MF Global Circus: A New Senate Hearing & CFTC Divulges Exclusive Emails Re Corzine/Gensler Meetings

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A new Senate hearing during "Money Smart Week"

The MF Global circus continues, as only yesterday, the Senate Banking Committee announced it will hold a hearing next Tuesday, April 24, 2012, in which a few old and a few new faces will grace Congressional Chambers.  We can only hope that some of the Committee members will pursue the panelists with the same zeal that certain members of the House Financial Services Oversight & Investigations Subcommittee did in their three hearings.  

According to a press release that arrived in our email box this morning, next week is Money Smart Week at the Chicago Fed.  The awkward phrasing sure sounds smart.  The National Futures Association, the CFTC and AARP will hold a seminar entitled "Avoiding Fraud is Your Best Money Strategy."  No kidding.  Tell that to Mr. Corzine and the MF Global customers.  The always pithy CFTC Chairman Gensler had a few choice words as well: "When making important financial decisions, even simple actions like asking a few smart questions can help set people on the right course."  Right...and where were your smart questions, Mr. Gensler, when you let the SEC steamroll the CFTC into accepting a bankruptcy and liquidation structure of MF Global and its broker unit such that the customers ended up on equal footing with creditors?  

Maybe the SEC's Director of the Division of Trading and Markets, Mr. Robert Cook, can shed some light at next week's Senate Banking Committee hearing on why he ordered a firm with 388 securities accounts and 38,000 futures accounts to be put into a SIPC liquidation, where there is no insurance fund for futures customers and where the liquidation Trustee has no clear right to assets in the parent company's Chapter 11 estate.

And, if Mr. Gensler truly believes that the "CFTC exists to protect Americans in financial markets and to ensure the integrity of the marketplace for investors," perhaps CFTC Commissioner Jill Sommers can enlighten the Senate and public as to why the CFTC delayed implementing reforms to Rule 1.25 governing investment of customer funds, conveniently around the time when Mr. Corzine and his fellow ex-Goldmanite general counsel, Laurie Ferber, were meeting with Chairman Gensler, CFTC Commissioners and other high level CFTC officials in July.  Only after MF Global's demise did it become imperative to finally implement the changes, now dubbed appropriately, the "MF Global Rule."

CFTC discloses new emails regarding top level meetings with Gensler, Corzine and Ferber

This gets to another event that transpired yesterday, wherein the CFTC finally responded to a five month old FOIA request regarding those very meetings on July 20, 2011. has exclusively obtained a smattering of emails from such figures as Ms. Ferber, Chairman Gensler and Amanda Radhakrishnan, Director of Clearing and Risk for the CFTC.  

In one email from Ms. Ferber to Ms. Radhakrishnan on the morning of the 20th, she pleads "I know you must be truly swamped, but I also know that we are having calls with some commissioners today...I continue to believe that you and your team are the most important to be speaking with on 1.25 and I know Jon [Corzine] would appreciate the opportunity to speak with you."

In another series of emails, we learn that Chairman Gensler initially turned down a request on July 11, 2011 from Mr. Ferber to meet with Corzine, [ex-Refco exec] Dennis Klejna and others on either the 20th or 21st, citing scheduling conflicts.  (See Francine McKenna's article for background on Klejna and JP Morgan's inside track to MF Global here).  Yet, Mr. Gensler would eventually make a point to chat by telephone with Corzine and others on a 1:00 pm call on July 20.  Such was the former Senator and Governor's clout, or the zeal and persistence of Ms. Ferber.

Certain details of these meetings were already public, having been posted on the CFTC's website. (We first wrote about them in detail on November 9, 2011.)  But we now know exactly who pushed for them (Ferber) and just how badly Corzine needed to wield his starpower in front of the regulators.  After all, MF Global was about to float a $325 million bond offering (now practically worthless) that would close just days later on August 2, 2011, and any threat to MF's revenue model would have likely derailed it.

Regulatory Capture Kept the Corzine Trade Alive

According to a Bloomberg piece by William Cohen, Corzine himself said that the repo transactions pursuant to 1.25 made with customer funds with other broker-dealers as counterparties should be permitted “because such transactions could be beneficial to” firms like MF Global.  Without the extra income from investing customer funds (and they need not have been necessarily invested directly in the sovereign bonds), the Corzine Trade would be toast.

This was also a time when FINRA was about to push for a regulatory capital hike (eventually stalled by Corzine at the SEC, but not ultimately defeated), and a time when the SEC decided to sit on the annual audit of the broker unit for over three months instead of making it public right away as it customarily does.  This was the only document that would have been public at the time that disclosed the true risk of the Corzine trade to MF Global customers, wherein all of the risk was saddled in the broker unit and the bulk of the profits were sent overseas.  Who knows, maybe the bond investors would have been interested in that information too.

But we digress.  Back to those July 20 CFTC/MF Global meetings, what was the outcome?  According to the Federal Register, the CFTC filed on July 22, 2011 a notice effective July 20, 2011 regarding other rulemaking, and provided a footnote disclosing that "The amendments [to Rule 1.25 and 30.7] proposed in those Notices are not addressed herein and may be subject to future Commission rulemaking."  Apparently, Corzine and Ferber least for the time being.  

MF Global's long standing push against Rule 1.25 reform

But July, 2011 was not the first time that MF Global had pushed against Rule 1.25 reform.  Only months after it put on the Corzine Trade in September, 2010 (and lying about its existence to FINRA that same month), Ms. Ferber and a representative from Newedge penned a letter on December 2, 2010 to the CFTC.  As we quoted on November 9, 2011:

The ironic, if not prophetic, introduction:
As a general matter, we applaud the CFTC for seeking new ways to ensure the safety and liquidity of investments made by futures commission merchants under CFTC Rules 1.25 and 30.7. However, as we set forth below, we believe the specific amendments being proposed: (a) are unnecessary, considering that the current permissible investments under Rule 1.25 have not, to our knowledge, resulted in any FCM's inability to provide customers their segregated funds upon request or to continue as a solvent entity, (b) will, in many cases, create new investment risks and logistical difficulties for FCMs, and (c) may well change the pricing dynamics for customers and the industry at large. Recognizing the CFTC's concerns, however, we have set forth our own proposed amendments which we believe satisfy the CFTC's desire for the enhanced security of customer segregated funds without the risk of significantly increasing costs to customers.
On fixing something that is not broken (until it is):
B. The Investments Currently Permitted Under Rule 1.25 Have Not Put Customer
Funds at Risk.
We believe strongly that the CFTC's proposed amendments endeavor to "fix something that is not broken." Indeed, the evidence is clear that the investments permitted and safeguards required under Rule 1.25 have met the CFTC's stated "objectives of preserving principal and maintaining liquidity" of customer segregated funds. Sec Rule 1.25(b). Among other things, since the CFTC's 2004 expansion of permissible investments under RuIe 1.25, we are not aware of any FCM that has been unable to liquidate and provide to their customers upon request any segregated funds invested under Rule 1.25 (or under Regulation 30.7 either, for that matter).4
Further, since this expansion, no FCM to our knowledge has failed or otherwise been unable to meet any other of its financial obligations as a result of investments made under Rule 1.25.5 In short, we believe the current investment criteria set forth under Rule 1.25 have worked, including over the past two years of market instability and uncertainty - the ultimate stress test. Nevertheless, the Commission has proposed changes so sweeping that they may in fact increase systemic risk by imposing new burdens on otherwise effective, efficient and liquid settlement processes. Such a radical overhaul, in our view, is unnecessary considering the Rule's stellar track record. At most, the CFTC should be adjusting only slightly the products, counterparties and concentration percentages currently permitted. 6

Need for a fraud investigation and lawsuits against the execs

Mr. Corzine and Ms. Ferber, apparently operating under an end-justifies-the-means ethics, did not get their desired end, and now face a greatly undesired one.  They need to be held personally accountable, both criminally and civily, for their actions, should the facts warrant (which we believe they do).  The case, far from being cold, is just getting warmed up.  We hope the SIPC Trustee, James W. Giddens, keeps his word when he said last week he would go after MF Global personnel who broke the law by dipping into segregated funds.  We have also hopefully established enough intent to justify a fraud investigation by the DOJ, not that intent is a prerequisite to clawing back missing customer funds, which are statutorily required to be sacrosanct at all times.  

Using his former Congressional chambers as a stage, Mr. Corzine has theatrically attempted to set up a MF Global back office worker, one Edith O'Brien, to take the fall for it all.  While she may or may not have some culpability as firm Treasurer, she appears to hold the key to unraveling the mystery that has always been exposed in plain day.  If anyone deserves immunity, it is she.

A video explains it all

Explaining the situation in simple terms with some great background is Mark Melin of Opalesque TV.  Feel free to forward to anyone who might not be up to speed on MF Global, as this first part in a series of three is an excellent primer.  Mark will also appear on RT's Capital Account with Lauren Lyster [correction: Friday] to discuss these latest developments.


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