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MF Global: The Untold Story of the Biggest Wall Street Collapse Since Lehman

There are plenty of lessons to be learned from MF Global, all of which we can count on Congress to ignore at the behest of Wall Street money until the next financial crisis.

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According to FINRA’s rules, “Principal examinations are rarely waived.” A Principal is the person charged with supervising other security personnel and requires a Principal’s license. Based on Corzine’s testimony, he was not only trading debt but  he was  instructing others to write tickets.  Corzine’s Principal license, a Series 24, would have lapsed when he left Goldman Sachs in 1999.  Even though its own rules say that waving a Principal examination should be a rare occurrence, FINRA waived that for Jon Corzine as well, according to a spokeswoman.

Against this backdrop of regulatory and Board waivers, it is painful to watch 10 hours of Congressional hearing videos and listen to the Chief Executive Officer, two Chief Financial Officers, Chief Operating Officer, Chief Risk Officer and General Counsel tell Congress and the American people they have no idea how $1.6 billion of what should have been legally segregated funds in customer accounts is missing. Edith O’Brien, the former assistant treasurer, took the fifth in house hearings, while smiling like Mona Lisa.             

The final meltdown of the firm came during the week of Monday, October 24 through Monday, October 31, 2011 – the day the firm filed bankruptcy. On Monday, October 24, according to a Congressional memo, Michael Stockman, the Chief Risk Officer who had replaced Michael Roseman, sent an email that listed the firm’s net funded exposure to European sovereign debt from Greece, Ireland, Italy, Spain and Portugal at $7.687 billion and $422 million for Belgium and France.  On the same day,the ratings agency, Moody’s, downgraded MF Global to the  lowest investment grade rating, Baa3.

According to an email obtained by Congress, on October 24, Henri Steenkamp, the CFO of the holding company for MF Global, sent an email to Standard and Poor’s, writing that MF Global’s “capital and liquidity has never been stronger…MF Global is in its strongest position ever….”  Mr. Steenkamp is still employed at the firm and is signing financial documents for the bankruptcy trustee of the holding company.

On Tuesday, October 25, the firm announced the largest quarterly loss since going public in 2007, a net loss of $191.6 million.  Corzine was on the earnings call with investors and explained his bets on sovereign debt as follows: “…the structure of the transactions themselves essentially eliminated market and financing risk.” The stock price lost 44 percent on the day.

On Wednesday, October 26, Standard and Poor’s issued a Credit Watch with negative implications, noting that it might soon downgrade the debt to below investment grade, i.e., junk. On Thursday, October 27, Moody’s again downgraded the firm’s rating, this time to junk (Ba2), citing the firm’s “outsized proprietary position.” In the wee hours of Sunday morning, the firm owned up to customer money missing from the segregated accounts. A potential sale of the firm was aborted. On Monday, October 31, MF Global Holdings Ltd., the parent entity, filed for bankruptcy and the Securities Investor Protection Act (SIPA) liquidation proceeding was filed for the securities brokerage and Future Commission Merchant which held the customer accounts.

Eighteen days before the firm failed, the Treasury, Finance Group, and a Senior risk officer prepared a hypothetical death spiral scenario for the firm titled “Break the Glass.”  Disturbingly, the following sentence appears in the document:

“How quickly do we want to send cash back to clients, what is the message if we do not send immediately, what is the strategy if we want to keep the customer and wait until the storm passes..."

The checks that were mailed to customers who wanted their money out of MF Global after its credit ratings downgrades and announcement of a record quarterly lossbounced.

Customers have moved their accounts elsewhere now but the cumulative total of money missing in the customer accounts is $1.6 billion, according to the liquidation trustee hired by the Securities Investor Protection Corporation (SIPC), James W. Giddens of the law firm, Hughes Hubbard and Reed.  Hughes Hubbard has served as bond underwriting counsel for Citigroup, JPMorgan, and Bank of America on multiple occasions. These are three of the 22 banks which provided the unsecured credit facility of $1.2 billion to MF Global.  The law firm told the court it would drop JPMorgan as a client in response to letters of complaint from customers. The trustee is currently negotiating with JPMorgan to return money it says belongs to customers. Hughes and Hubbard’s current relationship with the 21 other banks in the syndicate is unknown.

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