MF Global’s former CEO Jon Corzine responded to questions from the House Agricultural Committee yesterday, but shed no further light on what transpired in the chaotic final days of the futures brokerage firm’s existence.
In live testimony on Capitol Hill, Corzine, looking pale and stressed out, said he was “devastated” by the collapse of MF Global, but didn’t offer any explanations for where the missing $1.2 billion in customer money is.
His language and his comments made him sound like an out-of-touch CEO who sat on Mount Olympus, who kept his distance from the peons who carried out the nuts and bolts functions of the firm’s operations, compliance and accounting departments.
In response to comments from House Agriculture Committee Chairman Lucas that the firm’s books and records were a mess, Corzine avoided discussing the state of the firm’s recordkeeping. "My understanding was that our books and records were reflecting chaos in the last 2 days," Corzine told Ag Committee Chairman Lucas. Later in his testimony, Corzine suggested that there could have been a "miscalculation" or that monies were not returned by banks or counterparties to MF Global.
Several lawmakers asked Corzine if he had directed the movement of customer money in segregated funds, estimated to total about $5.5 billion. Corzine replied: “I never intended to break any rules.” As for his own personal role, “I did not direct anything about the movement of segregated funds, Corzine told House Ag Committee.
He didn’t offer any theories as to how MF Global’s customer funds in segregated accounts could have been lent to the broker-dealer/proprietary trading side of the business to finance its positions in European sovereign debt.
Though Corzine took responsibility for what happened to MF Global, he claimed not to know who had the authority to move customer funds out of segregated accounts. “I believe it was a team of people,” said Corzine, adding that cash management may have had that authority. “I don’t think that rests with any single individual,” he continued. He noted that the firm had a CFO for North American operations, a CFO for European operations, etc. “Ultimately there is somebody who hits a button. To this day I don’t know who that person was,” said Corzine.
Another theme in Corzine’s testimony was that he didn’t have access to his notes or financial statements at the firm. “Without looking at records, it was very hard to try and reconstruct how that all worked from the position I held. It’s a complex process.”
As for how the customer funds vanished, Corzine carefully distanced himself from having knowledge of the day-to-day operations. For instance, FCMs like MF Global are required to submit daily reports of segregated customer funds to the regulator, which, according to testimony by CFTC Commissioner Jill Sommers, was the CME. "I didn’t look at those calculations on a daily basis. I was assured that they were calculated everyday and submitted to appropriate bodies," Corzine told lawmakers.
Corzine said he first became aware of the shortfall in customer funds – whichhe referred to as "the lack of reconciliation” on Sunday, Oct.30th. Though Corzine showed a great deal of remorse and sorrow for what happened to MF Global’s customers, he defended his decision to make $6.3 billion in risky bets on sovereign European debt, pointing out that the board of directors was aware of the strategy.
"Indeed the trades were described, analyzed and debated at multiple board meetings," former MFG CEO Corzone told the Ag Committee.
One of the more interesting exchanges occurred when Corzine, a former senator and governor of New Jersey, was asked about the firm’s former chief risk officer, Michael Roseman, who reportedly disagreed with Corzine’s risk assessment on the European debt trade. "Mr. Roseman had a different view about the sovereign default risk," admitted Corzine at the hearing. A live Wall Street Journal blog noted that Roseman felt the firm didn’t have enough liquidity (a.k.a.,cash on hand) to withstand a credit downgrade of the European bonds – invested the distressed debt of Italy, Spain, Portugal, Ireland and Belgium.
Roseman was fired in late 2010 and replaced with Michael Stockman from UBS who headed risk there during the disastrous subprime crisis of 2008, notes The Motley Fool.
But in the end, Corzine maintained that MF Global’s undoing was not caused by the position in European debt or by its leverage – 30 to 1 – higher than Morgan Stanley or Goldman Sachs – but rather it’s failure to persuade the rest of the world that nothing was wrong – and that it’s $197 million third quarter loss was due to a tax adjustment and not its repurchase-to- maturity or RTM positions.
“The cause of stress in last few days was MFG's sovereign debt positions to the marketplace, rating downgrades, and management’s inability to explain losses to the marketplace.”
After the hearing, the Ag Committee’s star witness was said to have made a hasty exit. But Corzine is expected to be back again at center stage next week as he faces subpoenas from two other Congressional panels — the Senate Agriculture Committee and the oversight arm of the House Financials Committee.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio