I’m a proud American but sometimes when watching Congress at work I wonder if our Founding Fathers were a bit daft. Case in point: The House Agriculture Committee hearings on the MF Global failure held Dec. 8. Between the redundant, silly, random and political ax grinding questions, it’s a wonder anything was learned. However:
- We did learn Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler was in Europe during these hearings, which made some Congressmen indignant.
- Jon Corzine admitted that he didn’t know where the missing money was, and that he was "stunned" when told on Sunday, Oct. 30, "that MF Global could not account for many hundreds of millions of dollars of client money."
- We also learned from Corzine that the $191.6 million second quarter loss was largely made up of deferred losses that had to be recognized. Only $18 million of that was due to operating losses, none of which, said Corzine, was due to the repurchase transactions to maturity or RTMs, which was a main focus of the hearing by the Congressmen.
- MF Global had been a troubled company for years. In February 2008, in the so-called "Dooley Trading Incident," the firm lost $141 million alone because of a rogue broker out of Memphis. That fiscal year it had a $71 million loss, followed by a $69 million loss in 2009, $168 million loss in 2010 and 2011 was looking more bleak. So despite the effort to make it look like it was only the sovereign debt trading that put the nail in MF’s coffin, it was many factors.
- CME Chairman Terry Duffy testified that on Thursday, Oct. 27, two CME auditors (CME was the designated self-regulatory organization for MF Global) made an unannounced visit to MF’s Chicago offices to review the daily segregation report, and they found "segregation was intact." The auditors continued reconciling the books until Oct. 29, Friday evening — remember this day — when they left the office having found "only immaterial discrepancies." That same day, the CME received a report from MF Global stating everything was in full compliance. During questioning, Duffy said that Chairman Gensler had called him on that Friday to see if the exchange was worried about MF Global’s capital. Duffy said he didn’t know and they would need to talk to the clearinghouse.
- CME auditors returned to MF Global offices on Sunday, Oct. 30 because "we learned from the CFTC that the draft segregation report for Friday, Oct. 28, which had been provided to the CFTC that day, showed a $900 million shortfall in segregation caused by an "accounting error."
- At 2:00 a.m. on Monday, Oct. 31, MF Global told the CME and CFTC that customer money had been transferred out of seg fund accounts. As Duffy testified, "Transfers of customer funds for the benefit of the firm constitute serious violations of our rules and of the Commodity Exchange Act." It appears on Friday, when CME auditors were at the firm and when Gensler was contacting Duffy, transfers had been made out of customer seg funds, but to where is still the question. Further, according to Corzine, he didn’t know about it until Sunday.
This story still is unfolding. Check out our coverage by Managing Editor Dan Collins (MF Global failure highlights cracks in the system and CTAs on the front lines of MF Global battle), as well as updates here on futuresmag.com.
The futures industry says the seg funds system works, but apparently not if money is missing and fraud occurs. Perhaps red flags need to be acted upon faster; and in MF Global’s case, there were plenty until it finally raised the white flag.