MF Global Report: Full Recovery Still Iffy

Commodities 19 Nov 2012

According to an optimistic reading of the MF Global affair that one does sometimes encounter, the funds to make the customers whole are available, and although it is of course unfortunate (the optimists acknowledge) that the customers have had their patience tried for so long, when the necessary red tape is sorted out, they will get their money back, through the work of the trustees.

A House of Representatives subcommittee on oversight & investigations, chaired by Rep. Randy Neugebauer (R- TX), has issued its long-awaited autopsy of the failure of MF Global, and the report is in general not consistent with such optimism. One of the takeaways from this report is that recovery for the customers of the U.S. based subsidiary, MFGI, is still very much at risk, notwithstanding the efforts of trustee James Giddens, and largely because of a fraught relationship between the US and UK entities.

“Giddens and the MFGUK administrators disagree” the report tells us, “about whether, under U.K. law, Giddens is entitled to have his claim satisfied from the disputed fund before other creditors….A trial is scheduled for April 9, 2013, in the U.K., to resolve the dispute.”

It seems that, if the trial doesn’t go Giddens’ way, the customers whose interests he represents may be out of luck with regard to some portion of that money, depending of course on the claims of those other creditors. Furthermore, as the report also observes, “Because MFGI’s other creditors normally would be entitled to have their claims satisfied … diverting MFGI property to make customers whole will diminish any recovery the company’s creditors otherwise would realize.”

In fisherman’s English: somebody is getting scrod here, though the courts may still need to determine who that is.


Separately, the report finds:

  • That it was Chairman and CEO Jon Corzine who “made several fateful decisions, the cumulative effects of which caused MF Global’s bankruptcy and jeopardized customer funds.”
  • That the regulators were not properly coordinated, that is, the SEC and CFTC failed to share critical information with one another.
  • That MF Global was less than forthright with regulators and the public concerning its exposure to European bonds and its liquidity/illiquidity
  • And that the ratings agencies, Moody’s and S&P in particular, did not “sufficiently review MF Global’s public filings to identify these risks [associated with its proprietary trading positions] when they did emerge.”

Tick Tock

This report may be destined for immortality as a reference work because it provides a detailed timeline for the final days and hours of the Corzine reign at MF Global. For one stretch the coverage is actually minute by minute.

It appears to have been Corzine’s decision to buy European sovereign bonds and use them as collateral in repurchase-to-maturity transactions (RTMs) as a revenue raising operation.

Beginning in September 2010, MF Global expanded its RTM position. Just weeks before the company collapsed, the net position on European sovereign debt was $6.3 billion.  The three big factors that led to the collapse, then, were “MF Global’s belated disclosure of its extensive European RTM portfolio, its inability to meet increasing liquidity demands, and its lack of internal controls,” the report says.

MF Global’s insolvency became obvious on the weekend of October 29-30, 2011. The Commodities Futures Trading Commission set a deadline of the 30th, Sunday, 1 PM, on which MF Global was to provide that agency with information on its customer segregated funds.

But almost two hours after the passage of that deadline (at 2:57 PM) CFTC staffer Melissa Hendrickson would email her superiors that the information still wasn’t ready, apparently the MF Global staff were working furiously to compile it.

Two minutes later, (2:59), the Chief Counsel, Division of Clearing and Risk, CFTC, emailed Melissa Hendrickson to say, “This is NOT good.”

One minute after that, (3:00), CFTC staff at the Chicago office of MF Global saw a draft of its customer segregated funds statement. The funds that were supposed to all be accounted for … weren’t. CFTC informed CME Group of the shortfall.

Blame the Bookkeepers

By 7 PM, the MF Global staff was telling CFTC and the CME that the shortfall was an “accounting error.” But nobody, in the course of what it seems was a frantic evening, could identify any error that would explain this discrepancy.

By 12:40 AM Monday, October 31, a member of CME’s audit team was emailing colleagues that Christine Serwinski, MF Global’s CFO for North America, would “look into coming up with additional funds to transfer into segregation as a contingency,” if the accounting explanation continued to be elusive.

MF Global had over the previous days been seeking to sell itself to Interactive Brokers, but on Monday, when it told IB about the customer shortfall, IB ended those discussions, and MFG had no choice left but to file for bankruptcy court protection.

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