MF Global's Disappearing Cash

As the intensive search continues for missing customer money that disappeared from MF Global, $200 million in cash has reportedly surfaced at J.P. Morgan in Britain, according to unnamed sources cited in today’s New York Times.

According to the New York Times, MF Global reportedly overdrew an account at JP Morgan, according to another unnamed source. There is speculation on the part of investigators that in the final “chaotic days” before filing for bankruptcy, MF Global raided its customer accounts to transfer the money to JP Morgan.

The article says there is speculation among investigators that the transfer may have been the first misuse of customer money at MF Global, the futures and options brokerage previously run by Jon Corzine, the former CEO of Goldman Sachs and governor of New Jersey.

Investigators are reportedly looking into whether J.P. Morgan questioned MF Global about the origins of the cash to see if the desperate brokerage firm was complying with regulations, which prohibit touching client segregated funds.

On the other hand, it’s possible that MF Global had some extra money stashed away that it used to cover the shortfall with JP Morgan, one of its primary banks. There is a possibility that MF Global kept a “cushion of cash to protect customer accounts, which they are allowed to tap with certain restrictions,” reports the New York Times.

The article also questions JP Morgan’s role in the MF Global collapse, drawing parallels to the bank’s position in the messy collapse of Lehman Brothers. In the fall of 2008, when Lehman was fighting to stay alive, JP Morgan demanded several billion dollars in collateral to meet margin calls, which Lehman provided but then was forced into a liquidity crisis.

This is from today’s NY Times Dealbook article:

In the case of MF Global, the process is further complicated since the roughly $200 million is believed to be in Britain, which has its own bankruptcy rules.

The transfer came after a relatively routine overdraw of an account MF Global held at the bank, the person close to the matter said. JPMorgan systems picked up the shortfall and sent an automated message to MF Global, said the person, who requested anonymity because the information was private. The firm complied with JPMorgan’s request and transferred the money, the person said.

After receiving the money, JPMorgan raised questions about its origins but received few answers. Some investigators suspect that MF Global transferred the customer money to another unit of the firm and mixed it with the company’s capital before sending it to JPMorgan.

Such a transaction would have masked that it was customer money. It also would have violated a guiding principle of the futures industry: never mingle customer money with firm money.

But even if the cash was transferred to JP Morgan, it apparently no longer exists. Despite this glimmer of hope for farmers, hedgers and commodity trading advisors (CTAs), whose funds are frozen in the MF Global bankruptcy process, investigators are not sure if they can recover the $200 million, according to the New York Times.

Meanwhile, the $200 million that is thought to be at JP Morgan is a sliver of the money that is missing. At first when the firm filed for bankruptcy, it reported $600 million in customer funds were missing, but last week a trustee appointed by the bankruptcy court, put the number at $1.2 billion. But some regulators including the CME, operator of the exchange where MF Global did most of its trading, disagree with the larger figure and are accusing the trustee of double counting.

Apparently because of the MF Global’s messy books and records, there is considerable debate over how much client money is missing. Perhaps some of the mystery will be cleared up next month when two Congressional committees holding hearings on Capitol Hill. [The Senate Agriculture Committee will hold the first hearing on Dec. 13, while the House Financial Services’ oversight panel will hold a hearing on Dec. 15.]

Obviously,lLawmakers are looking to question Corzine who led the firm’s leveraged foray into Eurozone debt. In addition, lawmakers are looking to talk to Bradley Abelow, who served as MF Global’s risk manager and worked for Corzine at the statehouse in Trenton and previously at Goldman. It is not clear if the two men will appear, notes the New York Times, but the committees have subpoena power.

Amid all the debate over how much client money is missing, customers should relentlessly repeat: “Show me the Money.”