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Representative Marcy Kaptur’s Special Order

Representative Marcy Kaptur’s Special Order on MF Global read into the Congressional Record on December 14, 2011.

Ms. KAPTUR. I thank the Speaker.

Let me rephrase this. At the hearing, the Commodity Futures Trading Commission’s Jill Sommers’ testimony was invaluable to the public. Her testimony places the MF Global collapse in proper perspective, and I’m quoting directly. She said:

“Lehman Brothers and Refco are the two most recent futures commission merchant bankruptcies. While the Lehman Brothers’ bankruptcy was monumental in scale and the Refco bankruptcy involved serious fraud at the parent company, commodity customers did not lose their money at either firm. In both instances, commodity customer accounts were wholly intact; that is they contained all open positions and all associated segregated collateral. That being the case, customer accounts were promptly transferred to healthy FCMs”–or futures commission merchants–“with the commodity customers having no further involvement in the bankruptcy proceeding. Unfortunately, that is not what happened at MF Global because customer accounts were not intact.”

The fact that “customer accounts were not intact,” as Commissioner Sommers described it, means that someone took other people’s money. I believe most of us would call that theft. Even if some of the money is recovered by the bankruptcy process, that does not alter the fact that the process by which customer accounts were violated broke the law. [Emphasis added]

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It is an understatement to say that many American families and businesses lost important investments. The mismanagement of this one firm has put hundreds of people’s investments in jeopardy. They deserve answers. Congress has lead responsibility to ask hard questions, and here are some questions that demand reply.

On transfers of funds from customer accounts, Congress must ask examiners from Chicago Mercantile Exchange Group, who said that transfers at MF Global were made “in a manner that may have been designed to avoid detection,” so let us ask: Should the person or persons who attempted to avoid this detection be held accountable, and how should that occur? It seems unlikely Mr. Corzine is not responsible. So which person, or persons, at MF Global made the decision to invade customer accounts? Congress must assure full tracing of those transactions.

A second group of questions should revolve around who are the responsible parties. If Mr. Corzine simply cannot recall or does not know what happened at MF Global, as he seemed to claim, who should Congress and investigators speak with at MF Global to ascertain his exact role and those of other top executives? Who’s going to probe? That’s the role of a congressional investigatory committee.

Who, besides Mr. Corzine, was directly responsible for segregating customer account funds from MF Global funds? Over $1 billion did not walk off on its own. Some set of persons at MF Global moved those funds, and it’s highly implausible that no one authorized that action. So what set of persons authorized those actions exactly?

Another set of questions should revolve around who approved MF Global’s risk standards? We know that Michael Roseman, MF Global’s former chief risk officer who resigned in March 2011, reportedly assessed that the strategy that MF Global was undertaking was too risky. Any assertion that the strategy was prudent at the time, as Mr. Corzine is arguing, is against the facts of history because MF Global went bankrupt. Congress needs to take whatever steps are necessary to find out exactly who pressured Mr. Roseman to resign for blowing the whistle on the behavior inside that company.

Another set of questions can be asked about what other financial partners participated in MF Global’s trades. There are allegations that the transfer of $200 million to J.P. Morgan in the final days of MF Global was suspected by J.P. Morgan bankers of utilizing MF client funds. To what extent are these allegations true? At what point can we determine whether wire fraud was committed and, if so, by whom and to what extent? All of this begs the ultimate question of whether or not sufficient protections were exercised for customers to stop wire fraud.

Another set of questions can revolve around were any inside players aiding and abetting MF Global’s behavior. We know that current Commodity Futures Trading Commission Chairman Mr. Gensler has recused himself from the case. Mr. Gensler actually worked for Mr. Corzine at Goldman Sachs, and they apparently carried on later in the same social and academic circles. The public has a right to know at what point Mr. Gensler had any knowledge or reason to believe that the customer accounts at MF Global might not have been intact; and then, how did he and his agency and his staff respond–day by day, hour by hour, email by email?

Finally, according to Reuters, companies like Koch Industries removed billions from MF Global just before it filed bankruptcy. How did that powerful company know when to take their money out and why did my constituents not know when to take their money out? Could, in fact, Koch Industries have gotten the same tip-off that Goldman’s CEO Hank Paulson had given Freddie Mac investors and Fannie Mae investors just a few years before? How much of MF Global’s money not wired rightfully belongs to the holders of segregated accounts that were inappropriately tapped by MF Global? How do my constituents get full restitution?

Yes, there are far too many questions–lots of questions–and far too few complete answers.

Yes, this Congress needs to take white collar crime more seriously. Who would accept an explanation, as we heard the other day, that “I did not intend to steal.” It could be $100 from the corner gas station, right? How can that be an acceptable answer for taking hundreds of millions and over $1 billion?

Rigorous investigation matters. Congress needs more robust hearings. We need more thorough investigations.

[Time: 21:30]

What should concern all of us is that the financial industry’s fraud and imprudence, yes, addictive behavior, is not limited to a case here or there. In the financial services sector, fraud has become systemic. It is endemic. It has harmed our Nation’s economy to its vitals and has hurt millions of people across our country and the financial systems of other countries.

In 2009, the FBI testified before the House Judiciary Committee that the current financial crisis, and I’m quoting directly, “has produced one unexpected consequence: it has exposed prevalent fraud schemes that have been thriving in the global financial system. These fraud schemes are not new, but they are hitting the economy hard and the public is hurting as a result of market deterioration.”

What a true statement. Regretfully, this isn’t the first time that our country has seen a crime wave in the financial services industry. Indeed, the crimes and addictive behavior seem to be getting bigger, not smaller.

In the 1980s, it was the savings and loan crisis. Then the FBI responded with a staff of 1,000 agents and forensic experts based in 27 cities.

Do you know how many they had over there when this started? Forty-five. You could count them on your own hands.

Perpetrators went to jail back then but, rather, the Congresses at that time ignored the warnings of what had happened, and they gave an even bigger green light during the 1990s to more abuse by removing the rules of the road for banking during the 1990s.

Example, the upending of the Glass-Steagall Act in the late 1990s that blew the lid off prudent banking and allowed bankers and speculators to be in the same company. And look what has happened. We need to restore the Glass-Steagall Act, and I have a bill to do that, and there are dozens and dozens of cosponsors on that bill.

In 2000, the surreptitious undermining of derivative regulation by this Congress led to Wall Street’s bullish plunder that we are now experiencing again, the result of addictive behavior of the 2000s.

You know, when you go back to the savings and loan crisis, that was much smaller than what we are enduring today. That is why I have a straightforward bill, H.R. 1350, the Financial Crisis Criminal Investigation Act. It authorizes an additional 1,000 agents and forensic experts for the white collar crime division of the FBI to investigate and prosecute these financial crimes. I encourage all of my colleagues to join me as a cosponsor. The Bureau does not have anywhere near the resources it needs to take on crimes of this magnitude and dimension.

Congress has long debated what level of regulation is needed to restrain financial addicts. There should be no debate about the need to uphold the law, to recover innocent people’s money, to prosecute the addicted gamblers, to set a strict standard of behavior in the financial sector so it simply never happens again, so that we can restore confidence and regular order, not insider abuse, to America’s financial markets.

I think this Congress has an awesome responsibility to do its job, and it should not fear anyone. The committees of this House should be working overtime to probe the truth, to find the truth, to get at the truth of those who have harmed America, that have put so many millions of people out of work, where so many homes have been foreclosed that the property values of this country can’t even find their footing at this point.

It’s affecting capital formation; it’s affecting the ability of local banks to make loans because they’re not sure what’s going to happen to valuation on their books. What could be more serious than the committees of this Congress doing their job?

I want to commend Congressman Lucas of Oklahoma. I want to commend Congressman Peterson of Minnesota. Wouldn’t it be wonderful if

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they could continue their important work, but that the other committees of this Congress that have responsibility for oversight, Government Oversight and Reform, the Judiciary Committee, the Financial Services Committee, the Energy and Commerce Committee, were actually to do the work that needs to be done to put this country’s banking and financial system back in a decent position with prudent rules and to finally quash the addictive behavior that has brought our country to this very dangerous point?

[From The New York Times, Dec. 11, 2011]

A Romance With Risk That Brought On a Panic

(By Azam Ahmeo, Ben Protess and Susanne Craig)

Soon after taking the reins of MF Global in 2010, Jon S. Corzine visited the Wall Street firm’s Chicago offices for the first time, greeting the brokers, analysts and sales staff there.

One broker, Cy Monley, caught Mr. Corzine’s eye. Unknown to MF Global’s top management in New York, the employee, whose job was to match buyers and sellers in energy derivatives, was also trading a small account on the side, using the firm’s capital.

“How are you making money on side bets? What else are you guys doing to make money here?” Mr. Corzine asked enthusiastically, his eyes widening, the broker recalled. The new chief executive grabbed a seat and spent an hour questioning Mr. Monley as other top executives from New York hovered impatiently nearby.

Although Mr. Corzine had been a United States senator, governor of New Jersey, co-head of Goldman Sachs and a confidant of leaders in Washington and Wall Street, he was at heart a trader, willing to gamble for a rich payoff.

Dozens of interviews reveal that Mr. Corzine played a much larger, hands-on role in the firm’s high-stakes risk-taking than has previously been known.

An examination of company documents and interviews with regulators, former employees and others close to MF Global portray a chief executive convinced that he could quickly turn the money-losing firm into a miniature Goldman Sachs.

In the final days before filing for bankruptcy, MF Global moved an estimated $1.2 billion of customer funds to other institutions.

He pushed through a $6.3 billion bet on European debt–a wager big enough to wipe out the firm five times over if it went bad–despite concerns from other executives and board members. And it is now clear that he personally lobbied regulators and auditors about the strategy.

His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC.

After joining MF Global, Jon S. Corzine invested heavily in the debt of troubled European countries.

Yet few appeared willing to check Mr. Corzine’s trading ambitions.

The review of his tenure also sheds new light on the lack of controls at the firm and the failure of its watchdogs to curb outsize risk-taking. The board, according to former employees, signed off on the European bet multiple times. And for the first time it is now clear that ratings agencies knew the risks for months but, as they did with subprime mortgages, looked the other way until it was too late, underscoring how three years after the financial crisis, little has changed on Wall Street.

MF Global filed for bankruptcy on Oct. 31. As the firm spun out of control, it improperly transferred some customer money on Oct. 21–days sooner than previous y thought, -F.-s-gd people briefed on the matter. And investigators are now examining whether MF Global was getting away with such illicit transfers as early as August, one person said, a revelation that would point to wrongdoing even before the firm was struggling to survive.

The consequences of the firm’s collapse have been severe: Some $1 billion in customer money remains missing and thousands of clients, including small farmers in Kansas or hedge funds in Connecticut, still do not have nearly a third of their funds.

Some of that money may never be recovered if, as some regulators now fear, MF Global used it to cover trading losses and replenish overdrawn bank accounts.

The bet on European sovereign debt is not thought to be directly connected to the missing money. But the fears about the firm’s exposure to Europe tipped an anxious market, causing a run on MF Global that regulators suspect led the firm to fight for its life using customer money.

Mr. Corzine has not been accused of any wrongdoing. Through a spokesman, he declined to comment for this article.

While Mr. Corzine apologized for the firm’s collapse when he appeared before the House Agriculture Committee on Thursday, he has continued to defend the European trade, calling it “prudent” at the time.

The European trade was initiated by Mr. Corzine late in the summer of 2010. The new chief executive explained the bet to a small group of top traders, arguing that Europe would not let its brethren default. In just a few months, the trade swelled to $6.3 billion, from $1.5 billion.

Europe’s debt crisis, meanwhile, continued to flare, raising questions about whether some of the Continent’s bigger economies, Spain and Italy, might be ensnared in the maelstrom.

In August, some directors questioned the chief executive, asking him to reduce the size of the position. Mr. Corzine calmly assured them they had little to fear.

“If you want a smaller or different position, maybe you don’t have the right guy here,” he told them, according to a person familiar with the matter. He also told one senior board member that he would “be willing to step down” if they “had lost confidence in me,” Mr. Corzine told Congress on Thursday, although he said he had not intended to make a threat.

The board relented.


Few would have guessed that Mr. Corzine, having led Goldman Sachs before serving in the Senate and as a governor of New Jersey, would wind up the chief executive of a little-known brokerage house.

At Goldman, which he joined in 1975, the young bond trader quickly gained a reputation as someone able to take big risks and generate big profits. Even after ascending to the top of the firm, he kept his own trading account to make bets with the firm’s capital. In 1999, Mr. Corzine was ousted from Goldman amid a power struggle.

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By 2010, having suffered a stinging defeat in his bid for re-election as the Democratic governor of New Jersey, Mr. Corzine hoped to resume his career on Wall Street.

A friend, J. Christopher Flowers, one of MF Global’s largest investors, helped him get there. Mr. Corzine and Mr. Flowers worked at Goldman decades ago, and at one point, Mr. Flowers helped manage Mr. Corzine’s vast wealth while he was a senator, according to Congressional records.

Mr. Corzine’s arrival was a coup. MF Global had hired an executive search firm, Westwood Partners, to hunt for a new leader. But some members of the board, including David I. Schamis, who worked for Mr. Flowers, were recruiting Mr. Corzine.

He was a popular manager, former employees say. An avuncular presence with a beard and sweater vest, he had a knack for remembering names. Even in the firm’s final hours, they recall that Mr. Corzine never lost his temper. His work ethic also impressed colleagues. He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.

His intense routine was on par with his ambitions for the firm. With 15 top executives in the firm’s boardroom on his first day, March 23, 2010, he said, “I think this firm has tremendous potential and I can’t wait to get started,” one person who attended said.

Mr. Corzine faced a steep challenge.

For years, MF Global aligned buyers and sellers of futures contracts for commodities like wheat or metals, and took a small commission along the way. But over the last decade, that business had become endangered. By the time Mr. Corzine arrived, near zero-percent interest rates and paper-thin commissions had led to five consecutive quarters of losses.

Soon after taking the helm, Mr. Corzine oversaw a wave of job cuts and overhauled compensation, moving from steady commissions to salary and discretionary bonuses like the rest of Wall Street.

At the same time, Mr. Corzine filled the ranks with employees from Goldman Sachs and hedge funds like the Soros Fund Management. He recruited Bradley Abelow, a fellow Goldman alumnus and a top aide when he was governor, to be chief operating officer.

Mr. Corzine arrived just as Washington was pressing the big banks to curb their lucrative yet risky businesses. Spotting an opening, he fashioned new trading desks, including one just for mortgage securities and a separate unit to trade using the firm’s own capital, a business known as proprietary trading.

Not to be outdone, Mr. Corzine was the most profitable trader in that team, known as the Principal Strategies Group, according to a person briefed on the matter. Mr. Corzine traded oil, Treasury securities and currencies and earned in excess of $10 million for the firm in 2011, the person said.

Some inside MF Global worried that the expansion of the profitable trading business in New York came at the expense of its futures clearing operation, which was centered in Chicago. To drum up sales, Chicago brokers were pushed to introduce longtime clients to their counterparts in New York, a move that raised tensions.

At times, Mr. Corzine seemed unfamiliar with some aspects of the futures division. In June, speaking at the Sandler O’Neill Financial Services Conference at the St. Regis Hotel in Manhattan, Mr. Corzine stumbled. “Right now, if you thought about MF Global’s retail business, you probably could only think of–” he said, then paused to recall the name of the division at MF Global that catered to individual investors.

He leaned over to an aide, who told him it was Lind-Waldock.

“Chief Risk Officer”

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“I consider one of my most important jobs to be chief risk officer of our firm,” Mr. Corzine told that conference.

Yet soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul, according to former employees. (A person familiar with Mr. Corzine’s thinking said that he saw the need to upgrade, but that the system being proposed was “unduly expensive” and was focused in part on things the firm didn’t trade.)

While risk at the firm had been sharply increased with the bet on European sovereign debt, there was a compelling argument for Mr. Corzine’s strategy.

MF Global had obtained loans to buy debt of Italy, Ireland and other troubled European nations, while simultaneously pledging the bonds as collateral to support the loans. The loans would come due when the bonds matured, which would happen no later than the end of 2012. MF Global, Mr. Corzine reckoned, would profit on the spread between the interest paid on the loans and the coupons earned from the bonds.

But the size of the European position was making the firm’s top risk officers, Michael Roseman and Talha Chaudhry, increasingly uncomfortable by late 2010, according to people familiar with the situation. They pushed Mr. Corzine to seek approval from the board if he wanted to expand it.

Mr. Roseman then gave a PowerPoint presentation for board members, explaining the sovereign debt trade as Mr. Corzine sat a few feet away. The presentation made clear the risks, which hinged on the nations not defaulting or the bonds losing so much value they caused a cash squeeze. The directors approved the increase. Mr. Roseman eventually left the firm.

Within MF Global, Mr. Corzine welcomed discussion about his bet and his reasons for it, though some senior managers said they feared confronting such a prominent figure. Those who did challenge him recall making little progress. One senior trader said that each time he addressed his concerns, the chief executive would nod with understanding but do nothing.

These concerns were only internal at first because, while MF Global had disclosed the existence of the transactions in at least one filing in 2010, it never mentioned the extent to which they were used to finance the purchase of European debt.

The firm bought its European sovereign bonds making use of an arcane transaction known as repurchase-to-maturity. Repo-to-maturity allowed the company to classify the purchase of the bonds as a sale, rather than a risky bet subject to the whims of the market. That called to mind an earlier era of trading when firms used repo-to-maturity to finance the purchase of risk-free assets like United States Treasury securities, Mr. Corzine’s specialty at Goldman many years earlier.

“It’s like a bond trader from 15 years ago went to sleep and suddenly awoke to make these trades,” one regulator who later reviewed the transactions remarked to a colleague.

Eventually, MF Global’s auditor, PricewaterhouseCoopers, asked Mr. Corzine to report the European debt exposure to his investors. He personally met with the accounting firm in December 2010, two people said, and it was agreed that the transactions would be mentioned in a footnote in the firm’s annual report, which was filed on May 20, 2011.

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Mr. Speaker, I thank you very much for the time this evening, I thank my colleagues and those who are listening, and I yield back my remaining time.

See also: “MF Global’s Revelations Keep Getting Worse” – November 11, 2011

Read finance articles by Janet Tavakoli