From the July/August 2013 issue of Futures Magazine • Subscribe!

CFTC takes action against MF Global, Corzine and O’Brien, finally

How did they get there?

By now, even the least interested person knows about the failure of MF Global, and that Corzine hoped to turn MF Global into an investment bank and invested funds into what became bad investments, especially sovereign debt. But the illiquidity of the firm had been ongoing…and then came Oct. 6, 2011. From the CFTC complaint:

…on Thursday, October 6, 2011, members of senior management were concerned about the Firm’s liquidity and ultimate viability. O’Brien, her supervisor, Holdings’ Global Treasurer, and others discussed on a recorded telephone line that the Firm expected to have to make a margin payment of $50 million to $75 million the next day for MF Global’s RTMs [repurchase to maturity trade]. They agreed that this margin obligation would have to be paid from FCM Excess Cash because the Firm had no other readily available source of cash that could cover that amount. At the time, the FCM Excess Cash balance was approximately $80 to $100 million. Holdings’ Global Treasurer expressed concern that even without the stress of this margin call, the Firm was facing the loss of liquidity and that it was “skating on the edge” without “much ice left.”

On that same day, Global Treasurer Vinay Mahajan spoke to Holdings CFO Henri Steenkamp and said that he had told Corzine that the Firm’s liquidity “situation” was “not sustainable” and that “the situation is grave.” Later during this conversation, the global treasurer stated that “we have to tell Jon that enough is enough. We need to take the keys away from him.” Corzine disparagingly nicknamed the Global Treasurer “the Gravedigger.

The evening of Oct. 6, Corzine received an email from Holdings’ CFO that detailed the financial stresses on the Firm. In the email, Holdings’ CFO told Corzine that “[o]f most concern, is the sustained levels of stress and the lack of signs that this will reduce soon.”

Holdings’ CFO identified MF Global’s three sources of liquidity: (1) cash from its subsidiary, MF Global Finance USA, Inc. (“Finco”); (2) FCM Excess Cash; and (3) MF Global’s broker dealer division. Holdings’ CFO warned Corzine that the Firm was becoming overly reliant on the cash in the FCM customer accounts because the other two sources of liquidity were insufficient: “the situation of our broker-dealer [is] that [it] is currently unable to fund itself, and more worrying continues to need more cash than we have in finco [sic], thereby having us dip into FCM excess every day.” 

However, it seems that Corzine was “determined to squeeze MF Global’s customer segregated accounts and customer secured accounts for cash. In a recorded conversation with another MF Global employee (“Employee #2”), Corzine pronounced: “We need to go through what that real number is at the FCM. You know, what’s the drop dead amount. . . You know, I’m sure there is a buffer in her thinking. We’ve got to find out what that is so that we have some ability to think about pulling it if we have to. Obviously, keep me posted.”

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