Cast your mind back to the Valukas report into the collapse of Lehman Brothers. Back to Repo 105, and the immortal lines, “It’s basically window‐dressing. We are calling repos true sales based on legal technicalities.”
If it could be called a sale, it could be removed from the balance sheet whenever a reporting date — and inconvenient questions about leverage — threatened. Read more
Hat-tip to the FT’s Tracy Alloway…
Some interesting detail from the House Financial Services Committee’s report into the collapse of MF Global. It’s an account of the broker-dealer’s arguments over the capital treatment of the eurozone sovereign debt which was used in its repo-to-maturity trades.
The gist of the argument was that the debt — Italian, Spanish, Belgian — should be treated as US Treasuries (safe, little to no haircut) or, oddly, as a corporate bond if it was Portuguese or Irish. Read more
Click through the pic for a look at how PFGBest was hoping to avoid becoming the next MF Global.
You’ll find 53 pages of charts like the one above in the MF Global trustee’s report trying to map the broker-dealer’s cash transactions in the week beginning October 26, when MF Global first inappropriately tapped customer funds, according to the trustee. Read more
A big thanks to the FT’s regulatory correspondent Kara Scannell for passing along the May 2011 presentation by consultancy Promontory to the MF Global board’s audit and risk committee.
As Kara and Tom Braithwaite write in their piece this morning, the presentation concluded (at T -5 months to bankruptcy) that MF Global had “robust enterprise-wide risk management”. The report was commissioned as part the broker-dealer’s settlement with the CFTC after the wheat futures trading scandal in 2009. Read more
NYT DealBook has more on that “JC” email: apparently there was *another* email which puts Jon Corzine’s alleged instructions to transfer $175m of customer money to pay that JP Morgan overdraft in a more positive light. Before Corzine sent that email, some unspecified MF staff in Chicago had first transferred $200m from a customer account to a ‘house’ account — DealBook cites people briefed on the matter as saying. Corzine was then told that those funds were from MF Global’s own accounts:
The transfer, the e-mail said, was a “House Wire,” meaning that it came from the firm’s own money. The e-mail, sent at 2:20 p.m. on Oct. 28 to Mr. Corzine and two of his assistants in New York, says the transfer came from a “nonseg” account, industry speak for a noncustomer account. Read more
From Bloomberg:
Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. (JPM) accounts in London, according to an e-mail sent by a firm executive. Read more
Liquidators of failed brokerage MF Global will start returning funds to a further 1,300 UK clients next week, the FT says, after returning a total of $3m to 600 others in a first wave of repayments last Friday. KPMG, which is overseeing the liquidation of MF Global’s UK assets, said on Monday that it had made interim payments to 600 clients with estimated claims of $12m, at a rate of 26 cents on the dollar. A further 1,300 clients, with claims of $19m, would be repaid at the same rate from next week. The repayment of the funds, which were held in so-called segregated accounts, will do little to alleviate the uncertainty of clients whose funds were not ringfenced from MF Global’s own. Meanwhile Reuters reports the independent Chicago broker RJ O’Brien, which got more former accounts from bankrupt rival MF Global than any other merchant, built on that success in December, while other brokers lost some of that extra business, according to data from the CFTC. Read more
From the Powerpoint of the trustee’s update on their investigation — re-ordered slightly, for narrative flow.
Let’s start with the timeline of margin calls… Read more
MF Global began using customer funds a day earlier than previously believed as it struggled to deal with customer withdrawals and margin calls in the run-up to its bankruptcy filing on October 31, according to the first official account by its court-appointed trustee. The FT reports a preliminary status report released by the trustee on Monday said the broker began dipping into customer funds on October 26, resulting in a deficit of $300m that day. Eventually, the shortfall mushroomed to $1.2bn at the futures broker, which was run by Jon Corzine. The report, which described sloppy records and an “unprecedented” volume of transactions totalling $205bn in the company’s final days, said the ultimate recipients of the transfers were banks, counterparties, exchanges, clearing houses and customers. A person familiar with the matter told the newspaper investigators believe customer money is tied up at the same entities. Read more
R.J. O’Brien Associates and Rosenthal Collins, two of Chicago’s oldest independent brokers, ended up gaining the bulk of MF Global’s former customers following its collapse, Reuters reports. Some $1.2bn in segregated customer funds flowed to the two firms in November – $800m to RJO and $362m to Rosenthall — making it the biggest monthly increase for both in three years, CFTC data revealed. The CME transferred MF Global’s diverse collection of customer accounts en masse in the wake of its bankruptcy, but received little interest from established Wall Street broker-dealers. Read more
This looks like a sign of the post-MF Global shift in the futures market…
Investigators have tracked down almost all of MF Global’s missing client funds, but haven’t disclosed their progress publicly because it may complicate retrieval of the money, NYT Dealbook reports. The root of the problem lies in a conflict between one team of lawyers pressing to recover cash for clients, and another seeking recovery for creditors. Some funds from MF Global’s futures client accounts were paid out to securities customers leaving the broker, Dealbook adds. Meanwhile, MF Global’s former chief risk officer is expected to reveal his warnings about the broker’s sovereign debt trades in Congressional testimony on Thursday, the FT says. Read more
MF Global’s chief risk officer urged senior executives and the company’s board to pare back its $6.3bn proprietary bet on the debt of troubled European nations roughly three months before the futures broker declared bankruptcy, according to his prepared congressional testimony, seen by the FT. Michael Stockman, the failed brokerage’s risk officer for much of 2011, planned to tell the US Congress on Thursday that beginning in July, he told executives it would be “prudent for the company to mitigate the increased risks” associated with the brokerage’s position, according to his prepared statement. Mr Stockman said in his statement that he “initiated several discussions with senior management to express this view” and urged the company’s leaders to “consider entering into hedging transactions to reduce the company’s exposure”. His statement did not identify the managers. Read more
Officials hunting for an estimated $1.2bn in missing MF Global customer money increasingly believe that much of it might never be recovered, the WSJ says, citing people familiar with the investigation that involves regulators, criminal and congressional investigators, and court-appointed trustees. One person said the “significant amount” of the missing money could have “vaporised” during the week before the company’s bankruptcy filing in October. Read more
An administrator of MF Global’s UK arm has warned some customers of the failed futures broker might not see all their money returned. Richard Heis, joint special administrator at KPMG, told the FT that his firm had recovered some £594m or 82 per cent of customer funds held in so-called segregated accounts, where money is supposed to be held at arms length from the business. But he said the total pay-out would be dependent on resolving valuations of outstanding claims and costs being racked up by KPMG. These costs already totalled nearly £20m. Mr Heis said there was a possibility that some customers would not see all their money returned. He said there were “more people claiming segregated status than there is segregated money”. Unlike counterparts around the world, such as the US and Canada, the UK has yet to return any assets to clients, leading to warnings that the delay was damaging London’s reputation as a financial centre. Read more
US financial regulators have raised the idea of extending investor safeguards proposed for certain derivatives to the futures markets as they probe missing customer funds at bankrupt broker MF Global. Investors in cleared swaps are set to receive stronger protection than futures traders in a vote by the CFTC on Wednesday, reports the FT, but two commissioners on the five-member body are now questioning the fairness of that approach and are opening the debate as to whether the same rules should apply to both swaps and futures, a move likely to provoke a backlash from the industry. Jill Sommers, a Republican and Bart Chilton, a Democratic commissioner, both told the newspaper they believed the regulator should consider whether futures customers should not receive the same protection as swaps users. Meanwhile, the WSJ reports that Jon Corzine, the former chief executive of MF Global, is looking for office space in New York City. Citing a person familiar with the situation, Mr Corzine is said to be interested in viewing the offices of John Carris Investments; reportedly for a space, not for a job. Read more
US financial regulators have raised the idea of extending investor safeguards proposed for certain derivatives to the futures markets as they probe missing customer funds at bankrupt broker MF Global. Investors in cleared swaps are set to receive stronger protection than futures traders in a vote by the CFTC on Wednesday, reports the FT, but two commissioners on the five-member body are now questioning the fairness of that approach and are opening the debate as to whether the same rules should apply to both swaps and futures, a move likely to provoke a backlash from the industry. Jill Sommers, a Republican and Bart Chilton, a Democratic commissioner, both told the newspaper they believed the regulator should consider whether futures customers should not receive the same protection as swaps users. Read more
MF Global’s bankruptcy trustee has asserted client privilege in declining to hand over documents about the failed broker to regulators, the WSJ says. Louis Freeh’s office said it was prepared to waive the privilege if the CFTC, which is probing the loss of customer funds from MF Global, discussed the issue with them. However, the dispute threatens to slow down the customer funds investigation, which is already in its third month, Reuters adds. The CFTC is also investigating the role of the CME in verifying the safety of the funds held at MF Global, NYT Dealbook reports. Read more
The Commodity Futures Trading Commission is looking at the actions of CME Group as part of the regulator’s inquiries into the collapse of MF Global, says NYT Dealbook, citing people briefed on the matter. CME operates the main exchange used by MF Global, and also served as the commodities brokerage’s primary regulator. It has come under criticism after $1.2bn in customer money disappeared from MF Global. The CFTC is reviewing whether CME’s efforts to verify the safety of customer funds were sufficient, the report says, while CME has said that MF Global may have intentionally produced inaccurate documents. CME has not been accused of any wrongdoing, and the review of its actions may not produce any findings, it says. Read more
Jon Corzine, the former chief executive of MF Global, has denied that he knew the broker-dealer lent customer funds to a European affiliate shortly before it went bankrupt, reports the FT. At a House financial services subcommittee hearing on Thursday, Terry Duffy, chief executive of CME Group, the exchange operator that oversaw MF Global’s customer accounts, repeated his claim that “Mr Corzine was aware of the loans being made from segregated accounts”. He attributed that to a CME auditor who heard the comment during a conference call involving senior MF Global employees. Addressing the House hearing on Thursday, Mr Corzine said he did not know the source of Mr Duffy’s allegation. Mr Corzine suggested that Mr Duffy may have been referring to money transferred to JPMorgan Chase as MF Global scrambled to sell billions of dollars worth of securities. Much of the remainder of the five-hour hearing focused on the missing money and who was to blame for the firm’s collapse, as NYT DealBook details. Read more
The Federal Reserve Bank of New York expressed concerns over MF Global’s internal controls as far back as 2009, more than two years before the brokerage declared bankruptcy in October and an estimated $1.2bn in customer funds was discovered missing, the FT reports. The New York Fed’s reservations led it to delay by one year MF Global’s application to become a so-called “primary dealer” and join a select group of 21 banks and investment firms authorised to trade directly with the central bank, according to written remarks by Thomas Baxter Jr, the New York Fed’s general counsel, who is due to testify before the US Congress on Thursday. Reuters reports Jill Sommers, who is heading the CFTC’s investigation into MF Global’s collapse, says the regulator ”are far enough along the trail” that they know where the money went, but it must sort out which transactions were legitimate before more money can be released to customers. Meanwhile Congressional investigators are exploring whether regulators and feeble risk controls allowed the brokerage to fail, says NYT DealBook, as the authority of the role of chief risk officer was reduced in early 2011. Read more
In case you missed it, last night Jon Corzine was artfully thrown under what looked like a bomb-strapped bus being driven by the Chicago Mercantile Exchange, with no Keanu Reeves in sight.
Terry Duffy, chief executive of CME group, told the Senate hearing on MF Global that the former New Jersey governor “was aware” that money had gone missing from customer accounts. Read more
Jon Corzine, the former chief executive of MF Global, “was aware” that the broker-dealer made use of customer funds during its desperate fight for survival, a US Senate hearing was told on Tuesday. The FT reports Terry Duffy, chief executive of CME Group, the futures exchange operator that supervised MF Global’s handling of customer money, said a CME auditor heard an MF Global employee say during a conference call involving senior MF Global employees that “Mr Corzine was aware of the loans being made from segregated accounts”. A spokesman for Mr Corzine declined to comment. The hearing was thrown into confusion by Mr Duffy’s comments, says NYT DealBook, as the claim was not included in Mr Duffy’s prepared remarks for the hearing, catching Senators off guard. Meanwhile investigators, including the SEC, the Justice Department, the CFTC, and the bankruptcy trustee are reviewing MF Global’s accounts to find out whether the brokerage intentionally used customer funds to cover margin payments on European sovereign trades, says Bloomberg, citing people with knowledge of the probe. Read more
Two top MF Global executives on Tuesday plan to join chief executive Jon Corzine in denying any knowledge of how an estimated $1.2bn in customer funds went missing during the failed brokerage’s frantic final days, reports the FT. Henri Steenkamp, MF’s chief financial officer, plans to tell the Senate agriculture committee that he has “limited knowledge of the specific movement of funds … during the last two or three hectic business days prior to the bankruptcy filing”, according to prepared testimony. Bradley Abelow, MF Global’s chief operating officer, plan to tell the legislators that he is interested “in finding out exactly what happened”. “At this time, however, I do not know the answers to those questions”, Mr Abelow’s prepared remarks said, in response to queries over where the missing money went. Read more
The following raised some eyebrows in the FT newsroom on Friday.
Via Reuters: Read more
The family fund managed by George Soros bought up $2bn of MF Global’s eurozone government bonds after the broker’s collapse, according to the WSJ. MF Global had positioned $6.3bn of Italian, Spanish and other peripheral countries’ debt in a series of repo-to-maturity trades which eventually foundered. MF Global’s liquidators sold $4.8bn of the bonds in the days after its bankruptcy, with Soros purchasing $2bn of them below market price. Italian debt has since slightly recovered from its most distressed price levels. Read more
Jon Corzine, the former chief executive of MF Global, told a congressional hearing on Thursday he was stunned to learn of the estimated $1.2bn of missing customer funds from the bankrupt broker deal, saying “I simply do not know where the money is”, the FT reports. Passing up the chance to “plead the fifth” and use his right to silence, Mr Corzine told lawmakers he learnt that customer funds were missing just a day before the bankruptcy on October 31. Regulators and the Federal Bureau of Investigation are examining how the firewall between MF Global’s accounts and those of its customers was breached in the dramatic days that preceded the company’s collapse. Mr Corzine was contrite and freely answered lawmakers’ questions during a fairly friendly House Agriculture Committee hearing, says Reuters, but tried to duck responsibility by repeatedly claiming a lack of intent and lack of recollection about key events that led to the firm’s downfall and its scrambled books. Read more
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2Pump up, debase
3Further reading
4The risk of a Japanese VaR shock
5Collateral crunch-counting gets sophisticated
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