Financial Services Subcommittee Report Finds Decisions by Corzine, Lack of Communication Between Regulators Led to MF Global Bankruptcy and Loss of Customer Funds
Washington,
November 15, 2012
The House Financial Services Subcommittee on Oversight and Investigations, chaired by Rep. Randy Neugebauer, released the full results of its year-long majority staff investigation into the collapse of MF Global on Thursday. Report Findings and Recommendations:
Finding: MF Global Chairman and CEO Jon Corzine Caused MF Global’s Bankruptcy and Put Customer Funds at Risk · Corzine decided to transform MF Global from a futures broker to an investment bank without having a complete understanding of the futures business or the potential risks associated with such a radical transformation. · Corzine was the driving force behind the decision to heavily invest in the sovereign debt of struggling European countries. · The risks associated with the firm’s repo-to-maturity (RTM) portfolio were exacerbated by the lack of internal controls and an atmosphere that Corzine created, in which nobody could challenge his decisions. · The responsibility for failing to maintain the systems and controls necessary to protect customer funds rested with Corzine. · Both agencies focused on their respective jurisdictional interests and not the firm as whole. · There is no record of meaningful communication between the SEC and the CFTC until the week before the company’s bankruptcy. When these regulators finally tried to coordinate, it was disorganized and haphazard. · The SEC did not include the CFTC in discussions it had with other securities regulators related to growing concerns about MF Global’s financial health. The SEC also did not inform the CFTC about discussions about MF Global’s failure to take haircuts on its RTM portfolio. Senior CFTC officials said they “wished they were brought into the conversation” about the haircuts earlier since it affected their regulatory equities. · The CFTC did not inform the SEC that MF Global was using the Alternative Method, which left the SEC with an incomplete picture of the firm’s liquidity situation. · The CFTC “pressured” MF Global to transfer $220 million out of the broker-dealer excess to the FCM without consulting the SEC first. Chairman Schapiro: “Without telling us. That is unacceptable.” FINRA also said in an email that MF Global ignored SEC instructions not to transfer the funds. · The MF Global case alone does not necessitate the merger of the SEC and the CFTC; however the evidence found in the MF Global case is symptomatic of regulatory inefficiencies. · As financial products, markets, and market participants have converged, the SEC’s and the CFTC’s regulatory jurisdictions have increasingly overlapped. It only makes sense to collapse these entities and create a regulatory framework that brings us into the 21st century. · MF Global was not forthright with FINRA about its exposure to European sovereign debt. The company denied it had European exposure in September 2010, despite a nearly $2 billion portfolio. FINRA thought this was “negligent” and “misleading.” · MF Global did not disclose its exposure to European sovereign debt in full until a full year after it began accumulating the positions. There was no mention of net exposure in its September 2010 10-Q (when it had a $2 billion exposure) and December 2010 10-Q (a $4.5 billion exposure). MF Global finally disclosed its exposure of $6.3 billion in its March 2011 10K - released in May, 8 months after the firm entered into the trades. · Executives presented a much more optimistic picture of its liquidity situation to the public than what was privately understood. On October 6, 2011, MF Global’s CFO Henri Steenkamp informed Corzine that one of MF Global’s affiliates was undergoing significant liquidity stress and characterized MFGI’s liquidity as being in a state of “sustained stress”. However, on an October 25, 2011 earnings call, Steenkamp described how MF Global had “improved [its] capital and liquidity positions” that quarter. Corzine backed Steenkamp’s claim by stating that MF Global’s action had put the firm in a “much, much stronger liquidity position” as of September 30. As a result of these public statements, investors were not aware of MFGI’s liquidity issues and could not assess their impact on MF Global’s overall condition. · Despite being disclosed in May 2011, the rating agencies did not factor MF Global’s European exposure into its ratings assessments until late October. · The credit rating agencies (CRAs) did not understand the nature of MF Global’s European sovereign exposure. · The CRAs failed to conduct adequate due diligence. Documents demonstrate that neither Moody’s nor S&P asked sufficiently probing questions or pursued fundamental information related to MF Global’s European exposure until 11 days before the firm’s bankruptcy. · Credit ratings were not based on a full and complete examination of all relevant information affecting the company’s long-term health. · The use of the Alternative Method by MF Global put customers who traded on foreign exchanges at risk of losing money. · The substantial “excesses” resulting from the use of the Alternative Method made customer accounts a more attractive source of liquidity for MF Global’s day-to-day operations. As a result, it is likely that MF Global’s use of the Alternative Method contributed to the shortfall in customer segregated accounts. · MF Global’s risk management failure, chronic net losses, and untested business strategy, combined with the NY Fed’s internal concerns that MF Global posed reputational risks, should have given the NY Fed pause before conferring primary dealer status on MF Global. · MF Global’s aggressive pursuit to become a primary dealer should have given the NY Fed further pause. Recommendation: Direct the CFTC to study whether it could better mitigate the risks customers face when they trade abroad. |