"The theory is that someone at the firm overrode internal controls that safeguarded customer funds and transferred money out of them to shore up the company's global liquidity position. Congress and federal investigators are particularly focused on the role of Jon Corzine, the former CEO of Goldman Sachs and governor of New Jersey, and whether he purposely directed his treasury department to use customer funds."
"Oh what a tangled web we weave,
When first we practise to deceive."
Sir Walter Scott
Like the WMD's in Iraq, the financial people at MF Global spent three days looking for an accounting error to explain how $1.6 billion in customer money went missing. And like the WMD's in Iraq, the chimerical accounting error never existed. The reason for the missing money was a deception with a purpose.
Edith O'Brien has the answers, certainly to at least the first phase of the fraud, which involved taking customer money from segregated accounts to meet margin calls.
The second phase of this scandal is external, involving the parties who hid the stolen customer money, most likely manipulated the post-collapse bankruptcy process to favor themselves over the victims, and may possibly have been involved in the takedown of MF Global in the first place.
I wonder if there were CDS and stock options that paid off with their bankruptcy. Who benefited from the failure of one of the larger clearing brokers serving the retail customer? Who held the other side of MF Global's trades?
Besides Edith O'Brien and Jon Corzine, the parties with the greatest insight into MF Global's positions and financial structure were JP Morgan and Goldman Sachs based on the reports that I have read. As Francine McKenna has said, JPM knew MF Global 'all too well.'
This analysis by CFO.com helps to highlight the key issues in the first phase.
The spin that these were just simple 'accounting errors' and that the money 'simply vaporized' is pure fantasy, repeated by a servile and unambitious mainstream media, and the Wall Street demimonde of enablers and attendants.
Janet Tavakoli has produced a rather nice summary of the key facts and issues in the MF Global scandal provocatively titled, "MF Global: JPM Produces Smoking Gun."
It is not quite a smoking gun, in the irrefutable legal sense of evidence, but it certainly helps to narrow the possibilities in a system of discovery and justice. Oh that we still had one.
The more that I think on this whole situation, the more that I suspect, as a personal theory, that the genesis of the MF Global collapse resides in an attempt by a few financial industry participants, with some insider knowledge of the firm, to break Cozine's Euro debt trade by increasing his margin demands on an overleveraged 'sure thing' against an overly thin wallet.
The goal was to force Corzine to settle what ought to have been a good trade at a loss, and perhaps to be forced to surrender the firm, and in particular their important positions in the metals exchanges, in addition to a not insubstantial amount of bullion, to an acquisition at a very modest price to value in order to provide the liquidity. Instead, Corzine dipped into customer funds, and took it to a whole new level, spoiling any further thoughts of an easy acquisition. This of course does not absolve Corzine for his highly risky trade, even though he may have been privately assured that the European debt would be made good.
I might have to give too much credit to say it was like burning the farms and buildings before Stalingrad. Instead the whole city itself was burned and rendered uninhabitable.
But this theory may be a bit labored. Still, this is a well worn trading gambit on the Street of Thieves.
MF Global’s Inscrutable Accounting Error
By Vincent Ryan
April 03, 2012
The securities dealer’s finance department and its regulators were busy looking for a mysterious reporting glitch during the company’s final days – one they never found.
MF Global’s general counsel and the CFO of its broker-dealer unit appear to never have had any evidence that faulty reporting had caused a deficit in customer-segregated accounts. But they persisted in their belief for as long as three days, according to a timeline of the firm’s final days constructed by the Chicago Mercantile Exchange. The reason? The amount was so large “it was too big to be anything else.”
In turn, early on, the CME and the Commodity Futures Trading Commission were prevented from conducting a full audit of customer-account statements because they didn’t have all the necessary documentation from MF Global. The three-day delay in confirming the customer-account shortfalls combined with the inability of regulators to get timely information from MF Global personnel may have contributed to the “loss” of $1.6 billion in customer funds and the firm’s eventual demise.
The bankruptcy has stirred up a firestorm in the securities industry and among regulators because many of the customers who lost money were farmers and ranchers who used futures in nonspeculative ways to hedge against price volatility. The firm went from reporting a $192 million quarterly loss on October 24, 2011, to filing Chapter 11 on October 31.
The theory is that someone at the firm overrode internal controls that safeguarded customer funds and transferred money out of them to shore up the company's global liquidity position. Congress and federal investigators are particularly focused on the role of Jon Corzine, the former CEO of Goldman Sachs and governor of New Jersey, and whether he purposely directed his treasury department to use customer funds...
Read the rest here.