and
sounded more like something out of a John
Grisham novel.
With significant facts still yet to be uncovered, it's
certainly possible that something surprising, or
even bizarre, happened here. As they say, fact is
often stranger than fiction. However, at the time
of this writing, we believe that one of the
scenarios presented above will eventually be
proven by investigators.
But no matter what happened to the money, MF
Global customers have had to deal with the fact
that a huge amount of money is missing and
much of the rest of their deposited funds were
frozen for an extended period of time. This has
created hardship for thousands of customers that
were directly involved with MF Global.

Furthermore, it has had a chilling effect that
reaches much more broadly than MF Global, as
futures traders all over the country wonder
whether this might be a sign that the system is
simply broken.

[parsley]

That is the last entry

Note what cotton noted. There is a an epidiemic
of contagious trading-skepticism spreading
throughout the world, isn't there.
Trust Greece? Italy? Yes, well.

Canada has a chance that comes in a million to
establish a global trading institution. There ia a
need. Opportunity. Canada has a good financial
reputation. Product. Alberta and Saskatchewan
both have supportive environments for the
establishment of a trading centre.
The ability of so many young educated farmers
to support and participate in a trading centre is a
huge asset.

[cottonpicken]

Lol,i'm glad i dont like apple pie.

[parsley]

You are lucky, Ridgerunner. I have an update
entry.

Before most of the world knew MF Global (OTC:
MFGLQ) was preparing to file for bankruptcy,
regulators knew that customer money had been
moved. Much of it, an estimated $1.2 billion at
last count, is still missing.

Former MF Global CEO Jon Corzine has sworn
before Congress that he doesn't know where the
missing money is. At least one regulator is now
challenging that story.

In explosive testimony during the House
Agriculture Committee hearings on MF Global
last week, CME Group (NYSE:CME  ) Executive
Chairman Terry Duffy said that at roughly 2 a.m.
on the morning MF Global declared bankruptcy,
the company told representatives of the U.S.
Commodity Futures Trading Commission and
CME that "customer money had been transferred
out of segregation to firm accounts."

In similar testimony before the Senate on Dec.
13, Duffy said an agency auditor participated in a
phone call where an MF Global employee
indicated Corzine knew the firm had loaned
customer cash to a European affiliate.

Unnamed sources pointed to missing customer
funds as early as two weeks after the bankruptcy,
but Duffy's testimony represents the first time a
high-level executive had gone on record to state
definitively that MF Global had commingled
accounts. More damaging? The CME knew
about it.

But who knew what, and when, goes far beyond
executives in a hearing. Customers, introducing
brokers, and MF Global traders paint a picture of
warning signs and weak-kneed regulators who
failed to take action in the days, weeks, and
years leading up to MF Global's death. This is a
closer look at what they witnessed.

Rich Ilczyszyn, a former MF Global trader who
now runs iitrader.com, arrived for work at the
Chicago office at 6 a.m. that Halloween morning.
From the outset, he was told that "offset only"
trades were being allowed that day; brokers could
only exit positions on behalf of their clients. An
email from the firm's back office verified the
order.

"It was a huge red flag," Ilczyszyn says. He and
several colleagues attempted to reach the New
York office to get clarification but the phone lines
were jammed. A short time later, the computer
system went down. "Clients couldn't get out of
the market at all," Ilczyszyn says, "which is a
dangerous proposition when you're talking about
leveraged futures positions that can skyrocket or
collapse within minutes."

Until arriving at the office that morning, Ilczyszyn
wasn't especially concerned about the bankruptcy
rumors he'd heard over the weekend. "We'd seen
this sort of thing before."
Ilczyszyn was in a good position to know. He had
been a trader with Lind-Waldock since 2002,
then went to Refco when the latter bought the
first. But then Refco went bankrupt and was
swept up by MF Global. Ilczyszyn was unaffected
because Lind-Waldock remained its own
operation, with its own CEO.
Corzine changed that by putting the MF Global
brand on every business unit. It would be the first
of many changes in the new regime. "I felt the
difference right away," Ilczyszyn says, but he
also never saw any signs that MF Global was
about to implode. "I can't even imagine how
something like this could happen."

Fingers are quick to point at Corzine. His
testimony on Friday, Dec. 8 in front of the House
Committee on Agriculture didn't help his case
much; Corzine gave vague, generic answers that
came just shy of taking Fifth Amendment
protection against self-incrimination.
Yet he also has supporters. Says one former
trader for the principal strategies desk: "Beyond
everything that happened, [Corzine] was the guy
who knew everyone's names, he was walking
around, smiling, saying hello to people ... I mean,
he was like the dear leader."
He says this without irony, not realizing it's a
name most often applied to North Korea's Kim
Jong-il.

For all the praise, there were criticisms of
Corzine as well, many of which centered on his
restructuring of the firm. By all accounts, MF
Global was a company with many silos. Mike
Fitzpatrick, a former MF Global oil trader, notes
this isn't unusual in older commodities firms.
"Cocoa, metal, wheat ... all are their own little
fiefdoms."

A series of mass hirings and firings over the past
two years had only exacerbated the problem. In
2009, MF Global had expanded its fixed income
team and created a new institutional sales team,
both of which brought on a slew of new hires.
The company had three chief financial officers in
four years.

Upon his arrival in March 2010, Corzine
continued to restructure the company and made
several of what multiple insiders describe as
questionable hires. "When I got the chance to
see Corzine and his people, I was not
impressed," says Ilczyszyn. "These were the
same people you always see who were 'good on
paper.'"

For customers, blame isn't as important as
restitution. Steve Meyers, owner of Grainbelt
Commodities, tried to get his business out of MF
Global the Friday before the bankruptcy. "I
ordered a bunch of wires sent out. They got back
to me when it was too late to do anything and
claimed they couldn't find wiring instructions for
my account," he says.

Later, instead of receiving the wire transfers he
had requested, Meyers received approximately
$500,000 in checks by mail, one of which was for
$350,000. "Nobody in their right mind would send
out a check," Meyers says. "In fact, if I had ever
ordered one, they wouldn't have done it."
The checks bounced.

There were other warning signs. In the weeks
leading up to the bankruptcy, MF Global
instituted what appears to have been a
crackdown on margin calls. "I generally don't
have margin calls but when I did, I'd get a call
immediately," Meyers recounts. "They started to
require 100% margin up at all times, even for day
trading. It was a telltale sign that they were either
really cutting back on risk or something's going
on here."

Others say MF Global had been changing for a
while. In 2008 and 2009, Jeff Malec, CEO and
founding partner of Attain Capital, says MF
Global staff became more difficult to work with;
there was more paperwork and red tape with
opening accounts. 

Commission payouts were rarely done correctly.
"We had customer assets in the tens of millions
with MF Global," Malec says. "So, perhaps not
small, but small in comparison to their large
business, and most importantly, made to feel
small." Attain severed its relationship with MF
Global in mid-2009.

But some customers, like Don Miller, didn't notice
anything different about the way MF Global was
operating. Miller dealt specifically with S&P
futures and equities, and maintained an almost
entirely cash account at MF Global. He was one
of the most affected when excess cash was
frozen.

"I've had to shut down my business," he says,
echoing Meyers. "I have no capital to work with."
His daughter's $30,000 tuition bill is due, and
Miller had expected to pull the money from his
business. "I'm scrambling now."

Peter Lamoureux, president of Everest Asset
Management and trustee for unwinding overseas
operations during Refco's scandal-tainted 2005
bankruptcy, states that in the case of MF Global,
small is an illusion. "The MF Global failure might
look small, but we're still talking about billions in
contracts that could have a material impact on
certain types of commerce," he says. "Not
solving this issue is tantamount to inviting
another fiscal crisis."
"Saying MF Global has 'just 30,000 accounts'
misses the point that some accounts could have
served 1,000 clients," Lamoureux says. "We
really don't know the multiplier effect at work
here."

On Friday, Dec. 9, a judge approved a $2.2
billion transfer of funds to MF Global commodities
customers. It was the third such distribution since
the bankruptcy, and brings the total of returned
funds to $4.1 billion. A petition from the early
days of the bankruptcy put MF Global's assets at
$41 billion.

JPMorgan Chase, (NYSE: JPM  ) MF Global's
primary lender, has filed for "super-priority"
creditor status for the $26 million credit line it
extended to MF Global Holdings to fund the
brokerage's bankruptcy. If granted, funds
released in the future would go straight to the
bank.

James Koutoulas is CEO of Typhon Capital and
lead counsel for the Commodity Customer
Coalition, or CCC, which represents more than
8,000 MF Global customers. Koutoulas filed an
objection to JPMorgan's request for super-priority
status on behalf of the group. "We're simply
asserting that if MF Global commingled funds
from customer accounts, or cannot properly
account for them, JPMorgan can't lay claim to
those funds as if they were their own," Koutoulas
says.

Several customers also object to MF Global
Trustee James Giddens' relationship with the
large bank. Giddens, a partner with the law firm
Hughes Hubbard & Reed, admits his firm
represented JPMorgan Chase in 2009 and 2010
but claims the bank's billings accounted for
roughly one-tenth of 1% of the firm's annual
revenue.

Though JPMorgan's connection to MF Global is
increasingly complex, it is but one of several
banks facing lawsuits for its potential role in the
brokerage's collapse. Bank of America (NYSE:
BAC  ) ,Citigroup (NYSE: C  ) , Deutsche Bank
(NYSE: DB  ) , Goldman, Jeffries Group, and the
Royal Bank of Scotland were also named in a
suit alleging the large banks covered up issues
that eventually led to MF Global's bankruptcy.
HSBC (NYSE: HBC  ) also finds itself in a tight
spot, as it's unable to determine whether a
customer or the trustee is the rightful owner of
gold bars and silver contracts it is storing for MF
Global.

Another battle, Miller says, is that the trustee
doesn't seem to understand the nature of the
case he's working. Meyers agrees, and says
working with the trustee's office has been an
endless source of frustration: "The claims forms
they put together don't even make any sense. It's
clear they don't have an understanding of the
futures market."

Giddens isn't the only official under fire, and
rightfully so. A timeline issued by the CFTC
detailing its involvement with the MF Global case
offers platitudes but little in the way of action. 

CFTC "worked with" the trustee, "addressed
questions," "has been in regular contact with,"
"encouraged," etc. Not the language of a
determined regulator demanding customer
restitution.
Perhaps it's to be expected. In the wake of MF
Global's disastrous quarterly earnings on Oct. 25,
CFTC officials spent several days on-site at MF
Global specifically to obtain segregated account
financials. On Oct. 31, when they learned of the
customer funds shortfall, rather than working in
tandem with securities regulators, CFTC kicked
the MF Global bankruptcy to the SEC and
Securities Investor Protection Corporation. 

The SIPC, in turn sought Giddens, who had
worked with the agency seven times previously --
most recently on efforts to unwind Lehman
Brothers. The decision was considered, made,
and implemented in less than three hours, from
2:30 a.m. until 5 a.m., according to the timeline.

As the document explains it, CFTC was "unable"
to initiate a bankruptcy proceeding for a
registered futures clearing merchant such as MF
Global. SIPC therefore had to be involved. What
isn't clear is why CFTC never asked to be
involved in the unwinding and return of futures
and commodity customer assets when Giddens,
the trustee, was being appointed.

Repeated attempts to get clarification from CFTC
officials have thus far been denied. In the
meantime, Commission Chairman Gary Gensler
has recused himself from the agency's
investigation into the MF Global bankruptcy, citing
a potential conflict of interest arising from an
association with Corzine that dates back to their
days working together at Goldman.
Getting back to even
"I'm not special," Meyers says. "I'm not unlike
thousands of brokers who are going through the
same thing. And we have lost faith in the system
because the industry was nowhere for us."

Ilczyszyn understands Meyers' frustrations, and
takes his customers' losses personally. "We're all
trying to help our clients. We're talking about
millions of dollars. It's our reputations on the line.
The reach of this thing is amazing."
Fitzpatrick says, "I was always under the
impression that the clearinghouse would make
everyone whole."
Dean Tofteland, the Minnesota farmer who's still
waiting for tens of thousands of dollars to be
unfrozen, understands the risk inherent in the
business. On balance, he believes business
failure is part of the economy and improves the
overall system.
"A bankruptcy is a bankruptcy," Tofteland says.
"When you fail, that's a fact of life, but there
needs to be an efficient outcome for the
customer."

"I feel that the industry had a moral obligation to
its current and future customers to ensure a
process is put in place to make sure that
customers are made whole," Miller says. "I ask
myself: What's the right thing to do?"

[bduke]

Holy smokes Parsley... you have been busier than the check-outs in Regina
today.... which were crazy.

So the info you have gleaned claims that MFG used the hypothecation of customer
accounts to secure loans at 1% to buy Italian and Spanish bonds which paid 5% at
maturity, and the loans and bond maturities were synchronized.. known as repos.

The 4% spread was easy money for MFG .. so it seemed.

However, the bonds were being downgraded by the rating agencies before
maturity, and the repo contracts required more collateral as the bond ratings
reduced.

BTW Repos are off balance sheet entities... by GAAP... but shouldn't be IMHO.

MFG was quickly running out of funds... known as becoming illiquid.. and
probably used more then the 140% of customer accounts which Cottonpicken
correctly pointed out.

MFG also had margin accounts and proprietary trading which was also requiring
greater margins, especially as their own ratings dropped.

BTW there is disagreement regarding the use of CDS insurance to cover their
trades.

I doubt if they could do the volume they did without hedging via CDS.

Regardless, the rating agencies were also downgrading MFG, which dropped their
share values...i.e. capitalization... and thereby quickly increased their leverage to
about 40%.

Without Eurozone support by the ESEF MFG insolvency was imminent.

So we now wait for forensics to "find the money".

Doesn't pass the smell test.

Cheers... Bill

[bduke]

Oops again Parsley... leverage should be 40 times...
not percent...... Bill