Business As Usual: What the Collapse of MF Global Reveals about Financial Reform in the USA

Submitted by Elaine Magliaro, Guest Blogger

Nomi Prins, a former investment banker who once worked for Goldman Sachs and Bear Stearns, recently appeared on Democracy Now! Amy Goodman questioned Prins about the collapse of MF Global and John Corzine’s testimony before Congress.

Corzine has claimed that he never directed anyone at MF Global to misuse investors’ funds.  A witness named Terry Duffy, however, has testified that “Corzine was aware of loans that may have used customer money.” Duffy is chairman of the Chicago Mercantile Exchange.

In her interview with Amy Goodman, Prins spoke about a clip of Corzine’s testimony that she and Goodman watched: “We’re listening to someone try and dodge his way out of responsibility and accountability, which is very much what all of the CEOs on Wall Street have done through the subprime crisis and through past crises.” Prins added, “And for him to sit there in front of Congress and talk about ‘not intending’ and ‘I didn’t know’ and ‘I didn’t instruct’ and ‘I didn’t misuse’ and all these sort of legal maneuvers around this issue really is deplorable.”

Deplorable indeed! Especially when one considers that we supposedly got “financial” reform after the financial crisis of 2008 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Goodman asked Prins to talk about the Dodd-Frank Act.

Prins replied that Dodd-Frank “doesn’t protect consumers, and it didn’t reform Wall Street. So, you can call it anything you want to call it, but the fact is that these banks, that were big before the subprime component of what is now a global crisis, are bigger than they were. They have more derivatives exposures than they did. They are taking more risks than they did. They are getting away with more than they did. And they are doing it with more reliance on federal subsidies than they did before what happened in 2008. So everything, by every standard, with respect to risk and coddling of Wall Street, is worse than it was before 2008, before that act. And there is no opposition in Washington, which is why—you know, talk about an Occupy movement. That’s about the only opposition that’s happening right now.”

Goodman spoke of how President Obama while adopting some of the language of the Occupy Wall Street movement “is also receiving more money from Wall Street than any president in history.”

Prins said that is the reason she thinks Obama won’t do anything that would hurt his relationship with the Wall Street community. “So, what he says—and I believe, truly, they discount what he says with respect to supporting the Occupy movement. And it’s nice that he’s saying it, but in terms of actually doing something, he has shown—he had the opportunity to really push through major reforms, and instead backed this very lukewarm act that does nothing. And I don’t see him doing anything different than that besides talking, unfortunately, between now and the election. He’s really acted more than he’s spoken. I mean, well, he’s done both, but his actions speak louder than his words, I should say.”

Goodman and Prins also talked about how thousands of the Occupy Wall Street movement protestors and demonstrators have been arrested while Wall Street executives seem to have been left untouched after the financial crisis that cost taxpayers trillions of dollars in bailout money.

Prins said that every now and then someone will be “thrown under a bus for some sort of minor trade that happened, but none of the executives that had the accountability, that made the millions of dollars, that had the power, that had the political connections, that had the meetings in Washington that enable them to do what they do, none of those people have been arrested.” She faulted the kind of questioning that Corzine received from members of Congress—and added that even when the testimony is sent to the Justice Department little is likely to happen because “there is a big punt going on at the Washington level.”

Earlier this year, Matt Taibbi wrote an article for Rolling Stone titled Why Isn’t Wall Street in Jail? In the article, he revealed how the feds have been doing more to protect than to prosecute the financial criminals who helped to bring down the world economy. Taibbi spoke to a former Senate investigator who laughed and explained the situation succinctly: “Everything’s fucked up, and nobody goes to jail.” The former investigator added, “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”



Corzine Grilled over MF Global Collapse After Witness Suggests Knowledge of Misused Funds (Democracy Now)

Why Isn’t Wall Street in Jail? : Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them (Rolling Stone)


The Silver Rush at MF Global: Investors are furious that they can’t get back the gold and silver they stashed with the failed brokerage (Barron’s)

Corzine: MF Staff Said Fund Transfer Legal (Bloomberg)

Tossed Bomb: Former MF Global CEO Jon Corzine Aware of Money Transfer, Says Senate Witness (ABC News)

TARP To Cost The U.S. Nearly Double The Initial Estimates: CBO (Huffington Post)

Bank of America & The Great Derivatives Transfer (Turley Blawg)

38 thoughts on “Business As Usual: What the Collapse of MF Global Reveals about Financial Reform in the USA”

  1. MF Global Collapse Spotlights Practice That Heightens Systemic Financial Risk

    The swift implosion of MF Global highlights a common practice used by aggressive speculators, one that experts say makes the broader financial system vulnerable to another crisis. It’s called rehypothecation, and it allows a firm to essentially pledge the same limited collateral to arrange fresh loans.

    MF Global is believed to have used client funds as collateral to borrow money to make bets on the risky sovereign debt of Portugal, Spain and Italy, leading to a daisy chain of securitization, Thomson Reuters Business Law Currents reported. It’s akin to using a single home as collateral for several loans and then investing that money to earn dividends before payments are due on the loans.

    In recent weeks amid the turmoil of the debt crisis, European banks appear to be taking measures to restrict their exposure via these collateralized loans made through rehypothecation and have shortened the daisy chains of loaned securities. Clamping down on lending, they have instead deposited assets at the European Central Bank where the assets cannot be recommitted, Bloomberg reported on Thursday. They kept an average of $356 billion at the central bank over the last 20 days, nearing the record high from July 2010.

    But the overall value of collateral made available through rehypothecation is $5.8 trillion at the 14 largest securities dealers, according to November figures from the International Monetary Fund.

    MF Global’s London-based subsidiary had sold or repledged $16.1 billion in customer collateral as of March 31, 2011, according to accounts filed by the firm. Its use of rehypothecation is now being closely examined by bankruptcy trustee James Giddens, according to his spokesman.

  2. anon nurse,

    Thanks for the link to Taibbi’s article. It provided a link to an interesting Huffington Post piece by Jeff Connaughton:

    Obama and the Rule of Law

    Long silent and now contradictory, President Obama needs to deliver a clarifying speech about our financial markets and the rule of law. Speaking in Kansas on December 6, he said, “Too often, we’ve seen Wall Street firms violating major anti-fraud laws because the penalties are too weak and there’s no price for being a repeat offender.” Just five days later on 60 Minutes, he said, “Some of the least ethical behavior on Wall Street wasn’t illegal.” Which is it? Have there been no prosecutions because Wall Street acted legally (albeit unethically)? Or did Wall Street repeatedly violate major anti-fraud laws (and should thus find itself in the dock)?

    The President is confusing “legal” with “difficult to prosecute successfully.” The Justice Department’s repeated decisions not to risk losing at trial against Wall Street executives don’t make these person’s actions legal. (If a district attorney can’t prove the actual thief stole your wallet, that doesn’t make stealing legal. It simply means that, regrettably, a malefactor goes unpunished.) As Securities and Exchange Commission Enforcement Director Robert Khuzami said in Senate testimony in 2009, Wall Street perpetrators “are smart people who understand that they are crossing the line” and “are plotting their defense at the same time they’re committing their crime.”

    Moreover, the President is misleading us when he says that Wall Street firms violate anti-fraud law because the penalties are too weak. Repeat financial fraudsters don’t pay relatively paltry — and therefore painless — penalties because of statutory caps on such penalties. Rather, regulatory officials, appointed by Obama, negotiated these comparatively trifling fines. This week, the F.D.I.C. settled a suit against Washington Mutual officials for just $64 million, an amount that will be covered mostly by insurance policies WaMu took out on behalf of executives, who themselves will pay just $400,000. And recently a federal judge rejected the S.E.C.’s latest settlement with Citigroup, an action even the Wall Street Journal called “a rebuke of the cozy relationship between regulators and the regulated that too often leaves justice as an orphan.”

    The Obama Justice Department hasn’t tried a single Wall Street executive in a criminal court. Against a handful, it decided to let the S.E.C. bring civil charges of fraud, which are easier to prove. So if defendants’ wrists are merely being slapped by the S.E.C. instead of cuffed by the Justice Department, Obama has only his appointees to blame.

    For three important reasons, the President needs to explain why the Justice Department has filed away its investigations of big banks and Wall Street firms without indicting anyone. First, American confidence in the system is deeply shaken. Second, it strains credulity for millions of Americans — and has impelled thousands of them to occupy public places in protest — that no banking or insurance executive deserves criminal prosecution for the actions that brought on the financial crisis. Third, by failing to prosecute a single high-profile Wall Street actor today, the Administration is failing to deter financial fraud tomorrow.

  3. A new Taibbi piece:

    Obama and Geithner: Government, Enron-Style

    December 20, 10:06 AM ET


    If Geithner and Obama really wanted to convince the world that America’s markets weren’t broken, they would effectively police fraud, and by extension prove to everybody that at the very least, our regulatory system is not broken.

    But by taking a dive on fraud, and orchestrating mass cover-ups like the coming foreclosure settlement fiasco, what they’re doing instead is signaling to the world that not only are our financial markets corrupt, but our government is broken as well.

    The problem with companies like Lehman and Enron is that their executives always think they can paper over illegalities by committing more crimes, when in fact all they’re usually doing is snowballing the problem so completely out of control that there’s no longer any chance of fixing things, thereby killing the only chance for survival they ever had.

    This is exactly what Obama and Geithner are doing now. By continually lying about the extent of the country’s corruption problems, they’re adding fraud to fraud and raising such a great bonfire of lies that they probably won’t ever be able to fix the underlying mess.

    If they looked at the world like public servants, and not like corporate executives, they’d understand that the only way out is to come clean. That they don’t look at things that way should tell people quite a lot. (end of excerpt)

    Another great article, Elaine. Thanks.

  4. MF Global Judge Considering Nine Lawsuits Against Corzine
    December 19, 2011
    BloomBerg Businessweek

    Jon Corzine, MF Global Holdings Ltd.’s former chief executive officer, is the defendant in nine lawsuits before a federal judge in Manhattan that are seeking compensation for losses from the company’s collapse.

    The plaintiffs, including an electricians’ union, allege that Corzine and other company officials made misleading statements about MF Global’s financial condition before its Oct. 31 collapse. U.S. District Judge Victor Marrero has been combining the cases into one, saying they make similar claims about similar facts and events, and he now has consolidated nine of them, according to a court filing today.

    Andrew Levander, a lawyer for Corzine, didn’t immediately respond to an e-mail seeking comment on the suits, which are seeking class-action, or group, status.

    Corzine, the former governor of New Jersey, and senior MF Global officers touted the company’s internal financial controls and liquidity levels in statements that were “materially misleading or untrue,” according to a Nov. 3 complaint filed in Manhattan federal court by Joseph DeAngelis on behalf of himself and other MF Global shareholders.

    DeAngelis also named Henri Steenkamp, the New York-based company’s chief financial officer, and Bradley Abelow, its president.

    ‘Power and Influence’

    “Defendants had the power and influence — and exercised such power and influence — as to cause MF Global to engage in the unlawful conduct and practices,” DeAngelis alleged. “Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of MF Global common stock.”

    MF Global filed for bankruptcy listing $41 billion in assets after making bets on European sovereign debt and getting margin calls. The holding company is the parent of a futures brokerage that is being liquidated in a separate court proceeding.

    An Oct. 25 release on second-quarter results “falsely stated” that MF Global had strengthened its capital and liquidity, according to the suit.

    Corzine said in the release he was confident the company had “the resources and expertise to continue to successfully manage these exposures,” according to the suit.

  5. Govt warned to reform MF Global laws: report
    Business Spectator (Australia)

    In a development that relates directly to the collapse of broker MF Global, the Australian Securities and Investments Commission (ASIC) warned the federal government two years ago that laws intended to protect retail investors’ portfolios were not effective, according to a report by the Australian Financial Review.

    As many as 17,000 clients remain affected by the broker’s collapse, as MF Global Australia’s administrator, Deloitte, has thus far managed to recover only about half of $313 million in client investments.

    The remaining balance, about $167 million, is held by counter parties and offshore MFG affiliates.

    About two years ago, ASIC urged the government to reform client money laws for over the counter derivatives over concerns that brokers, such as MF Global, could use client funds to hedge trading positions for other clients.

    The AFR quoted ASIC officials and other experts saying pressure had been put on the government to enact reforms.

    MF Global used its clients’ funds as collateral to counter parties, according to the AFR.

  6. Elaine, thanks for the article and your continued work and dedication to keeping us informed and getting the word out on the corruption and hypocrisy on Wall Street.

    Now if we could only get the majority of Americans to listen…

    I often wonder what will it take for main street America to wake up.

  7. Rehypothecation Is An Old Story: MF Global’s Story Is a Different Story of Filched Funds
    By Janet Tavakoli

    Yesterday Congress held another hearing on MF Global. One representative seemed to suggest that MF Global’s movement of money to the UK may have somehow been allowable under Rule 1.25. It was as if a Member of Congress had become Corzine’s PR flack, an apologist for Corzine, and was trying to create a false excuse for Corzine. Jon Corzine has been a big Congressional fundraiser and bundler, and it is interesting to see how cheaply some Members of Congress can be bought.

    Rule 1.25 wouldn’t allow investment in foreign sovereign debt for U.S. dollar accounts, and even if it did, the accounts’ assets must be segregated. Rule 1.25 does not allow anyone to filch funds from customers’ accounts.

    Accounts at MF Global are missing money and have no corresponding asset entries. There is a shortfall of an estimated $600 million to $1.2 billion.

    Congress keeps asking how we can prevent this in the future, and I have an answer for them. Run firms with honest people that can reasonably explain the workings of their business to other honest and reasonable men. Reasonable explanations took a holiday from the Congressional hearings.

    CFTC Commissioner Jill Sommers did a good job of explaining MF Global’s problem in earlier testimony. The cases in which investment in foreign sovereign debt for customers’ own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts), and it is never allowable to transfer money out of the customer accounts to commingle with MF’s investments.

    Lies, Cover-ups, and Rubber Checks While Corzine Headed MF Global

    The behavior of some Members of Congress is disgraceful because so many honest people were cheated. Here’s just one example. While Jon Corzine still headed MF Global, customers requested wire transfers of their money, but MF Global stalled, rubber checks were written and sent to customers, and the checks bounced.

    Yet on November 1 while Corzine still headed the firm, Kenneth Ziman, a lawyer for MF Global, relayed information from MF Global to U.S. Bankruptcy judge Martin Glenn in Manhattan: “To the best knowledge of management, there is no shortfall.” That wasn’t the truth.

    “According to a U.S. official, MF Global admitted to federal regulators early Monday [October 31, 2011] that money was missing from customer accounts. MF Global acknowledged a shortfall in a phone call amid mounting questions from regulators as they went through the firm’s books.” (“MF Global’s Collapse Draws FBI Interest,” by Devlin Barrett, Scott Patterson, and Mike Spector, WSJ, November 2, 2011.)

    We bailed out large failed financial institutions with invisible support amounting trillions of taxpayer dollars and visible support amounting to billions of taxpayer dollars. Hardworking farmers and others that had accounts with MF Global have been left to twist in the wind. Innocent reputations and businesses have been damaged due to MF Global’s shortfall.

  8. Good job Elaine. Corrine and his fellow thiefs should be in jail and the Justice Department should be indicting te whole lot. Without the fear of serious jail time, these guys will continue to gamble on our dime.

  9. Corzine’s best defense is an offensive rule
    Chicago Sun-Times

    Oh, the tangled webs they wove at MF Global. Their handiwork at the collapsed futures brokerage has tied up assets for thousands of account holders and hurt the integrity of the Chicago futures markets, damaging a signature industry here.

    The craftiness was on display at three congressional hearings held this month, two of which were last week. Let’s be fair: No one has been charged with a crime, not the firm’s ousted chairman and chief executive, Jon Corzine, nor Chief Operating Officer Bradley Abelow, nor Chief Financial Officer Henri Steenkamp.

    All have now sworn to Congress that they weren’t involved in improper transfers from customer accounts and don’t know who was. An estimated $1.2 billion has disappeared that a bankruptcy trustee is trying to claw back, and the company’s three top executives profess ignorance. The statements were greeted with open skepticism from congressmen, politicians who are used to whoppers, but they still rendered the whole inquiry impotent. Despite the advantages of subpoena power and investigative staffs, no one on three congressional panels was able to tease much that’s useful from Corzine and his lieutenants.

    Their language was precise. Corzine said he never told anyone to “misuse” customer money. Abelow said he couldn’t recall “any conversation about customer funds being used for anything other than their intended purpose.” Steenkamp said he did not “authorize, approve or know of” any such transfers.

    But deep in Corzine’s remarks is a clue of what his real argument will be if the matter ever goes to a trial. His secret weapon will be the laxity of the federal regulator that’s supposed to oversee futures trading, the Commodity Futures Trading Commission.

    It’s known as Rule 1.25 and until the agency modified it after the MF Global scandal broke, it allowed brokerages to invest customer money in debt of foreign nations, the kind of bet that Corzine made.

    A year ago, the CFTC thought about eliminating that loophole. It’s a great irony of the Washington insider game that Corzine and MF Global went on record as asking that the loophole be maintained in the name of padding profits.

    Another irony: CME Group (CME), the exchange operator whose own behavior in this episode is under scrutiny, expressed the same view. It’s a profit-making company that has auditing responsibility for its customers, and MF Global was among its biggest.

    CME has said the brokerage deceived its auditors, breaking federal law. But what incentive did it have to be tough? The triumvirate here — brokerage, regulator, exchanges — is too cozy. Market virtue is expensive, and Congress must decide if the futures industry needs to be taxed for protection from itself.

    In the meantime, traders will wonder if Corzine et al. will ever spend a night in prison. On that score, his investments may already be paying dividends.

  10. Nal,

    In more related financial news:

    GOP shows it doesn’t care about U.S. consumers

    Thank you, U.S. Senate Republicans. Your actions this week showed your callous disregard for Americans from all stripes and colors, folks who have seen $2 trillion in retirement accounts wiped out in the past 15 months.

    This week, the GOP used the filibuster to prevent the U.S. Senate from taking a vote on President Obama’s nomination of Richard Cordray, the former attorney general of Ohio, to head the Consumer Financial Protection Bureau.

    By forcing the Senate to meet the 60-vote threshold, the GOP effectively prevented Cordray from taking control of the office. By not having a full-time director, the bureau, already approved by Congress and signed into law by Obama, can only do a limited number of things.

    Right now, the bureau can oversee bank regulations, but can’t examine payday lenders and the mortgage servicers. These were ground zero for all of the shenanigans that destroyed the housing market, sending our economy into a tailspin.

  11. The systemic risk revealed by MF Global’s collapse

    3. As a result of MF Global’s lobbying, key rules were deregulated. This allowed the firm to use client money to buy risky sovereign debt.

    4. In 2010, someone from the Commodities Futures Trading Commission recognized these prior deregulations had dramatically ramped clients’ exposure to risk and proposed changing those rules. Jon Corzine, MF Global’s chief executive, successfully prevented the tightening of these regulations.

    In related news, GOP votes to slash $30 million from the Commodity Futures Trading Commission (CFTC) budget.

  12. As a new college graduate, I ended up living with my parent’s while I searched for employment. My mother had died and my dad remarried some years ago, so this was my biological daddy and my step-mother. The economy had just crashed, they had most of their wealth tied up in real-estate, and the crash left them indebted and at the end of their wits.

    So I show up because I have nowhere else to go. And, having spent my life developing my personhood by searching for the truth, we were off to a rocky time. They had acquired their wealth through deceit and harm to others, and I called them on it, so I was persona non grata. But there was nowhere else for me to go.

    At that point, my very existence became a burden on others. It was something I could not bear, having spent my life trying to make life for others easier, richer, and more beautiful – the last thing left to do was end my own life.

    I set the date, gave away my prized snowboard gear, and wept. The day arrived, and with it the realization that it was my beloved brother’s birthday – the one person that meant most to me on this planet. I couldn’t do that to him. So I snapped out of it, and wish I could say that immediately everything got better. Not so. It was a long, slow grind up and out of that dark dark place.

    I wish it on no one, but I see it just on the horizon.

  13. And that is why the global markets are on the verge of collapse. Because nothing has been fixed. Money was just thrown at the problem to paper it over, and instead of a house of cards, we now have a tower of babel.

    It’s almost too late.

  14. Our ex Governor has another reason also, for people my state to be mad at him.

    Parkway, Turnpike commuters brace for 50 percent increases
    Published: Sunday, December 18, 2011, 7:00 AM Updated: Sunday, December 18, 2011, 10:48 AM
    By Mike Frassinelli/The Star-Ledger

    “signs are going up tomorrow reminding the drivers who make 600 million trips a year on the Parkway and Turnpike about the hike — the second part of a two-phase toll increase adopted by the New Jersey Turnpike Authority under Gov. Jon Corzine in October 2008.”

    It is true”when it rains it pours”.

  15. The situation is worsening by the hour. Many of those very same CEO’s will eventually be in prison … just like every other criminal cartel throughout history who considered themselves untouchable.

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