Corzine’s culpability

By Felix Salmon
December 8, 2011
testifying; the bad news is that he's almost certainly not going to say anything substantive in his testimony.

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The good news, today, is that Jon Corzine is testifying; the bad news is that he’s almost certainly not going to say anything substantive in his testimony. His prepared statement is a bit odd: he says that he has “had limited access to many relevant documents, including internal communications and account statements, and even my own notes, all of which are essential to my being able to testify accurately” — and then says that somehow he might have been able to gain such access between now and January, as though anything will have changed between now and then.

In any case, when it comes to the huge black hole where MF Global’s customer funds should be, Corzine’s testimony is clear: “I simply do not know where the money is, or why the accounts have not been reconciled to date.”

But Christopher Elias has an idea — he reckons that the hole in MF Global customer accounts might well be due to rehypothecation.

You’ll remember rehypothecation from the Lehman bankruptcy: brokerage customers of Lehman in the US got their money back much more easily than brokerage customers of Lehman in the UK, because in the UK brokerages are allowed to “rehypothecate” customer funds — essentially, to use them for their own corporate purposes, including putting them up as collateral in their own trades.

And guess what: MF Global, too, had a UK subsidiary, MF Global UK Limited, which had over 10,000 accounts. Just as Lehman monies sloshed back and forth chaotically from New York to London and back in the company’s final days, it seems that something similar was going on at MF Global: after all, JP Morgan Chase in London seems to have been transferred quite substantial sums in the days before MF Global’s bankruptcy.

This is all highly speculative, of course. And given the utter mess which investigators seem to have found when trying to piece together what happened to customer funds, it’s entirely possible that we’ll never know exactly where they went. Money’s fungible, and once it disappears into the global financial system, it can’t easily be traced.

Corzine’s statement includes an apology “to all those affected” by MF Global’s bankruptcy; he also takes responsibility for entering into the ill-fated repo-to-maturity trades. But he doesn’t seem inclined to admit that as CEO of the company, it was his job to ensure that customer funds were well looked after:

As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business.

This is an abrogation of responsibility, but it also rings true: back-office clearing and settlement operations are largely ignored by senior management most of the time. Still, Corzine was responsible for them. And he testifies that in its final week, “MF Global undertook extraordinary steps” in an attempt “to sell assets and generate liquidity”. It it possible that those extraordinary steps included hands entering cookie jars where they weren’t actually allowed to enter? I’d say it’s not only possible but likely. And that the more “extraordinary” the steps that Corzine was encouraging his lieutenants to take, the more likely that he would have been effectively condoning the idea that customer funds could be used in an attempt to stave off bankruptcy.

Ultimately, of course, it was the missing customer funds which torpedoed any prospects of MF Global being sold to a deep-pocketed buyer: Corzine might have scrambled a bit too much in those “chaotic, sleepless nights” which he now recollects so dimly. I sincerely hope that his actions in those days and nights can be pieced together with hindsight. Because at some point he’s going to have to be held accountable for what he did.

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