Will MF Global Get Away With It?

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Will MF Global get away with it?  And — by extension — will Jon Corzine escape any prosecution?  Those questions are discussed in Joe Nocera’s excellent New York Times column today.  Joe concludes that the answer is, “most likely they’ll walk.”  He, like me, is nauseated and repulsed by this potential outcome.  He notes that Mr. Corzine was both former governor of New Jersey and a very big fundraiser for President Obama in 2008.  But he refuses to believe — at least in print — that Mr. Corzine’s connections have anything to do with the Justice Department’s failure to prosecute.  Given Attorney General Eric Holder’s incredible politicization of Justice, I’m personally inclined to believe the story.

For those who have been asleep for the last six months, MF Global collapsed after making a highly leveraged (40:1) bet on European currencies.  Mr. Corzine was the CEO who developed this great “strategy.”  No problem so far.  But there’s the small matter of $1.6 billion missing from supposedly segregated customer accounts.  According to Mr. Nocera, that’s 25% of the total balance in customer accounts at MF Global.  Excerpts from Mr. Nocera’s column tell the rest of the story better than I can:

“Yet, a few weeks ago, Azam Ahmed and Ben Protess, who have done a remarkable job covering the MF Global bankruptcy for The Times, wrote an article suggesting that prosecutors were having trouble putting together a criminal case against anyone at MF Global. So far, wrote Ahmed and Protess, they’d been “unable to find a smoking gun.” In fact, they continued, “a number of federal prosecutors have expressed doubts” that MF Global “intentionally misused customer money.” Apparently, the current theory is that it was all just a big accident, the chaos of those final days causing the firm’s executives to tap into customer funds without realizing it.

Excuse me while I roll my eyes. Of course there isn’t a smoking gun. As a general rule, financial professionals tend not to write e-mails that say, “Hey, we’re desperate. Let’s break into the customer accounts!” And, of course, they are always going to say it was unintentional. They are saying it already, starting with Corzine, who told Congress last year that “there was no intention to violate segregation rules.”

As for the chaos, you bet it was chaotic at the end. How could it not have been? Last month, James W. Giddens, the bankruptcy trustee for the broker-dealer arm of MF Global, issued a report that vividly described the scene: “The rush to meet funding needs … led to billions of dollars in securities sales, draws on credit facilities and a web of intercompany loans. … The company’s computer systems and employees had trouble keeping up. … A number of transactions were recorded erroneously or not at all. …” And so on.

Well, fine. But is it really plausible that you can take $1.6 billion — nearly 25 percent of the customer assets under management — and not know you’ve used customer money? It is not. One theory, which is implicitly suggested in the trustee’s report, is that the executives “borrowed” the money thinking they would be able to replace the funds quickly, which they then couldn’t because the counterparties wouldn’t give back the collateral. That’s still a crime.

I understand that bringing complex financial cases in front of a jury is not easy. But what prosecutors don’t seem to understand is that the country needs them to bring these cases. When they took a pass on Angelo Mozilo, the former chairman and chief executive of Countrywide, and Richard Fuld, who was chief executive of Lehman Brothers when it went bankrupt, they sent a signal that the highly paid executives who gave us the financial crisis would not be held to account.”

This time, the politicization of the U.S. Attorney General’s office will do real harm by destroying quite a lot of credibility in markets.  Until now, customer funds have been sacrosanct.  If no one is prosecuted for the fiasco at MF Global, U.S. securities markets will take yet another hit.  Globalization means that fewer trades will be executed on U.S. markets.  And the economy will suffer yet another blow.


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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.