by Janet Tavakoli

The Collapse and Regulatory Connections

When MF Global collapsed on October 31, it became the largest financial firm to fail since Lehman Brothers in September 2008. Chairman and CEO Jon Corzine had connections to the head of one of his key regulators, the Commodity Futures Trading Commission (CFTC), through his former protégé at Goldman Sachs, Gary Gensler. He also knew the Fed’s William Dudley, a key member of the Fed’s Open Market Committee, from their days together at Goldman Sachs. The Fed approved MF Global’s status as a primary dealer—a participant in the Fed’s Open Market Operations—less than one year after Jon Corzine took the helm and ran it aground on leveraged credit risk.

MF Global’s officers admitted to federal regulators that before the collapse, the firm diverted cash from customers’ accounts that were supposed to be segregated:

MF Global Holdings LTD. “violated requirements that it keep clients’ collateral separate from its own accounts…Craig Donohue, CME Group’s chief executive officer, said on a conference call with analysts today that MF Global isn’t in compliance with the rules of the exchange and the Commodity Futures Trading Commission.”

“MF Global Probe May Involve Hundreds of Millions in Funds,” Bloomberg News – November 1, 2001 by Silia Brush and Matthew Leising

 Note: It was later revealed $1.6 billion in customer funds were missing.

The Impermissible Commingling of Funds

Cash in customers’ accounts may be invested in allowable transactions, and MF was permitted to generate additional revenue from this income. However, what isn’t allowed—and what MF Global apparently admitted to doing—is commingling customers’ money with its own funds and taking money from customers’ accounts to meet margin calls on MF Global’s proprietary transactions. Even if all the money is eventually clawed back and recovered, this remains an impermissible act. Moreover, full recovery—even if possible—is not the same as restitution. People have been denied access to their money, and businesses and reputations have suffered damage.

In layman’s terms, you may buy a Rolls Royce with customers’ excess cash, sell it at a profit, and pocket part of the proceeds. You may also buy a Rolls Royce with your firm’s own cash and attempt to resell it at a profit. But you aren’t allowed to take customers’ money to make car payments on your firm’s Rolls Royce. If one engages in this impermissible activity, it becomes nearly impossible to cover up when you crash that Rolls Royce.

On November 1, 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.”

If that sounded like a cover-up, it was, unless of course you prefer to believe that the “best knowledge” of management is actually no knowledge at all.

The Scale of Missing Funds

How long does it take to locate more than $600 million to $1.2 billion of customers’ money (later determined to be over $1.6 billion)? MF Global’s books were so disorganized that one person couldn’t have created this chaos alone. Many people had to agree to abandon controls, standards, and procedures. I doubt this happened in just the final week or two before MF Global destroyed itself.

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 the shortfall in a phone call amid mounting questions from regulators as they examined the firm’s books.

“MF Global’s Collapse Draws FBI Interest,” by Devlin Barrett, Scott Patterson, and Mike Spector, WSJ, November 2, 2011

The initial bankruptcy estimate showed a shortfall of around $600 million. As of Monday, November 21, MF Global’s liquidating trustee believed the shortfall could reach $1.2 billion and possibly more (the amount was later determined to be $1.6 billion).

MF Global’s “Repo-to-Maturity”: A Total Return Swap Deception

If you call a total return swap-to-maturity a “repo-to-maturity,” you’re much less likely to alarm regulators. Many regulators still remember that Long Term Capital Management (LTCM) used total return swaps (among other instruments). Jon Corzine should remember too, since he was closely involved with LTCM when he headed Goldman Sachs. In September 2011, FINRA appeared to recognize that MF Global’s transactions were riskier than previously thought and demanded additional capital against these trades.

Consider the simplified diagram of a total return swap shown below. Directly beneath it is a diagram of the MF Global “tri-party repo to maturity” transaction, which is essentially a total return swap to maturity with some manipulation of end dates. Viewed this way, it’s easy to identify the payers and receivers in the transaction, the reference assets, the financing sources, and MF Global’s funding source. At the transaction’s conclusion, MF Global’s funding payments impermissibly came from customer accounts that were supposed to be segregated.

Part of AIG’s acute distress in 2008 resulted from credit default swaps, another type of credit derivative linked to the risk of questionable, overrated collateralized debt obligations. The basic problem was risk on fixed-income assets that could only decline in value, combined with excessive leverage.

I’d like to add a side note here. I understand that some pundits tried to claim that the New York Times’s Gretchen Morgenson was incorrect when she wrote that MF Global was felled by derivative bets. She is correct. The pundits jumped to the conclusion that when she referred to credit derivatives and “swaps,” she meant credit default swaps, but she was referring to total return swaps, a type of credit derivative. (Later in the article, she discussed a different topic: the lack of transparency in credit default swaps, another type of credit derivative.)

MF Global’s problematic trades differed from AIG’s, but they were also derivatives—specifically, a form of credit derivative. The “repo-to-maturity” transaction was merely a form-over-substance gimmick to disguise this fact. Specifically, the transactions were total return swaps, a type of credit derivative, and the chief purpose of these transactions was leverage.

A total return swap-to-maturity includes a type of credit derivative. It allows you to sell a bond you own and obtain off-balance-sheet financing through a total return swap. Alternatively, you can get off-balance-sheet financing on a bond with risk exposure you want (but don’t currently own, so there’s no need to sell anything) and assume both the default risk and price risk. (Price risk can result from both credit risk and/or interest rate risk.) This is an off-balance-sheet transaction in which the total return receiver (MF Global) bears both the price risk and default risk of the reference bonds. In this case, MF Global carried the price risk and default risk of $6.3 billion [This was the reported net position in the annual report dated March 2011; MF Global’s June 2011 filings revealed a gross $11.4 billion long position, offset by ‘short’ positions of almost $5 billion] in sovereign debt from Belgium, Italy, Spain, Portugal, and Ireland. As it happened, the price fluctuations of this debt in 2011 weren’t due to a general rise in interest rates—they resulted from a general increase in the perceived credit risk of this debt.

Repo transactions are on-balance-sheet transactions, but they don’t attract as much regulatory scrutiny. There was just one problem: MF Global wanted the off-balance-sheet treatment of a derivative—a total return swap—but didn’t want to call it a total return swap, so it used smoke and mirrors. Even if MF Global engaged in a wash trade at the end (assuming no default in the meantime) to repurchase the bonds, MF Global would receive par value on the bonds from the maturing securities. The repurchase trade at maturity is a formality with no real (or material) economic consequence.

In other words, the “repo-to-maturity” exploits a form-over-substance trick to avoid labeling this transaction a total return swap. Accountants paid by the form-over-substance seekers and inattentive regulators will sometimes, at least temporarily, go along with this sort of relabeling.

The fact that MF Global was exposed in a leveraged way to default risk and liquidity risk because of these transactions—and that the risk was linked to European sovereign debt—was disclosed in MF Global’s 10-K for the year ending March 31, 2011, a required financial statement filed with the SEC. The CFTC and other regulators had this information right under their noses, but they apparently didn’t understand they were looking at a leveraged credit derivative transaction that could lead to margin calls MF Global would be unable to meet.

The result is that yet another large financial institution was felled when it couldn’t meet margin calls due to the credit risk of fixed-income assets combined with high leverage in an off-balance-sheet transaction. The ugliest part of this story, however, isn’t that MF Global got in over its head—it’s that the bankruptcy trustee estimates customers’ money totaling $1.2 billion or more was missing (later revealed to be more than $1.6 billion: $900 million in the US and $700 million in the UK plus more), leaving farmers and other customers without access to their funds during a critical period.

Excessive Leverage and Risk Management Failures

MF Global reportedly employed 35:1 leverage—some reports suggest 40:1—against a portfolio comprised of approximately 20% European sovereign risks, including Belgium, Italy, Spain, Portugal, and Ireland. MF Global would have experienced several trading days in 2011 with moves of 5% to 10% on this sovereign risk. MF Global was so thinly capitalized that this trade alone could consume half of its capital. Any of MF Global’s other asset positions moving similarly in 2011’s highly correlated markets would have put MF Global in negative equity territory. From a risk management perspective, examiners must consider the strong possibility that MF Global had several negative equity days throughout 2011

How did MF Global meet margin calls throughout 2011? An investigation into money flows throughout 2011 appears warranted.

By the end of October, the combination of a $90 million August legal settlement against MF Global coming due, increased capital calls by FINRA, and margin increases from counterparties worried about MF Global’s creditworthiness made it impossible for MF Global to cover up its shortfall.

Corzine’s Resignation and Corporate Governance Issues

Jon Corzine resigned as Chairman and CEO of MF Global on November 4, just days after the October 31 bankruptcy announcement. As a matter of corporate governance, holding both the Chairman and CEO positions meant that Corzine wielded considerable concentrated power with little oversight. Many question the wisdom of a corporate structure that allows officers to hold this dual position. (Ken Lewis, the Chairman and CEO who merged Bank of America into financial trouble, also held this dual role. Lewis defended this practice at the Federal Reserve Bank of Chicago’s Bank Structure Conference in 2003.) Corzine was the former governor of New Jersey and had been out of the active markets for twelve years. Prior to that, until 1999, he had been the CEO of Goldman Sachs.

The Financial Industry Regulatory Authority Inc. (FINRA) granted Jon Corzine a waiver from his Series 7 and Series 24 exams when he took the helm of MF Global in March 2010. The former is required for anyone involved in the investment banking or securities business, including supervision, solicitation, or training of persons associated with MF Global—and that included Corzine. As an officer of MF Global, the latter was required for Corzine, since he had been out of the business for around 12 years or more—more than six times the two-year expiration date for reactivating these qualifications.

The test waiver by regulators appears to be blatant cronyism, because Corzine not only hadn’t been involved in day-to-day markets for more than a decade, but his responsibilities at MF Global included active decision-making. The waiver wasn’t justified. Corzine reportedly authored the strategy for the trades that killed MF Global, and he also had authority on the trading floor.

Jon Corzine pushed traders to increase their risk. According to an MF Global employee, Corzine knelt down beside Jim Parascandola, head of credit derivatives trading, and told him that next time he should “double up” on his winning protection bets on brokerages. Traders loved Corzine because he pushed them to increase risk. Now the traders aren’t lifting offers—they’re pounding the pavement.

Subsequent to this report, Jim Parascandola told me that he was never instructed to increase the size of any position, although his trades were profitable.

Primary Dealer Status and Fed Connections

MF Global’s financials had been shaky ever since Man Group spun it off in 2005 and saddled it with substantial debt. Yet MF Global was added to the Fed’s list of 22 primary dealers in February 2011, less than one year after former Goldman CEO Jon Corzine came on board. Primary dealers buy and sell U.S. treasuries at auction and serve as counterparties to the Fed’s Open Market operations.

William C. Dudley is the president and chief executive officer of the FRBNY. He also serves as vice chairman of the Federal Open Market Committee (FOMC) and VP of the Markets Group, which oversees open market and foreign exchange trading operations, provides account services to foreign central banks, and manages the System Open Market Account. Dudley is a former partner at Goldman Sachs (1986-2007) and served as Goldman’s chief economist.

Yet the Fed has dropped its surveillance role over primary dealers.

Besides trading treasuries, the primary benefit to primary dealers is the perception that the Fed will provide funding to primary dealers during a systemic liquidity crunch. Just before Bear Stearns imploded, the Fed changed the rules so that non-U.S. banks, along with brokers that were primary dealers (as MF Global later became), were allowed to borrow through a program called the Term Securities Lending Facility (TSLF) to finance mortgage-backed securities, asset-backed securities, and more. TSLF’s start date was too late to help Bear Stearns, and the program has since been discontinued, but the perception of a Fed safety net has precedent.

Why did the Fed award prestigious primary dealer status to a shaky operation like MF Global, an entity it doesn’t regulate?

Customers Account Mismanagement

The week before the bankruptcy, when customers requested excess cash from their accounts, MF Global stalled. According to a commodity fund manager I spoke with, MF Global’s first stall tactic was to claim it had lost wire transfer instructions. Instead of issuing an electronic check or sending an overnight check, MF Global sent paper checks via regular mail, including checks for hundreds of thousands of dollars. The checks bounced. After the checks bounced, the amounts remained debited from customer accounts, and no one at MF Global could or would reverse the check entries. The manager had to intervene to get MF Global to correct this and still hadn’t gotten the entries corrected. Reuters’s Matthew Goldstein reported more details in “MF Global and the Rubber Check.”

I thought that was bad enough, but on November 10, I was a guest on Stocks & Jocks, a Chicago radio show, when Jon Najarian said that a large broker he knows received a $400,000 electronic check from MF Global the Friday before the bankruptcy, and the check cleared. If that’s accurate, MF Global treated some customers differently than others. [Note: On December 23, 2011, Jon Najarian clarified that the check didn’t clear; “it bounced higher than the Willis Tower.”]

Tip-Offs for Some Customers?

In August, customers began pulling billions of dollars out of their segregated accounts with MF Global. It was the largest outflow of funds since January 2009. The bankruptcy trustee may claw back transfers of funds from MF Global as it was teetering, because it’s likely that employees within MF Global were well aware of the problems and tipped off key customers.

Regulatory Failures and Crony Capitalism

Yet Gary Gensler, head of the CFTC, did not investigate or begin transferring accounts out of MF Global before the bankruptcy—and that is unprecedented for the CFTC. Given that Gary Gensler was Jon Corzine’s protégé at Goldman Sachs, one should question why Gary Gensler didn’t act and why he should be allowed to remain head of the CFTC.

Gary Gensler, Jon Corzine’s former Goldman Sachs colleague and current head of the Commodities Futures Trading Commission (CFTC), had reason to be concerned about MF Global’s risk management. In early 2008, a rogue trader racked up $141.5 million in losses in unauthorized trades that exceeded his trading limits. He apparently accomplished this in under seven hours. In August of this year, MF Global and the underwriters of its 2007 initial public stock offering (IPO) agreed to pay around $90 million to settle claims by investors that they were misled about MF Global’s risk management prior to the rogue trader’s actions. Since 2008, MF Global’s financial condition has been nothing to celebrate. Now the settlement is in jeopardy due to the bankruptcy. [Michael Stockman, the chief risk officer of MF Global as of January 2011 (after the previously mentioned incident), was in my Liar’s Poker training class and was lampooned by another classmate, Michael Lewis.]

In the past, the exchanges and CFTC “always” moved customer positions before a Futures Commission Merchant (FCM) declared bankruptcy. The CFTC had ample reason to have contingency plans for MF Global based on publicly available information. Yet the Gensler-led CFTC didn’t follow this historical precedent when an FCM led by his former Goldman colleague teetered on the edge of bankruptcy. Gensler has recused himself from the CFTC’s probe of MF Global.

Market Impact and Systemic Implications

The exchange-traded futures markets have been shaken to their core. The Bankruptcy Code apparently conflicts with the Commodity Exchange Act, so customers of MF Global have less protection than one might expect. The Securities Investor Protection Corporation (SIPC) is not the FDIC. Account holders have no idea how long it will take to recover all their money—if it’s there to be recovered—and right now, it appears much of it cannot be found. This is why many traders sweep all excess cash out of their accounts each day and only deposit cash when required.

The “risk wizards” of Goldman Sachs once again appear as market wrecking balls. The futures market is a globally connected market and serves as a key mechanism for farmers, metals miners, and metals fabricators (among others) to hedge their risk. Confidence in the futures market has been shaken. No one knows if their money is safe, but what’s more disturbing is the appearance of crony capitalism once again providing favored treatment, lax regulation, and absent oversight to a crony capitalist who abused all these perks to blow up a large financial firm and damage a key global market.

Aftermath and Consequences

The MF Global collapse had far-reaching consequences that extended well beyond the immediate bankruptcy. In the years following the 2011 collapse, investigations revealed the full scope of the misconduct and resulted in various legal actions and regulatory responses.

Federal investigations ultimately determined that Jon Corzine bore significant responsibility for the misuse of customer funds. A New York Federal Court imposed a $5 million civil penalty on Corzine for his role in the unlawful appropriation of customer money. Additionally, he received a permanent ban from registering with the CFTC or working with any Futures Commission Merchant—effectively ending his career in the futures industry.

However, many observers noted the disparity between the penalty and the magnitude of the harm caused. The $5 million fine represented less than half a percent of the $1.6 billion in customer funds that went missing. Thousands of customers, including farmers who relied on futures markets to hedge their agricultural production, suffered significant financial losses and business disruptions.

Despite the civil penalties, no criminal charges were ever filed against Corzine or other MF Global executives. This outcome drew criticism from various quarters, particularly given the clear evidence of customer fund misappropriation. Some pointed to Corzine’s political connections and history as a major Democratic Party donor and fundraiser as potential factors in the decision not to pursue criminal prosecution.

The case highlighted ongoing concerns about different standards of justice for politically connected individuals versus ordinary citizens. It also underscored the challenges in the regulatory framework governing futures commission merchants and the protection of customer funds.

Today, despite the MF Global scandal, Corzine continues to operate in the financial industry through his own investment fund. The relatively modest consequences he faced stand in stark contrast to the devastating impact his firm’s actions had on customers and market confidence.

The MF Global collapse remains a cautionary tale about the dangers of excessive leverage, inadequate risk management, and the potential for regulatory capture. It also serves as a reminder that even segregated customer funds—supposedly among the most protected assets in the financial system—can be vulnerable when firms prioritize their own survival over their fiduciary duties.

While most customer funds were eventually recovered through the bankruptcy process, the damage was already done. Farmers missed critical planting and harvesting seasons without access to their capital, and many businesses suffered irreparable harm during the years-long recovery process.

Despite the clear evidence of customer fund misappropriation, no criminal charges were ever filed against Corzine—a fact so remarkable it inspired satirical commentary about the disparity in justice.

This article was originally published in November 2011 under the title ‘MF Global Revelations Keep Getting Worse’ to chronicle the events as the bankruptcy occurred. The title has been updated in June 2025 to better reflect the complete story and improve discoverability for readers researching this important financial scandal. The article’s body was updated in June 2025 with subsequently revealed higher amounts of missing money, high-visibility images to illustrate the trade, and a section on the aftermath to bring readers up-to-date. Additional resources were also added. See a related article on total return swaps linked in the “Additional Resources” section to learn about the regulatory response to the aftermath of the bankruptcy. For an in-depth look at this transaction, see Credit Derivatives and Securitization, 3rd Edition (2023) by Janet Tavakoli, President of Tavakoli Structured Finance.

About the Author

Janet Tavakoli is the president of Tavakoli Structured Finance founded in 2003. She is a globally recognized structured finance expert and derivatives authority who has advised financial regulators, testified as an expert witness in major financial litigation, and authored definitive works on credit derivatives and securitization.

For comprehensive analysis of structured finance products and securitization strategies, consult Tavakoli Structured Finance.

Primary Sources and Reports

Bloomberg News

• Brush, Silia and Matthew Leising. “MF Global Probe May Involve Hundreds of Millions in Funds.” Bloomberg News, November 1, 2011.
• “All MF Global Funds Are Accounted For, Lawyer Tells U.S. Bankruptcy Court.” Bloomberg News, November 1, 2011.

Reuters

• “Exclusive: MF Global Mixed Funds, Transferred Abroad.” Reuters, December 3, 2011.
• Goldstein, Matthew. “MF Global and the Rubber Check.” Reuters, November 5, 2011.
• “MF Global CEO Jon Corzine resigns under fire” – Reuters, November 4, 2011.

Wall Street Journal

• Barrett, Devlin, Scott Patterson, and Mike Spector. “MF Global’s Collapse Draws FBI Interest.” Wall Street Journal, November 2, 2011.

New York Times

• Morgenson, Gretchen. “In MF Global, Sad Proof of Europe’s Fallout.” New York Times, November 6, 2011.

NBC News

• “Rogue Trader Costs MF Global $141.5 Million.” NBC News, February 2008.

Forbes

• Singer, Bill. “Did Someone at FINRA Do Corzine a Favor and Waive His Registration Requirements?” Forbes, November 4, 2011.

Additional Resources

Congressional Record

• Representative Marcy Kaptur’s Special Order on MF Global – Congressional Record, December 14, 2011

Commodity Futures Trading Commission (CFTC)

MF Global Investigation Report – CFTC Investigative Report, June 2012

Tavakoli Structured Finance

• Tavakoli, Janet. “Total Return Swaps (TRS): Benefits, Risks, and Applications.” Tavakoli Structured Finance, June 2025.

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