Watch Jon Corzine's Follow Up Testimony On The MF Global Bankruptcy, Accompanied By MF's CFO And COO

Update: the three MF Global stoog... pardon, former executives, are now testifying

Even though he has had several days in which to "review his notes", the follow up testimony by former MF Global CEO Jon Corzine to the Senate Agriculture Committee starting momentarily will be replete with "I don't recalls" and "to the best of my knowledge" and will be largely devoid of all content, suffice to say it was not his intention to break the main law of broker dealers- no commingling. It will be even worse because today he will be joined by MF global's CFO and COO as well, all of whom will be completely clueless once again, and needless to say, shocked, SHOCKED, that they stole billions from their clients. Watch the full webcast below.

From the Senate Agri Committee

On October 31, 2011, MF Global Holdings Ltd. declared bankruptcy – the eighth largest bankruptcy in U.S. history. Since then, federal officials have been unable to find a significant amount of the firm’s customer’s money. It is currently estimated that up to $1.2 billion in customer funds is missing. The Senate Committee on Agriculture, Nutrition and Forestry has jurisdiction over the sort of commodity trading that MF Global was engaged in, and the hearing on December 13 will be a continuation of the Committee’s investigation into the firm’s bankruptcy.

Witnesses

Panel I

Mr. Roger Hupfer
    Grain Elevator Operator
    Freeland Bean & Grain, Inc.
    Freeland , Michigan
   
Mr. Jeffrey Hainline
    President
    Advanced Trading, Inc.
    Bloomington , IL

Mr. Dean Tofteland
    Farmer
    Luverne , MN

Mr. C.J. Blew
    Farm/Rancher, Chairman of the Board, Board Director
    Mid Kansas Cooperative Association, Board of CHS, Inc.
    Hutchison , KS

Panel II

Hon. Jon S. Corzine
    Former Chairman and Chief Executive Officer
    MF Global Holdings Ltd.
    New York , NY

Mr. Henri Steenkamp
    Chief Financial Officer
    MF Global Holdings Ltd.
    New York , NY

Mr. Bradley Abelow
    President and Chief Operating Officer
    MF Global Holdings Ltd.
    New York , NY

Panel III

Mr. Terrence Duffy
    Executive Chairman
    CME Group
    Chicago , IL

Mr. James W. Giddens
    Trustee
    Securities Investment Protection Act liquidation of MF Global, Inc.
    New York , NY

Hon. Jill Sommrs
    Commissioner
    Commodity Futures Trading Commission
    Washington , DC

Comments

[dwilso39]

Corzine was double-crossed by the JP Morgue to cover thier Silver short!  Corzine is a fall guy

[High Plains Drifter]

he had to fall on his sword.  will he go to the joint like madoff?

[SanOvaBeach]

Sure as fuck'in hope so!

[Duffminster]

While it is nearly a certainty that we will not hear the term re-hypothecation during the testimony, those of us who read Tyler's recent article entitled "Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else"

and the follow up articles on the subject here at Zero Hedge may find this comment from a contributor at my site, the Duffminster Times at the core of the problem and why MF Global is only the tip of the iceberg:

From Old and Gray at the Duffminster Times "...

Some definitions are in order here to make certain we're discussing the same topic.

Hypothecation - based on the word hypothetical. Collateral provided to guarantee performance on a loan. Such as a mortgaged house is hypothecated when the lender has the right to claim the house in the event of non-performance by the borrower (hypothetically, he would fail to meet payments).

It's also used in stock and commodity markets such as when stock is bought on margin and some asset, bonds, other stocks, are offered as collateral in event the margin is called for. Short sales might be another situation calling for collateral and hypothecation.

Rehypothecation is when the asset being offered as collateral by the owner, the first party, is then used by the second party at the same time as collateral for another transaction. There is supposedly a legal limit to the practice. I have no idea is that is a matter of total quantity or repeated rehypothecations, but that will be unearthed before we finish here.

And, "Shadow Banking System": Originally was meant to denote banks' shady dealings. But, the Federal Reserve Bank of New York (FRBNY) had a group of economists and others redirect the pejoratively intended label to other legitimate businesses who may or may not have been working with banks in the sale and distribution of toxic assets.

This was dealt with in the tsunami thread around September, 2010. The FRBNY Paper, Shadow Banking, Staff Report no. 458, July, 2010, which, according to the words of the authors, was "being distributed to economists and other interested readers solely to stimulate discussion and elicit comments." We made our unflattering comments.

The published section was identified as the first third of the complete project. The other two thirds were not yet available when last checked several months ago.

One young participant did all right for himself by the subject matter. He was a Research officer in 2008; in September, 2009 he was an assistant vice President; and at publication time for the subject paper he was a full vice President. During that time since it was a relatively new field of inquiry and study, he was privileged to address a number of prestigious forums here and abroad and gained quite a reputation, which must have contributed to the decision process when advancements were under consideration.

His paper will not be reviewed here. That would duplicate work already done in the tsunami. For interested parties, the paper is mentioned in messages # 1631 and #1645 and then reviewed in more detail beginning with message # 1651.

I will add a list of companies and industries the FRBNY staff tosses into the melting pot they've named the "shadow banking system" as drawn up in an elaborate chart include in the FRBNY pub. They are -

commercial banks, Finance Companies, Industrial Loan companies, Standalone finance companies, captive finance companies, a wide-ranging assortment of conduits created by banks, broker/dealers, regulated and offshore money market intermediaries, all manner of insurance companies including FDIC, credit and liability insurance, also, Fannie and Freddie Mac.

They even included households in the "Shadow Banking system" because after all some households have a cash flow problem and they hie themselves over to the nearest finance company to help tide over to the next influx of cash. Therefore, the assumption is that households are part of the Shadow Banking systems. I'm fairly confident in assuming households don't usually have discretionary funds in the amount of $20 millions available in order to qualify for trading in derivatives or the like. This may be flattery offered to households or desperation to include as many alien parties as possible to demonstrate the pervasiveness of shadow banking. In a sense, we're all guilty of patronizing it and it serves a community purpose.

I compiled the above list to question whether the reported $30 trillion attributed to the involvement of the Fed with the shadow banking system would suffice for the Fed's activities domestically and internationally.

How much is mortgaged, how much is pledged as collateral to all those companies listed in the Shadow system? The prevailing estimate of housing values stood at $15 billion before the collapse in values from 2007 on. And with an estimated collapse of 30% more or less, too many mortgages were under water. Corporate values must be multiples of that considering real estate (much of it mortgaged) and capital equipment (much of it financed). Right there we are well over $30 trillion!

ZH provides the Federal Reserve Flow of Funds diagram as his source, and, if we're inclined to accept this, then $30 trillion is the figure we'll go with. But, I have difficulty accepting this as realistic. I wonder if John Williams at shadowstats.com has done anything along these lines? That I could accept.

I'll make the safe assumption that the Fed's figures are ultra-conservative. . . say, about one half of the true value of the "Custody Assets". That would be so, UNLESS. . there is a great deal more rehypothecation going on than can be verified. In which case the assets figure may be correct but the actual flow would be some where in excess of that. . . either a fractional or whole number multiplier could be applied to bring it to the true level. And then that would indicate the level of pumping going on in the Eccles Building in Washingotn DC.

I don't believe we would be supplying the ECB with the guessed at figures in excess of $50 trillion (I've seen as much as $70 trillion total suggested!) if the Fed simply hypothecated. The value of the assets would need to be compounded.

In which case, it's no secret that the second implosion ZH mentions is high among our current concerns, has been for some time, and we're trying to determine the best way to cope personally with the prospect.

Not an Armageddon, but more than the sting we felt last time.

.

ADDENDUM: 12/13/11

BTW, something for you youngsters to look forward to: in our dotage, we're cursed with a mind that tortures us with questions long after the lights go out. That contributes to those nights of interrupted sleep. Earlier days allowed us to turn the process off because we knew that there was something of equal importance poised to bedevil us tomorrow, so we slept. We don't have the collaborative benefit of such diversions later in life.

Which tossing and turning brought us to the recall of an informative paper from the IMF archives. The usual caution is attached, that the paper does not represent the views of the IMF. They are strictly those of the authors.

A "Working Paper" is presented from a collaboration by a senior economist at IMF's Monetary and Capital Market Department and apparently a principal of Aitken Advisors, James Aitken, (with which and whom I am not familiar). Title of the July 2010 paper is "The (sizable) Role of Rehypothecation in the Shadow Banking System"; the authors, Manmohan Singh and James Aitken.

Some telling Keywords on the first page: Rehypothecation; FSA (UK's Finanacial Stability Authority); Velocity or Churning of Collateral; Counterparty Risk. The important concept here is the velocity or churning. This indicates the real nature of rehypothecation. As in an active account executive working out of a boiler room atmosphere persuading a client to allow non-productive buying and selling (until the assets are dissipated) so, too, did the hedge funds and banks work to dilute the value of the collateral "assets" where rehypothecation was concerned.

Some of the more interesting points made by the paper:

• Gary Gorton (as of last awareness, from Yale) was quoted from his 2009 NBR working paper 15787 "Questions and Answers about Financial Crisis" as writing "during a crisis, haircuts on collateral can result in a run on the shadow banking system".
• Singh and Aitken authored a prior paper in September, 2009 demonstrating that the shadow banking system was at least 50% larger than estimated. (Which adds to the impact of rehypothecation - and leads one to believe that should their research, etimates or calculations not hold up, it may have been higher yet.)
• In the same paper Singh and Aitken show there was a reduction in "rehypothecation, lending activities and hoarding of unencumbered collateral" in the amount of "up to $5 trillion" [presumably at the onset of the crsis].
• Customer Account Agreements or Prime Brokerage Agreements will include a "blanket consent to the practice of rehypothecation.
• After the collapse of Lehman Bros., the collapse of rehypothecation accelerated.
• In the UK rehypothecation was unlimited and there were no customer protections in force as of the writing of the paper. In the US "the broker/dealer may use/rehypothecate an amount up to 140 percent of the customer's debit balance."
• In the US, the agency responsible for investor protection is the SIPC (the Securities Investor Protection Corporation). [As mentioned there is no equivalent agency or unit providing protection in the UK, nor is there in the EU.]
• The high point of rehypothecation in the US reported by Singh and Aitken was in November, 2007. Charts indicate that banks provided funding via rephypothecation in the reported amount of approximately $6 trillion dollars, more than 1/3 the GDP and the redefined "shadow banking system" provided about $4.5 trillion. [This totals over $10 trillion in a $14 trillion GDP economy. Not a healthy state of affairs!]

As for "churning" or adding "velocity" to the collateral [circulating value which does not exist in a leveraging sense], Singh-Aitken noted:

". . . off-balance sheet item(s) like 'pledged-collateral that is permitted to be re-used', are shown in footnotes simultaneously by several entities, i.e., the pledged collateral is not owned by these firms, but due to rehypothecation rights, these firms are legally allowed to use the collateral in their own name."

What is the total effect on the market, circulating currency values and overall asset valuation? The authors attempt to calculate this with some math which ends up being speculative at best. To their credit, they attempted to verify banks' involvement in the velocity-generated (churning) values. They admit that the churning factor may be higher than their calculations determine.

They also provide three suggestions at the end of their presentation. They are -

• Supervisors of large banks that report on a global consolidated basis may need to enhance their understanding of the off-balance sheet funding that these banks receive via rehypothecation from other jurisdictions.
• The asymmetry between U.K. and the U.S. on the use of client’s collateral is an example that highlights the recent policy recommendations to limit leverage and jurisdictional arbitrage (Tucker, 2010).
• The reduction in pledgable collateral received by the large banks (and the associated churning factor) has a direct impact on global liquidity. Rehypothecation data and the associated churning factor might be considered by major central banks to augment their tools for understanding the shadow banking system and associated liquidity within the global financial system.

My comments on the suggestions:

The bankers responsible for developing and implementing this mechanism have proven they have no interest in stabilizing markets or currency nor are they devoted to protecting clients and customers. Again they'll resist any proposed rules or regulations restricting a process which enriches them.

The "asymmetry" between the UK and the US in regulating rehypothecation simply means that should US banks insist on availing themselves of the technique, they need only transfer the transaction to the UK venue and go ahead without limit. Since it is all off-balance sheet, the purported "shadow" entities banks generate can handle the process away from reportorial prying, meaning the SPIC may never hear of nor see any evidence of the extent of the activity. UK "Asymmetry" thus becomes an enticement to circumvent US rules.

There's no question of the last, something we've been emphasizing for three years on the 'net and nearly fifty career years. Rehypothecation is akin to generating e-money (not of the charge card type, but of the computer generated new account or long distance transactions type which goes unnoticed and unreported because it has not been defined or assigned a role in basic currency function.) In the process it's a direct and damaging debasement, devaluation and wealth generating process working against general interests serving only to feed the voracity of the self-centered, anti-social banking element - not all bankers, but too many. And it serves no other purpose but to gamble with our stability and security."

[SanOvaBeach]

rehypothecation????  I'm not as smart as the rest of you out there.  Looked it up in the dictionary and still don't get it.  Help a aging surf dude to understand, please!

[TheAkashicRecord]

"Re-hypothecation occurs when a bank or broker re-uses assets pledged as collateral by customers as collateral for its own borrowing.

Example: You give a bank collateral. The bank takes that collateral and uses it again. Your collateral is not longer controlled by the bank you gave it to. It's controlled by the bank that the bank you gave it to gave it to. That's re-hypothecation..."

http://tiny.cc/y55ca

[jmcadg]

These rude fuckers were getting up and leaving before the Chairwoman had finished speaking.

Liars and disrespectful.

[FJ]

Three totally ignorant managers pretend to know nothing except their names. Hilarious.

[eblair]

Right.  They obviously know exactly what the fuck happened and are just parsing everything to avoid saying anything.  Now that Sommers bitch is back.  Time to turn this shit off.  What a waste of my fucking time.

[RichardENixon]

You left too soon, Duffy just explicitly accused Corzine of a criminal act.

[Getting Old Sucks]

Pass the popcorn.  This is better than any reality show.  Pass the word to the surfs.