No easy answers figuring out what happened at MF Global
December 08, 2011 | 06:28 PM | Filed in: Commodities Futures Trading Commission House Ag Committee Rural America Trade
By JERRY HAGSTROM
Jon Corzine, the former Democratic senator and governor from New Jersey and former CEO of the bankrupt firm MF Global, was the star witness today at what must be the most widely publicized House Agriculture Committee hearing in decades.
But although Corzine shocked the committee and journalists by delivering 21 pages of testimony and answering questions rather than pleading the Fifth Amendment to protect himself, his appearance soon gave way to the grim reality of how hard it will be and how long it may take to figure out what happened at MG Global.
As much as $1.2 billion in customer accounts that were supposed to be segregated was lost, and investigators must figure out how much money can be returned to farmers and other customers and whether new rules should be written by either Congress or the Commodity Futures Trading Commission to avoid a repeat in the future.
Jon Corzine
Corzine said he was “devastated” by the impact of the losses to customers, farmers, ranchers and investors, but that he does not know what happened to their money.
“I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account of many hundreds of millions of dollars of client money … I simply do not know where the money is, or why the accounts have not been reconciled.”
Corzine, who was a senior partner in Goldman Sachs before he ran for political office, said, “As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral.”
Corzine could have pleaded his constitutional right to remain silent, but said that as a former U.S. senator who recognizes the importance of oversight, he believed it was appropriate to try to answer the inquiries.
His written testimony included a defense of his much criticized investment strategy at MF Global. Corzine noted repeatedly, however, that since his resignation from the firm on Nov. 3, he has had no access to the firm’s papers and therefore sometimes could not reconstruct events in detail. Corzine said he had hoped the committee and other congressional committees would give him until January, but that he had responded to a subpoena.
Before Corzine testified, James Kobak Jr., the counsel for James Giddens, the court-appointed trustee of the failed company, said Giddens would ask a bankruptcy court Friday to allow a further distribution of funds that should bring the percentage of funds that customers have received to 69 to 70 percent.
Jill Sommers, the Commodity Futures Trading Commission commissioner who is in charge of the MF Global investigation, testified that her number one priority is to get as much money as possible back to the customers as soon as possible.
But Kobak and Sommers both testified repeatedly that the thousands of transactions that occurred at MF Global in the days before the Oct. 30 bankruptcy mean that it will take time to sort through the records. Neither Kubak nor Sommers was able to answer questions about whether Corzine or other MF Global employees could be held personally responsible if all the money is not found.
Rep. Frank Lucas, R-Okla.
House Agriculture Committee Chairman Frank Lucas, R-Okla., started off the questioning in a low-key manner.
“From the start, I'd like to make it clear that our intent is not to sensationalize the events that have unfolded,” Lucas said. “And we are not here today to simply or haphazardly point fingers and place blame.”
Lucas lived up to his own admonition, but some of his fellow Republicans on the committee asked why CFTC Chairman Gary Gensler had removed himself from the case. That prompted statements from Democrats that Sen. Charles Grassley, R-Iowa, had called on Gensler to recuse himself because he had worked with Corzine at Goldman Sachs.
Gensler told the Senate Agriculture Committee last week that the CFTC counsel had said he did not need to recuse himself, but that he had decided not to participate in the investigation in order to avoid being a distraction.
Members of both parties said they want to restore investor confidence, but there were clear differences about whether the CFTC needs more resources and more powers to do a better job.
While Gensler and Democratic commissioners have said that the CFTC needs more personnel and improved technology, Sommers, a Republican, said she believes the agency’s resources are fine until it finalizes the rules it was given under the Dodd-Frank bill to regulate swaps and over the counter derivatives.
But she also said that there is “no doubt” the CFTC will need more resources to fulfill its Dodd-Frank responsibilities, and said that when the MF Global investigation is finished, “there will be policy changes we will want to come to this committee with.”
Questions asked also indicated how hard members found it to sort through MF Global’s roles as a futures commission merchant under the supervision of the CFTC and as a broker-dealer under the supervision of the Securities and Exchange Commission.
After members repeatedly asked Sommers similar questions, House Agriculture Committee ranking member Collin Peterson, D-Minn., stepped in to explain that the firm had been a futures commission merchant for decades but became a broker-dealer in order to make more money, and got into buying bonds from troubled European countries.
Lucas added as explanation that it appears money from the commodities accounts was used to make the potentially lucrative bets on the broker-deal side.
Corzine gave much the same story, but contended that the bets on the European bonds were a factor in the bankruptcy only because they reduced investors’ and regulators’ confidence in the firm, and that a major issue in the market’s loss of confidence was an unrelated write-off that MF Global officials did not explain well to investors.
Actions to regain the confidence of farmers and other users of the futures markets are likely to focus on the role of the designated self-regulatory organizations or DSROs that are between the futures commission merchants and the CFTC.
Terrence Duffy, executive chairman of the CME Group Inc., the DSRO for MF Global, testified that its audit and spot checks of MF Global “were performed at the highest professional level” and that MF Global’s failure to follow the rules “does not mean the segregation system is a failed system.”
But the National Grain and Feed Association, which represents many of the businesses that lost money, testified that the regulators and the self-regulatory organizations need to ask whether the customer protections are strong enough, whether audit procedures were implemented in a timely way, how often accounts were audited and whether “some entity other than [futures commission merchants] should be responsible for holding and safeguarding segregated customer funds.”
National Grain and Feed also asked whether there should be a federal or private insurance program against future losses.
“We make no judgments or recommendations on these questions today — and to be clear, we are not proposing that legislation or additional regulatory authority are needed — but the issues need to be examined carefully and quickly,” said National Grain and Feed’s witness, John Fletcher, general manager of Central Missouri Agri-Service LLC in Marshall, Mo.
The National Futures Association and the Financial Industry Regulatory Authority said they look forward to working with the regulators and Congress to figure out a better regulatory model.
Jon Corzine, the former Democratic senator and governor from New Jersey and former CEO of the bankrupt firm MF Global, was the star witness today at what must be the most widely publicized House Agriculture Committee hearing in decades.
But although Corzine shocked the committee and journalists by delivering 21 pages of testimony and answering questions rather than pleading the Fifth Amendment to protect himself, his appearance soon gave way to the grim reality of how hard it will be and how long it may take to figure out what happened at MG Global.
As much as $1.2 billion in customer accounts that were supposed to be segregated was lost, and investigators must figure out how much money can be returned to farmers and other customers and whether new rules should be written by either Congress or the Commodity Futures Trading Commission to avoid a repeat in the future.
Corzine said he was “devastated” by the impact of the losses to customers, farmers, ranchers and investors, but that he does not know what happened to their money.
“I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account of many hundreds of millions of dollars of client money … I simply do not know where the money is, or why the accounts have not been reconciled.”
Corzine, who was a senior partner in Goldman Sachs before he ran for political office, said, “As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral.”
Corzine could have pleaded his constitutional right to remain silent, but said that as a former U.S. senator who recognizes the importance of oversight, he believed it was appropriate to try to answer the inquiries.
His written testimony included a defense of his much criticized investment strategy at MF Global. Corzine noted repeatedly, however, that since his resignation from the firm on Nov. 3, he has had no access to the firm’s papers and therefore sometimes could not reconstruct events in detail. Corzine said he had hoped the committee and other congressional committees would give him until January, but that he had responded to a subpoena.
Before Corzine testified, James Kobak Jr., the counsel for James Giddens, the court-appointed trustee of the failed company, said Giddens would ask a bankruptcy court Friday to allow a further distribution of funds that should bring the percentage of funds that customers have received to 69 to 70 percent.
Jill Sommers, the Commodity Futures Trading Commission commissioner who is in charge of the MF Global investigation, testified that her number one priority is to get as much money as possible back to the customers as soon as possible.
But Kobak and Sommers both testified repeatedly that the thousands of transactions that occurred at MF Global in the days before the Oct. 30 bankruptcy mean that it will take time to sort through the records. Neither Kubak nor Sommers was able to answer questions about whether Corzine or other MF Global employees could be held personally responsible if all the money is not found.
House Agriculture Committee Chairman Frank Lucas, R-Okla., started off the questioning in a low-key manner.
“From the start, I'd like to make it clear that our intent is not to sensationalize the events that have unfolded,” Lucas said. “And we are not here today to simply or haphazardly point fingers and place blame.”
Lucas lived up to his own admonition, but some of his fellow Republicans on the committee asked why CFTC Chairman Gary Gensler had removed himself from the case. That prompted statements from Democrats that Sen. Charles Grassley, R-Iowa, had called on Gensler to recuse himself because he had worked with Corzine at Goldman Sachs.
Gensler told the Senate Agriculture Committee last week that the CFTC counsel had said he did not need to recuse himself, but that he had decided not to participate in the investigation in order to avoid being a distraction.
Members of both parties said they want to restore investor confidence, but there were clear differences about whether the CFTC needs more resources and more powers to do a better job.
While Gensler and Democratic commissioners have said that the CFTC needs more personnel and improved technology, Sommers, a Republican, said she believes the agency’s resources are fine until it finalizes the rules it was given under the Dodd-Frank bill to regulate swaps and over the counter derivatives.
But she also said that there is “no doubt” the CFTC will need more resources to fulfill its Dodd-Frank responsibilities, and said that when the MF Global investigation is finished, “there will be policy changes we will want to come to this committee with.”
Questions asked also indicated how hard members found it to sort through MF Global’s roles as a futures commission merchant under the supervision of the CFTC and as a broker-dealer under the supervision of the Securities and Exchange Commission.
After members repeatedly asked Sommers similar questions, House Agriculture Committee ranking member Collin Peterson, D-Minn., stepped in to explain that the firm had been a futures commission merchant for decades but became a broker-dealer in order to make more money, and got into buying bonds from troubled European countries.
Lucas added as explanation that it appears money from the commodities accounts was used to make the potentially lucrative bets on the broker-deal side.
Corzine gave much the same story, but contended that the bets on the European bonds were a factor in the bankruptcy only because they reduced investors’ and regulators’ confidence in the firm, and that a major issue in the market’s loss of confidence was an unrelated write-off that MF Global officials did not explain well to investors.
Actions to regain the confidence of farmers and other users of the futures markets are likely to focus on the role of the designated self-regulatory organizations or DSROs that are between the futures commission merchants and the CFTC.
Terrence Duffy, executive chairman of the CME Group Inc., the DSRO for MF Global, testified that its audit and spot checks of MF Global “were performed at the highest professional level” and that MF Global’s failure to follow the rules “does not mean the segregation system is a failed system.”
But the National Grain and Feed Association, which represents many of the businesses that lost money, testified that the regulators and the self-regulatory organizations need to ask whether the customer protections are strong enough, whether audit procedures were implemented in a timely way, how often accounts were audited and whether “some entity other than [futures commission merchants] should be responsible for holding and safeguarding segregated customer funds.”
National Grain and Feed also asked whether there should be a federal or private insurance program against future losses.
“We make no judgments or recommendations on these questions today — and to be clear, we are not proposing that legislation or additional regulatory authority are needed — but the issues need to be examined carefully and quickly,” said National Grain and Feed’s witness, John Fletcher, general manager of Central Missouri Agri-Service LLC in Marshall, Mo.
The National Futures Association and the Financial Industry Regulatory Authority said they look forward to working with the regulators and Congress to figure out a better regulatory model.
House Agriculture Committee Written Testimony
- Jon Corzine, former CEO, MF Global Inc., New York.
- Jill Sommers, commissioner, Commodity Futures Trading Commission
- James Kobak, lead counsel for the trustee for the liquidation of MF Global Inc., New York.
- John Fletcher, general manager, Central Missouri AGRIService LLC, on behalf of the National Grain and Feed Association, Marshall, Mo.
- Terrence Duffy, executive chairman, CME Group, Inc., Chicago.
- William J. Brodsky, chairman and CEO, Chicago Board Options Exchange.
- Dan Roth, president and CEO, National Futures Association, Chicago.
- Stephen Luparello, vice chairman, Financial Industry Regulatory Authority.
- Gerry Corcoran, chairman and CEO, R.J. O’Brien & Associates, on behalf of the Commodity Markets Council, Chicago.
