Fraud: Jon Corzine, George W. Bush and the 2005 Bankruptcy Reform

rcwhalen's picture

New York -- Yesterday the House Financial Services Committee confirmed what we already know, namely that former Goldman Sachs CEO Jon Corzine deliberately stole customer funds when he was CEO of MF Global.  See Blomberg News story below:

But what the Republican Committee report does not say is that the mechanism that allows Corzine and many others to walk away from such disasters without any civil liability for fraud is the 2005 Bankruptcy Reform Act, which the Republicans sponsored almost unanimously.  And we wonder why nobody is pursuing MF Global for the theft that it clearly involved?

By the bankruptcy code Congress adopted and which congress alone can change: (i) Bankruptcy Judges are PRECLUDED from appointing "receivers" (Sec. 105(b)), (ii) the stay precludes creditors who were robbed from pursuing a receiver at the District Court, (iii) state receiverships are collapsed into the bankruptcy when it is filed and (iv), at least in the 2nd Cir., only a receiver can pursue claims based on theft.

Ergo:  There is almost no way to go after people to collect stolen money in corporations that are subject to the Bankruptcy Code (particularly in NYC).  As one veteran litigator told me yesterday: “AND WE CONSIDER OURSELVES AS A NATION GOVERNED BY "THE RULE OF LAW”?

The “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was styled as a way to prevent abuse of bankruptcy by creditors, but really it was a way for the banking industry to protect itself from claims due to predatory lending.  Maryscott OConnor noted in an excellent 2005 analysis in the Daily Kos:

“The details of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 reveal it to be a bill crafted as a Republican paean to MBNA, the largest single contributor to the Republican party.  Far from being either an effort to stem "Bankruptcy Abuse" or an effort at "Consumer Protection", the bill is in fact an attempt to rewrite bankruptcy laws to reduce the ability of those laws to protect consumers from predatory lending practices on the part of MBNA members, and to stiffen the capabilities of those corporations to collect from consumers already suffering from extreme financial hardships.”

She notes that the legislation received unanimous support in the Senate from Republicans and that several Democrats also supported this legislation, including:

Sen. Nelson (D - Nebraska)

Sen. Johnson (D - South Dakota)

Sen. Carper (D - Delaware)

Also frequently voting with the Republicans was then Sen. Joe Biden (D - Delaware).

But what even the critics did not understand at the time was that the 2005 Bankruptcy legislation also effective prevents investors from bringing civil fraud claims against the likes of Jon Corzine or Madoff in the case of a bankruptcy.  Once a firm files bankruptcy, the officers and directors effectively get a “get out of jail free” card because the trustee cannot pursue fraud claims.  Unlike the case of  a failed bank where the FDIC is automatically appointed receiver, in bankruptcy a trustee’s powers are limited to the claims by the estate of the dead corporation. 

As I have written previously in ZH, only a receiver can go after fraud by third parties in a bankruptcy.  But since the 2005 Bankruptcy law effectively prohibits the appointment of a receiver in bankruptcy, the bad guys get away.  This is one of the proud legacies of President George W. Bush and the Republican Congress, BTW.

So when you hear Republican politicians pointing figures at Jon Corzine for his “alleged” acts of fraud in the MF Global collapse, ask them why they changed the bankruptcy code to allow such acts of fraud to go unpunished.  The answer is that MBNA and other large banks pushed the changes, but only now do we understand that the targets were not merely hapless consumers but all investors.  

The fact is that the Republicans sponsored the legislation to help banks continue to prey upon consumers is bad enough, but the real impact of the 2005 legislation was to give the officers and directors of failed broker-dealers effective immunity from civil fraud claims in the case of bankruptcy.  Until Congress repeals the 2005 Bankruptcy legislation, no investors’ funds are safe inside a broker-dealer – period.

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FrankDrakman's picture

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Yes, this aptly named bill was brought to you courtesy of the Ministry of Plenty, publicized by the Ministry of Truth, and conceived by the Ministry of Love.

Or, more succinctly, MiniPlenty, MiniTruth, and MiniLove.

yakmerchant's picture

Damn red team.  If the blue team only had the ball things would be so much better.  

Dear author, guess what?  The teams may have different coaches but they have the same owner and you are about to lick his boots.   I think the scary Fascist stuff always associated with right wing republicans will be brought to you by none other your beloved blue team as they are still going to have the ball when the fans are locked in the stadium without food and beer.   You might want to start seeing if you can get in the blue team lockeroom by blowing the equipment manager.


masaccio's picture

The author is talking about a damn fool court decision saying that the trustees can't sue for fraud because trustees are in pari delicto with the corporations for which they are trustees.

It could easily be reversed if all of the courts weren't totally in the Federalist camp.

kaiserhoff's picture

Thanks.  Now I know why I couldn't make any sense of that shit.

helping_friendly_book's picture

We are so fucked.

Just wait until my mutual fund decides to liquidate and tranfer the money to JPM.

The will say "You worked for 30 years and saved your money ....where?....oh that is gone now!...the manager quit the day before the bankruptcy and doesn't have access to his files"

Quantum Nucleonics's picture

This is a load of partisan crap!  Quoting a far left blog (Daily Kos) as some kind of credible source.  Come on!  The bankruptcy code isn't any sort of shield for Corzine.  The CFTC can indict him whenever they want.  All they need to do is give immunity to Edith O'Brian.

onebir's picture

Unless I've got authors mixed up, Whalen was tirelessly (& tiresomely) campaigning for the Republicans pre-election. Perhaps the CFTC could indict Corzine, but with a toothier bankruptcy code, creditors wouldn't have to rely on the CFTC...

fuu's picture

I'm actually surprised she hasn't had a fatal single car accident yet.

“Rebellion to tyranny is obedience to God.”-ThomasJefferson's picture

Solution:  Street justice; where and when the state fails to act, said offender needs to get his comeuppance.

Hopefully, Corzine and his fellow banksters, meet up unexpectedly with some pissed off, ripped off former account holders.

dexter_morgan's picture

haha - you talk like you think there are actually 2 parties

Either way, Corzine is scum and should go to jail......but it's not like he's the only one I suppose



notadouche's picture

IMHO Nelson (D) Nebraska proved that his vote was up for sale every time.

rosethorn's picture

Very informative analysis, thank you.

williambanzai7's picture

I don't care anymore who did it. We know who did it. They all work for the same company of thieves.

The problem is the turdball is on the books, so what are we going to do about it? The answer for starters is don't do any business with any of them. If you do, then you get what you pay for.

spooz's picture

Naked Capitalism posted a Marshall Auerbach and Yanis Varoufakis discuss Modern Money and Public Service.  One conclusion from Auerbach was that the Political Entity has become a source for private and corporate predation (he refers to James Galbraith's "The Predator State"), and that a good crisis has been "wasted", to paraphrase Rahm Emanuel.   Varoufakis says that after we arrest the crisis, we must ask ourselves whether a system like Capitalism, where collectively produed values are privately appropriated, is prone to crisis.

Varoufakis also discussed how Greek financial journalists jobs are dependent on writing stories they don't believe in. The CNBC interview with TARP inspector general Barofsky proves to me that financial journalists in our country are also constrained. Perhaps not so overtly where individuals are targeted for straying outside the accepted dialog, but with the direction our country is taking, it seems its only a matter of time before we get there. 

The moderator, Georges Ugeux, explained that he began blogging in 2008 because of the financial crisis, and he believes something is going on where people who know the truth and have a voice are starting to be recognized because of blogs and social networks.  He believes the fact that the truth is "out" that financial analysts with integrity can begin to talk about it.

Its a 2 hour video; I appreciate the fact that I don't have to be in Columbia Law School to hear it.

onebir's picture

Thanks - would never have found that otherwise.

Joe Davola's picture

The problem here is that journalists write stories they can believe in, unfortunately the stories don't reflect reality.

HD's picture

Biden. I know Obama gets all the hate - but over and over again Biden sells out the same Americans he pretends to be an advocate for.

notadouche's picture

This just points to having bills that aren't bundled.  The way the "good" part of an act gets the publicity while the evil parts are hidden from view.  It's both parties own little ponzi shceme against "we the people".  Hey guess what, with the advent of the internet I could actually represent myself with my government as opposed to needing the outmoded House of Reps that was merely a concoction of necessity during the horse and buggy period.  The critics will point out that the votes can't be secured and subject to massive fraud yet "we the people" are encouraged and expected to conduct our private banking affairs online and we are told they are safe and protected.  Hmmm....  Think of how much money we could save without the entire House of Reps and their staffs and their budgets.  It would also prove to be near impossible for lobbyist to bribe the population to get favorable status.   We would then truly get what we deserved.  I'd rather take a bite out of my own shit sandwich than be force fed the one's we are now.

aerojet's picture

The problems with your vision are manifold--first, the crooks can't be crooks if they can't insinuate themselves in the middle somehow.  Second, as bad as our representation is, it remains a shyte sight better than the flotsam and jetsam of the US all having a real voice--most Americans are hopelessly ignorant and do need to be led.  In fact, I'm in favor of a whole lot less democracy after this last election, because it is obvious that universal suffrage is another horse & buggy concept that has failed us.

Jean Valjean's picture

Take some time and listen to the real problem and only solution, then tell you friends:
notadouche's picture

I would suggest that while you may be correct in the most need to be led it is too much of a case where the blind are leading the blind.  More's the pity.

derryb's picture

tightening bankruptcy law in 2005 tells us THEY saw the financial crisis coming at least three years before it hit.

notadouche's picture

Makes you wonder or scared shitelss what they see with all of the ammo purchasing and storing by Homeland Security.

hangemhigh's picture

But wait!!!!!….there’s even more tricky   Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) news!!!!!….

THE SHADOW KNOWS  (excerpted from original article) 

The collapse of MF Global was a seminal event complicated by obscure, perhaps even carefully concealed, factors that occurred within a closed, non-transparent system. We know what happened.  An over extended, highly leveraged brokerage failed, but the question that remains unanswered is how exactly did it happen?   The final piece of the puzzle needed to understand what  actually happened at MF Global can be found in yet another round of stealthy rule changes, this time to Bankruptcy laws, that occurred in approximately the same time frame, 2005, as the other ‘Gods Work’ regulatory fine tuning discussed above. 

“When a company declares bankruptcy there is what the Americans call an ‘automatic stay’, which means all the assets left in a company at the moment it goes bankrupt are protected from the rush of creditor’s demands until appointed auditors can sort out who should get what. The automatic stay prevents a first come first served disorderly looting where those with the most muscle get everything and everyone else gets nothing.

But, in America culminating in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the order was changed. And that change is the crucial event.”   

“According to a scholarly article in the American Bankruptcy Law Review,” …the provisions [in the amendment] were derived from recommendations from the President’s Working Group and revisions espoused by the financial industry.” “The amendment exempted repos (and hypothecated and re-hypothecated assets) and a whole range of derivatives from the automatic stay….”   

The special bankruptcy treatment given repos and derivatives means that repo lenders and parties to derivative contracts can keep the collateral if their trading partner becomes insolvent.”  Or, as the official report from the US Financial Crisis Inquiry Commission said, “under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy. (p. 48) “

“This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies also allowed a whole range of far riskier assets to be used, making them, too, immune from the automatic stay in the event of bankruptcy. [Which meant]… traders flocked to a market where risky assets would be traded and used as collateral without apparent risk to the lender. The size of the repo market…increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone   else.  It also did one other thing…it meant they had no reason at all to try to stop a bank from going under. ”

“All other creditors – bond holders – risk losing some of their money in a bankruptcy….Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely.

“In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. The collapse of … Bear Stearns, Lehman Brothers….AIG…were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.”

So what we have, courtesy of the change in the bankruptcy laws is the means for banks to loot each other. Simply become a major short term funder via repo or hypothecation or a major counterparty in derivatives deals with the ailing bank and in both cases should the bank you are lending to go bankrupt, you will keep all  the assets it pledged to you before any other creditor gets a chance. (27) (28)

(27)     All italics, underling and bolding are by HMH and not the original author.

(28)     Commentary on role of Bankruptcy Law changes


Urban Redneck's picture

There's a reason a reason Joe BiteMe's nickname is THE SENATOR FROM MBNA

It's not just because he was the Senator from the BHC incorporation-haven of Delaware (whose first whore son is conveniently the AG of Delaware and yet refuses to prosecute bankers, and whose other whore son was an MBNA lobbyist)

Or just because he was the Chairman or Ranking Member of the Senate Finance Committee since forever, before being promoted to "Stimulus Sheriff"

He really was a meat puppet for Bruce Hammonds and the other big bank CEOs, who wrote the bankruptcy law themselves, in an alarmingly similar fashion to how Obamacare was drafted by big medcine's scribes.



Joe Davola's picture

Gotta love politics, bitch about what the other party did - then turn around and exploit the opportunity it affords.

waterhorse's picture

Far from being either an effort to stem "Bankruptcy Abuse" or an effort at "Consumer Protection".

I'm so sick of the duplicity in naming these FOUL acts and bills something that sounds like its "for the people".  Patriot Act.  Anything "patriotic" about that one?  "Commodities and Futures 'Modernization' Act."  The nut and shell fraud game is as old as the hills.  Nothing "modern" about it.  Why not call them what they are?  Patriot Act aka Authoritarian Act.  BACPCA aka Screw the Consumers and Investors and Unjustly Enrich All Banksters Act (although that is a bit long).  Commodities & Futures aka Toxic Financial Products (Caveat Emptor!) Act.

famousamos's picture

I think that's the whole point... it's LEGAL, hence immune from prosecution.

Bankster rule #43 "Don't forget to rehypothecate!"

El Viejo's picture

And didn't BAC decide to rehypothecate last year Oct 31??  That means you don't just have to be concerned about brokers.

El Viejo's picture


Bout time someone did an article on this!

 And out of the pit of hell came all sorts of govt sponsored gamblers without fear of retribution.

illyia's picture

I must say. About time... Geez...

earnyermoney's picture



Bush's fault! Are you kidding? What does theft have to do with Bankruptcy? Jump you Fucker.

LetThemEatRand's picture

Yes, most people don't understand this either, which is how they got away with the change in the bankruptcy code.   The author is trying to point out that the code was changed exactly to make it easier to get away with what Corzine did.    Under the old code, Corzine probably would have been charged criminally after a Receiver reviewed the filings.  Now, not so much, which allows corrupt players like Holder to "hold" all the cards and decide who to pursue and who not to pursue based on a political agenda.  Checks and balances.

steelhead23's picture

A man in the biz opens the door just a bit and lets us look inside and you encourage him to commit suicide - are you mad?   I also recall that that bill also made it impossible to discharge a student loan through bankruptcy, relegating underemployed (who isn't?) grads to wage garnishment and other horrors.  So, let me get this straight, thieves like Corzine skate with their stolen loot, while burger flipping MBAs get handcuffs?  Dear Mr. Earnyermoney, you don't need to jump - just get close enough to the edge so we can push you off!

LMAOLORI's picture



Oh more Bush's fault - Why isn't anyone asking why Holder doesn't prosecute fraud it is his job??? 


He's back. President Barack Obama reportedly asked Eric Holder to stay as attorney general after he's inaugurated for a second term, and the controversial Cabinet head agreed.

“I don’t know if everyone in the White House wants him [Holder] to stay, but the important guy does, and that’s all that matters,” a source told the New York Post.

in full

And what about Biden?

As many remember, not only did Senator Biden vote for the bankruptcy bill, but he was one of the bill's leading proponents when it came up for vote in a previous version in 2001. Biden ended up voting for all four versions of the bankruptcy bill, which finally passed as BAPCPA in 2005.

Furthermore, some have questioned a potential conflict of interest behind Biden's votes in favor of legislation that many have seen as one-sided in favor of credit card companies and lenders.

Biden's son, Hunter Biden, was a financial consultant for the MBNA corporation, which was the world's largest independent credit card issuer before Bank of America bought them in 2005. Biden's largest campaign contributor has been MBNA, as is also the case for Biden's fellow Delaware senator, Tom Carper.

Obama’s Money Cartel How he’s fronted for the most vicious firms on Wall Street



goodrich4bk's picture

Did you read the article?  The AG, whoever it is, cannot prosecute Corzine for fraud because the customer deposits were legally hypothecated and rehypothecated to JP Morgan.  The filing of bankruptcy allowed JP Morgna to call its loan and take its collateral --- even though its collateral was property of MF Global's customers --- notwithstanding the automatic stay that prevented everybody else from doing the same thing.

There are many brokers running around outraged by this chain of events, but when they looked at the fine print in their contracts with MF Global, they found they had consented to such hypothecation.  To avoid suits from their customers, these same brokers have spent a lot of time on blogs and in the conservative media blaming Corzine, Holder and virtually anybody else other than themselves or the 2005 law that allowed this to happen.


El Viejo's picture

And once again for the viewers, who signed this horror of a law into being???

LetThemEatRand's picture

I think the point of this article is to explain that the Red Team is equally to blame -- not to suggest that it is all "Bush's fault."  It is Bush's fault, just as it is Obama's, Clinton's, etc.  Too many people believe it has to be one or the other, which is precisely why we are in the mess.

El Viejo's picture

Yep, Clinton repealed Glass Steagall and Bush signed the Corzine get-out-of-jail law into existence. Will someone competent please run for public office!

aerojet's picture

Holder should have been forced out because of Fast & Furious--what is so fucked up about our government that these crooks can so brazenly remain in their positions?

Zero Govt's picture

MBNA : Republicans largest campaign sponsors (corruptors) and Joe Bidens largest sponsor as well as employing his Son.

Working both sides of the isle, clever parasites

NotApplicable's picture

Isn't this also the law that switched everyone's credit cards to variable rate, tied to prime?

(Yet another consumer tripwire)