Last week Democratic members of the House Financial Service’s Subcommittee on Oversight and Investigations offered an addendum to the staff report issued by committee chair Rep. Randy Neugebauer (R-Tex.) on Nov. 15.
In it they expressed concern that the committee report put too much blame on Jon Corzine. Give me a moment to focus — this is not a joke; or at least not an on purpose joke.
While it is understandable that the Democratic members of the subcommittee may be upset over only having a day to review the report prior to it being released and — while I am no Congressional expert — the way a committee works everyone should agree on its conclusions, and if they don’t they offer any alternative view along with the report as it is released. Still to defend Corzine, even in the slightest, in this case is ridiculous.
While it would be fair to say, in any organization, that you win or lose as a team, whatever happened to the buck stops here? Corzine was the man in charge and that alone makes him responsible. But in this situation you add the fact that it was his plan to turn MF Global from a futures broker to an investment bank; he initiated the trades that put the firm on thin ice; he fought with and eventually got rid of the risk manager who challenged the wisdom of the size of those positions — going so far as to alter organizational reporting so that risk managers would report to him and his longtime minion Bradley Abelow instead of directly to the board of directors. So yes the board has some responsibility in this but mainly it is its failure to oversee Corzine’s activities. A board of directors shirking its responsibility is not unique to MF Global, but a head trader slash Chairman and CEO is.
The addendum points out that Corzine’s plan to transform MF Global into an investment bank is not the reason customer funds were inappropriately used.
While, in general, that is a correct statement in that investment banks can fail without misusing customer funds, MF Global was a large futures commission merchant that was struggling and unprofitable when the plan was hatched. So it would be fair to ask where does the money come from in an organization that had been losing money and whose prime function is futures brokerage? A futures broker earns money by executing trades for its customers and by earning interest on the customer money it is holding. Proprietary trading requires another source of money, so it is somewhat odd for a futures broker to simply declare itself an investment bank. I don’t recall any large inflow of money accompanying this plan. There may have been a bond offering or two, but that may be even more troubling.
The addendum strangely focuses on rule changes that have already been made like changes to the alternative method of calculating secured funds. They conclude, “We urge regulators to strengthen existing disclosure requirements to customers so that they will better recognize and understand the risks they face when they invest their funds in one place vs. another.”
Here, Rep. Michael Capuano (D-Mass.) and the other Democratic members of the subcommittee show a shocking lack of understanding to what occurred. Customers of MF Global never made any investment in MF Global. They opened accounts to trade futures. They are required to post margin to back the trades they make through MF Global. MF Global is allowed to invest the excess margin money of their customers in certain limited safe investments provided they post appropriate collateral before making any such investment. Customer money should never be at risk. If those customers wish to trade on overseas markets, their money is placed in part 30 secured accounts that allowed this alternative method of calculating what the broker must set aside for customers.
But make no mistake, futures customers are assured from the beginning of their involvement in trading that their money — placed as margin for their trading activity — is safely segregated from firm money. That is what was violated here. Reforms in certain regulations that may have arguably provided a loophole from total segregation such as the alternative method are welcome, but by no means explain violations of segregation.
While the addendum does acknowledge Corzine’s culpability going so far as to acknowledge that he could face criminal charges, to in any way take pressure off of Corzine is irresponsible and quite appropriately calls into question their motivation.
The addendum even promotes Capuano’s recently introduced legislation to merge the Commodity Futures Trading Commission and Securities and Exchange Commission, though it offers no information on how that may have helped prevent what happened at MF Global.
The shocking part of this entire episode has been how weak the investigation into wrong-doing has been and the lack of urgency in returning the property of former-MF Global customers. To use this report as an excuse to promote pet projects or ask for additional funding for regulators is symptomatic of what is wrong here.