For those holding out hope that the most recent Congressional hearings on the MF Global bankruptcy would clear up some confusion, Wednesday’s hearing before the House Financial Services Oversight and Investigations subcommittee entitled “The Collapse of MF Global: Part 3” was a huge disappointment.
Many people were eager to hear what MF Global Inc. Assistant Treasurer Edith O’Brien might say. However, as expected, O’Brien invoked her Fifth Amendment rights against self-incrimination and said little.
O’Brien was named by former MF Global Chairman and CEO Jon Corzine in hearings held this past December as someone who provided him assurance that money transfers to JP Morgan during the week prior to the bankruptcy filing were in compliance with the law.
This was of great interest as an e-mail from O’Brien was leaked, apparently from the subcommittee staff memo last week, that noted that the transfer was “Per JC’s [Jon Corzine’s] direct instructions.”
Appearing on the first panel in addition to O’Brien, who needed to be subpoenaed to appear, was MF Global Holdings General Counsel Laurie Ferber, MF Global Holdings CFO Henri Steenkamp and MF Global Inc. CFO North America Christine Serwinski.
Questions regarding the legality of those transfers were also of great concern to JP Morgan. The bank had gone so far as to request Jon Corzine provide written assurance that money transferred to cover an overdraft in one of its U.K. affiliates was not taken from customer segregated funds. Corzine turned this over to Ferber who asked JP Morgan to narrow the focus of the “compliance certificate.”
Both Ferber and Diane Genova, deputy general counsel for JPMorgan (part of the second panel), testified that this was an unusual request. Ferber testified that a second draft of the request was still too broad but that O’Brien indicated to her that she would sign the certificate if it was limited to the two transactions—a $200 million transfer from the customer segregated account to a house broker dealer account and a subsequent $175 million transfer from that account to the U.K. affiliate—in question.
The document was never signed, though Genova stated that she "believed we were given clear assurance that the transfers were lawful."
Most of the testimony covered well-worn ground and the inability to bring clarity to what happened during the final week of operations at MF Global led to some frustration on the part of lawmakers and some testy exchanges. One lawmaker said the situation was “utterly disgraceful” and another told witnesses on the first panel that they “all should be ashamed of themselves.”
The March 23 leaked memo from committee staff held out some promise that the hearings would be more eventful, and some items from the memo didn’t square with all of the testimony. For example, Genova’s written testimony states, “J.P. Morgan had offered, as part of its ongoing support for MF Global, to take the unusual step of providing same-day liquidity as to any such sales in which J.P. Morgan acted as agent on MF Global’s behalf with respect to securities actually custodied at J.P. Morgan. This measure would provide MF Global with liquidity on the fastest possible basis.…”
The staff background memo noted that in an Oct. 28 meeting with regulators that “Mr. Corzine and Mr. Steenkamp expressed frustration with [JP Morgan’s] delays in transmitting sale proceeds.”
It adds that MFGH Treasurer Vinay Mahajan noted in an e-mail that JP Morgan was “holding up vital business in the U.S. as a result” of the overdrawn U.K. account.
However, lawmakers did not pursue issues regarding the cooperation between MF Global and JP Morgan.
The memo also highlighted an interview with Serwinski where she revealed a conversation she had with O’Brien regarding the shortfall. When O’Brien revealed to Serwinski that the shortfall was real and not an accounting error, she also shared documents that showed the deficiency was the result of “three types of transactions: 1) intra-day loans between MF Global’s FCM and its broker dealer; 2) the funding of outgoing broker dealer client funds; and 3) a $175 million transfer to MF Global’s London office on Oct. 28. Together, these transactions totaled $909 million.”