MF Global: The Untold Story Of The Biggest Wall Street Collapse Since Lehman

This is not a flashback to the rotting financial carcasses of 2008. This putrid saga has been playing out in five Congressional hearings since December with the next episode scheduled for Tuesday, April 24, before the Senate Banking Committee under the auspicious title: “The Collapse of MF Global: Lessons Learned and Policy Implications.” (The title might more appropriately be, “MF Global: Lessons Never Learned and Policy Implications of a Wild West Financial System Just One TradeAway from the Next Taxpayer Bailout.”)

There are plenty of lessons to be learned from MF Global and heart-pounding policy implications; all of which we can count on Congress to ignore at the behest of the Wall Street money and lobby machine until the next epic financial crisis – an eventuality that is growing more likely each day as Congress refuses to restore the Glass-Steagall Act, the depression era legislation that bars Wall Street securities firms from owning banks holding insured deposits.

MF Global, the eighth largest bankruptcy in U.S. history, held 36,000 customer accounts in the U.S., over 5,000 in the U.K., and an unknown number in Japan, Australia, and Hong Kong. It’s a forensic accounting mess. Can you imagine what it would be like if one of the major Wall Street firms failed with more than 3 million customer accounts?

MF Global filed for Chapter 11 bankruptcy in the U.S. on October 31, 2011 because of off balance sheet transactions and proprietary trading – a quaint name for betting the house with other people’s money – resulting in a downgrade of their credit rating to junk and a resulting collapse in liquidity.

In MF Global’s unique world of risk controls, the CEO of the firm was doing the proprietary trading. Off balance sheet transactions blew up Citigroup in 2008, requiring hundreds of billions in taxpayer funds and guarantees to shore it up. Proprietary trading, of the heads we win, tails you lose kind, has cost Goldman Sachs and Citigroup serious reputational damage with customers. And yet, no lessons have been learned. Off balance sheet bombs are still lurking all over Wall Street and the SEC continues to stall on outlawing proprietary trading at securities firms holding customer accounts.

The CEO of MF Global when it disintegrated was Jon Corzine, the former New Jersey Senator and Governor and former co-head of Goldman Sachs & Co. Corzine took the reins of MF Global in March 2010. Conflicts abounded with the knowledge and rubber stamp of the Board of Directors. Corzine was not just Chairman and CEO, he was the firm’s top trader of volatile European BIIPS debt – Belgium, Italy, Ireland, Portugal and Spain. Corzine took the firm’s position from approximately $500 million when he was hired to $8.1 billion (including Greece and France) in the 19 months it took him to blow up the firm. (How does the CEO of a financial firm police a cowboy trader when he’s the same individual?) When the Chief Risk Officer of the firm, Michael Roseman, raised warnings about the risk with the Board of Directors, Rosemanwas asked to leave and replaced with a new Chief Risk Officer acceptable to Corzine, according to Congressional testimony given by Roseman and Corzine.

But wearing the three incompatible hats was not the only fatal flaw in Corzine’s management model: he contractually did not owe his total loyalty to MF Global. The August 11, 2011 proxy issued to shareholders and filed with the SEC carried this caveat: 

“During the term of Mr. Corzine’s employment agreement with the Company, Mr. Corzine will spend substantially all of his business time and attention on Company matters, except that he may serve as an operating partner of J.C. Flowers. Pursuant to his contract with J.C. Flowers, Mr. Corzine will not receive any salary from J.C. Flowers as long as he is serving as Chief Executive Officer of the Company, but he will have a financial interest as a limited partner in certain of J.C. Flowers’s investment management entities. Mr. Corzine’s employment agreement with the Company contains a provision regarding corporate opportunities. In general, this provision provides that, if Mr. Corzine acquires knowledge from J.C. Flowers (and not the Company) of a potential transaction or other business opportunity that may be a business opportunity for the Company he will have no duty to communicate or present such opportunity to the Company…” 

JC Flowers was the namesake of J. Christopher Flowers, a former colleague of Corzine’s at Goldman Sachs. Flowers had acquired a stake in MF Global to help shore it up in 2008 after a trader blew up $141 million of the firm’s money overnight in what the firm called an unauthorized trade. It was Flowers who invited Corzine to become CEO of MF Global. Corzine left MF Global on November 4, four days after its bankruptcy filing, at the request of the Board.

Why Corzine, a man of great wealth and political stature, would join an obscure brokerage firm is a mystery worthy of pursuit by the FBI, which is investigating the missing customer funds according to Congressional sources. One avenue worthy of pursuit according to Wall Street veterans, is whether Jon Corzine turned MF Global into a giant parking lot for other Wall Street firms’ bad bets on sovereign debt. Fueling that speculation is the fact that JPMorgan, Citigroup and Bank of America were part of a syndicate of 22 banks that provided MF Global with an unsecured $1.2 billion revolving credit line that required no posting of collateral, despite the company’sstring of losses and weak credit rating. The firm heavily tapped this line of credit in its last days.

The trustee of the Chapter 11 proceeding for the parent holding company is Louis J. Freeh, a former FBI director. On April 19, Freeh asked the court for an expedited hearing to grant him the ability to issue subpoenas to “the Debtors’ affiliates and subsidiaries, the Debtors’ former employees, current and former officers, directors and employees of the Debtors’ affiliates and subsidiaries, lenders, investors, creditors and counterparties to transactions with the Debtors…”

The court is allowing Freeh’s own firm, Freeh Group International Solutions, to perform the accounting work. Four docket entries show that Freeh has asked for and received four extensions by the court to file a list of assets of the holding company.

Compared to Corzine’s former employer, Goldman Sachs, MF Global was a flea on an elephant’s back. It had experienced a string of quarterly losses since 2007, waspredominantly a Futures Commission Merchant (FCM) holding retail and institutional commodity and futures trading accounts, and had 80 regulatory actions against it since 1997. It had a securities brokerage unit with 300 to 400 U.S. accounts according to the trustee. How big those accounts were is unknown. If they were all institutional or hedge fund accounts, it could have been a sizeable operation. One known account, which presciently moved out before the bankruptcy, belonged to the $100 billion private energy firm, Koch Industries, majority owned by Charles and David Koch, financial backers to numerous corporate front groups.

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