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from MacroScope:

MF Global hangs over futures conference

MF Global is front and center at the U.S. Futures Industry Association's annual conference – and hanging around attendees' necks.

A schedule of networking events tucked behind participants' name badges mistakenly advertises MF Global, the failed brokerage run by former Goldman Sachs CEO Jon Corzine, as the sponsor of a café on Wednesday and Thursday. The firm was a big player in the industry and sponsored the café, a centralized meeting point, last year.

Eurex took over as the sponsor after MF Global collapsed. It is correctly identified in other promotional material at the three-day conference in Boca Raton, Fla.

A Eurex representative referred questions about the mix-up to the futures association. The association declined comment.

The mistake keeps MF Global's bankruptcy in the face of industry members upset the collapse has hurt confidence in futures markets and reduced trading volumes. It also reinforces the large position MF Global held in the sector, where it specialized in commodities futures trading.

The firm failed on Oct. 31 after making bad bets on European sovereign debt. Some $1.6 billion is still missing from customer accounts.

Industry members are crafting proposals to rebuild trust in the markets, and reforms are a hot topic of conversation at the conference.

from Unstructured Finance:

The taxman cometh for MF Global

By Matthew Goldstein

You can add the U.S. Internal Revenue Service to the long list of creditors and customers looking to get their money back from MF Global, the failed futures brokerage firm.

The IRS slapped a lien on what's left of MF Global, seeking to recoup some $395,000 in unpaid taxes stemming from 2006 and 2007. The tax lien was filed with New York State's division of corporations on Nov. 16, about three weeks after MF Global filed for bankruptcy.

The unpaid tax bill predates the period during which former New Jersey Governor Jon Corzine took over the helm of MF Global.

It was Corzine's decision to make a big wager on European sovereign debt that ultimately sank the firm amid a series of margin calls from banks and lenders.

Earlier this year, we reported that in a last ditch bid to raise cash to meet those margin calls and return money to customers, MF Global sold hundred of millions of securities to Goldman Sachs on Oct. 27. But the proceeds from that transaction never made it into MF Global's coffers and instead was claimed by its primary clearing firm, JPMorgan Chase.

Federal authorities believe that in a bid to save the firm from collapse, MF Global may have dipped into some of the $6 billion in customer money it kept in segregated accounts at Harris Bank in Chicago and other institutions.

from Financial Regulatory Forum:

MF Global trustee reviewing firm’s practice of repledging collateral

By Emmanuel Olaoye and Christopher Elias

NEW YORK/LONDON, Dec. 21 (Thomson Reuters Accelus) - The bankruptcy trustee for collapsed U.S. brokerage firm MF Global Inc. is looking into how the firm re-pledged customer collateral as part of its search for $1.2 billion of missing customer funds.

The practice, called re-hypothecation, has drawn renewed scrutiny after the failure of MF Global and experts said U.S. regulators may face new restrictions as part of efforts to increase protection on customer accounts.

Kent Jarrell, a spokesman for MF Global trustee James Giddens, told Thomson Reuters that Giddens' team is reviewing MF Global's practice of re-hypothecation. "That is one of the areas we are looking into in [our] investigation into recovering the missing customer funds."

The trustee’s investigation was likely to take “a lot more than weeks,” he said.

"What we are doing is we're going through records and we are tracking transactions. We're trying to figure out when the transactions were conducted, why they were conducted, and where they are now. If we get in a situation where we believe the transactions were questionable, then we will take appropriate action to try to get it back," Jarrell said.

Said Nathan Powell, managing partner at Montanus Group, an independent research firm, "I think you're going to see a clear discussion by the Fed, CFTC, and SEC about the use of client collateral. Both commingling as well as the ability to re-hypothecate. On the accounting rules side they are probably going to focus more on the way that repurchase transactions are accounted for."

from Breakingviews:

Did MF Global clients forget Lehman’s lessons?

By Margaret Doyle The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Have MF Global’s clients suffered an action replay of the collapse of Lehman Brothers? That’s the intriguing question posed by the broker’s demise, which has left executives facing accusations of misusing client funds. One theory is that MF Global was able to use a legal process called rehypothecation to use customers’ money to back its own trades.

When investors enter into a trade with a broker, they typically secure the deal by posting collateral, which is deposited in a ring-fenced account. Rehypothecation is the practice whereby brokers ask clients for the right to use the collateral to back the broker’s own trades or borrowing. In return for allowing their assets to be reused in this way, clients get cheaper funding and services.

In the United States, regulators have limited the practice. Brokers are only allowed to rehypothecate assets worth up to 140 percent of the client’s liability. So if a client has borrowed $100 secured by collateral worth $300, the broker can rehypothecate assets worth up to $140. The remaining $160 of collateral remains untouched. But in the UK there is no limit to rehypothecation, so the broker can use the full $300 as collateral for another trade.

MF Global appears to have taken advantage of this transatlantic difference. According to accounts filed by MF Global in the UK, the broker’s London-based subsidiary had sold or repledged $16.1 billion in customer collateral as of March 31, 2011.

There’s no way of knowing how MF Global used these funds. Jon Corzine, the former New Jersey governor who ran the broker and masterminded its failed $6.3 billion bet on euro zone debt, has denied misusing client funds. KPMG, the administrator for MF Global’s UK arm, says it has no evidence that contractual terms were breached. But as rehypothecation was explicitly permitted in MF’s client agreements, this wouldn’t constitute a misuse.

Nevertheless, the apparent scale of MF Global’s use of rehypothecation is surprising given that many hedge funds were burned by the practice when Lehman collapsed in 2008. Many of the client assets in the Wall Street broker’s UK arm had been rehypothecated, leaving customers to fight for their cash as unsecured creditors.

from Unstructured Finance:

MF Global: gross negligence or intent

By Matthew Goldstein

There was plenty of theatrics Thursday when Jon Corzine returned to his old stomping ground--Capitol Hill--to offer an apology and a mild defense for the events that led to the collapse of MF Global. But in the end little light was shed on just what happened during those final days of October, as Corzine's firm spiraled towards bankruptcy and hundreds of millions dollars of supposedly protected customer money went missing.

Corzine said many times he didn't know what happened to the money and was shocked as anyone to find out the money was gone. But there is one thing Corzine said that will prove to be the most critical part of his testimony and that's his assertion that he never intended to do anything wrong. Or more precisely, he never intended to have customer money maintained in segregated accounts transferred to the firm's own bank accounts.

As anyone who has been following the MF Global saga now knows, the one inviolate rule of the futures industry is that a firm cannot commingle its money with its customers, or take customer money in a segregated account to pay the firm's bills or debts.

Yet it increasingly looks like customer money was moved and commingled with the firm's own money. But the challenge for investigators from the FBI to determine is whether the commingling was an accident--the result of gross negligence by harried and frantic employees of MF Global. Or was the money moved in a deliberate and desperate attempt to the keep the ship afloat.

It's an important distinction because gross negligence--no matter how bad that might be--would likely only expose those at MF Global to potential civil liability. That's bad and could results in stiff fines and bans from the futures business for individuals, but probably no jail time.

On the other hand if someone at MF Global gave an order to begin wiring money hand-over-fist out of customer accounts to meet some margin call, then a crime might very well have been committed. The key thing is whether anyone at MF Global had the intent to break the law and move customer money. It's why Corzine kept to the "I didn't intend" construction in answering questions during the hearing.

from Breakingviews:

Corzine apology little better than Fuld’s defiance

By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Jon Corzine’s apology isn’t much better than Richard Fuld’s defiance. The former boss of MF Global told the U.S. Congress on Thursday he regrets the loss of money and jobs caused by the firm’s collapse. But his prepared statement is also full of dubious explanations that don’t improve much on the blame-game tactics and lack of contrition from Lehman’s ex-chief.

The onetime senator threw caution to the wind by acquiescing to a grilling by his former congressional colleagues. Corzine’s carefully worded remarks may nevertheless return to haunt him in court. But even now, they raise troubling questions.

For starters, he says his resignation deprived him of valuable information, particularly corporate records that might reveal what happened to as much as $1.2 billion in missing client money. Why didn’t he stick around and seek answers instead?

Corzine also professes he’s no accountant, with limited knowledge of how trades were cleared or money moved. That may be technically true, but as a trader, he was almost certainly aware of the benefits - and risks - of the off-balance sheet treatment given repurchase agreements involving sovereign debt. What’s more, the Sarbanes-Oxley law makes him personally responsible, as CEO, for the accuracy of the firm’s financial statements.

His points about leverage are equally woolly. Corzine contends he reduced the firm’s borrowing from over $37 for each $1 of capital to about $30. But reducing leverage won’t help much with risky investments like Irish and Portuguese sovereign debt. And while company directors approved his decisions, Corzine didn’t, in his prepared statement, address media reports that he pressured them to get his way.

Roughly three years ago, Fuld went obstinately to Congress shortly after Lehman’s demise. He pointed fingers at short sellers, rumors, the media and the global financial crisis. He complained that the Federal Reserve and Congress helped other banks while letting his fail. The closest he came to an apology was to say he “felt horrible” for what happened.

Corzine did marginally better on that score. He said he was sorry to those who bore the brunt of MF’s bankruptcy. But in the end, Corzine portioned out most of the blame. On Wall Street, remorse still comes without responsibility.

from MacroScope:

Gensler’s grilling

Dave Clarke also contributed to this post.

Inside the Beltway, the ability to stay on message is a coveted trait. Politicians hate letting tough questions sidetrack them from their talking points. But it turns out they don't particularly like it when others use the same tactic on them.

On Tuesday, Republicans blistered Commodity Futures Trading Commission Chairman Gary Gensler at a Senate Banking Committee hearing, expressing frustration with his answers -- or lack thereof.

In particular they  focused on why in early November Gensler opted to recuse himself from participating in all matters related to the collapse and investigation of brokerage firm MF Global. Gensler once worked under MF Global CEO Jon Corzine while the two were at Goldman Sachs, and he worked on the Sarbanes-Oxley Act while Corzine served on the Senate Banking Committee.

In a testy exchange with ranking Republican Richard Shelby, Gensler repeated that he recused himself so that he did not become a “distraction.”  Shelby was not having it.

Shelby: Did you recuse yourself because of your relationship, past or present, with the chairman of MF Global, Mr. Corzine?

Gensler: I -- I indicated to our general counsel that Thursday, November 3rd, that I thought that I didn't want my participation to be a distraction from the very important matters...

Shelby:  So the answer is yes or no?

Gensler:  ... going forward.

Shelby:  Wait a minute, wait a minute.  I asked you a question. Are you recused -- did you recuse yourself from proceedings dealing with MF Global because of your prior relationship with -- with Mr. Corzine way back 14 years ago or currently -- a combination?

Gensler’s responses to Shelby’s questions only seemed to egg other Republicans on to challenge him when it was their turn at the mike. Senator Bob Corker told Gensler he had initially not planned to say anything about MF Global, but felt compelled to do so after. “I was disappointed in your testimony," he said.

from Unstructured Finance:

MF Global a month later and still a mystery

By Matthew Goldstein

It's been about a month since MF Global began spiraling towards bankruptcy and still there's no clarity about what happened to the missing customer money that was supposed to be kept in untouchable, segregated accounts. It's not even clear how much money is missing.

When the Jon Corzine-led firm filed for bankruptcy on Halloween, it was believed some $900 million in customer money couldn't be accounted for in MF Global's segregated accounts maintained at Harris Banks and other institutions. That sum was quickly revised downward to about $600 million. And the number remained at $600 million until the court-appointed liquidation trustee surprised everyone last week by saying more than $1.2 billion in customer money might be missing.

But now even that $1.2 billion figure is in doubt. Officials with the CME quickly questioned the much higher figure and so did other regulators. A law enforcement source tells me federal investigators also doubt the $1.2 billion figure and believe the missing money is still about $600 million.

Still, $600 million is a lot of money and it's a bit mystifying that regulators and federal investigators have yet to come up with a good working explanation for where the loot went.

At this point it seems pretty clear MF Global--whether intentionally or negligently--was commingling customer money with the firm's own money. The speculation is that as the firm was careening towards bankruptcy, MF Global dipped into the segregated customer account to cover margin calls on the firm's own trades and ones it made with customer money. But that's just educated speculation--not an official working narrative of events.

Maybe some answers will emerge on Dec. 15 when regulators, Corzine and others from MF Global are scheduled to appear on Capitol Hill to testify before a Congressional panel.

from Financial Regulatory Forum:

Off Balance Sheet Repo Risks Come Back to Bite

By Christopher Elias

NEW YORK, Nov.16 (Business Law Currents) - Off balance sheet items and undisclosed liabilities are coming back to bite companies, as repo-to-maturity disclosures prove to be a jarring reminder of pre-crisis risk proclivity.

Symptomatic of a wider problem gripping U.S. banks, MF Global’s bankruptcy has drawn attention to the danger of financial services firms hiding their true liabilities, no matter how safe they think they are.

The revelation that MF Global’s off balance sheet leveraged repo-to-maturity play was stuffed full of toxic Eurozone debt proved to be its downfall. The prospect of a Eurozone default spooked markets and MF Global’s liquidity drained away. A review of U.S. banks’ SEC disclosures reveals, however, some troubling implications of the gaps in U.S. GAAP filings as the true nature of hidden debt exposure becomes apparent. 

SEC filings from Nomura, Santander and Merrill Lynch have all acknowledged the heavy use of off-balance sheet repo-to-maturity transactions, and some even admitted to including Eurozone debt within these structures.

REPOS

By way of background, repos are used by many banks as a way to increase liquidity and involve the sale of a security (e.g. bonds) together with an agreement for the seller (the bank) to repurchase the securities at a later date. In return for “selling” the securities, the seller receives a purchase price with an agreement to repurchase the securities at a later date and probably for a greater price – effectively representing the “interest” (known as the “repo rate”). A repo is the economic equivalent of a secured loan with the buyer receiving securities as collateral and the seller receiving the purchase price as the loan principle, although as seen in Lehman Brothers’ collapse, this can be abused for accountancy purposes.

from Breakingviews:

MF Global could finally help SarbOx prove itself

By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

MF Global could finally help the Sarbanes-Oxley Act prove itself. The reform inspired by Enron, WorldCom and other accounting scandals helped clean up U.S. company books, albeit at a cost. But approaching 10 years on, enforcers have filed few cases under the law. They could finally get their big chance if questions surrounding MF Global’s failure prove to have substance.

SarbOx has always drawn gripes. A 2009 survey by the U.S. Securities and Exchange Commission pegged the average company’s cost of complying with the 2002 law at $2.3 million a year. Some firms complained that it deterred them from going public and drove business overseas. More recent research, in contrast, credits it for better disclosure, fewer financial restatements and a lower cost of capital for companies.

Either way, SarbOx has lacked muscle. Executives who certify books that turn out to be dodgy can be forced to cough up bonuses and other incentive pay. The SEC has filed cases against 31 honchos at 20 firms. But only piddling amounts have been collected since the financial meltdown, despite glaring failures, and about the only biggish names involved were Navistar, Diebold and Beazer Homes.

HealthSouth boss Richard Scrushy was prosecuted for signing a false financial statement, and a California man under investigation for child pornography was convicted of destroying his computer hard drive - a violation of SarbOx. Criminal cases, though, have been scarce.

One reason is that the law overlaps with some prohibitions in older statutes and those, already tested in the courts, may be preferred by enforcers. Regulators may also be wary of action that involves going after auditors, since the prosecution and collapse of Arthur Andersen left companies with few big accounting firms to choose from.

But MF Global is shaping up as a potential high-profile candidate. Bart Chilton, a commissioner at the Commodity Futures Trading Commission, on Tuesday suggested activities at the firm - where a whopping $600 million in customer funds still seem to be missing - could have been illegal. Critics have pummeled law enforcement for timidity toward financial crime and SarbOx for being all bark and no bite. Using the law to go after Jon Corzine’s former firm could show both have teeth after all.