Jon Corzine update: MF Global told CME it used customer funds

There are MF Global stories coming fast and thick. (Background here, if you need to catch up; bottom line is that Top 0.1% golden boy and MF Global CEO Jon Corzine appears to have used customer funds to pay off the firm's losses in bets made with its own money.)

This post will offer some headlines and links, just as a way to keep you abreast of this rapidly-moving story. My comment below; all emphasis mine.

■ CME was MF Global's regulator. Start here, with Yves Smith's wide-ranging post, "CME to Customers: Drop Dead". Ms. Smith makes several points in the post, the most important being the change in customer-mindedness in modern "capitalism" (my nasty quote-use). But note this:

CME ... is under the hot lights in the wake of the MF Global debacle. Legislators are trying to get in front of the unhappy mob of wronged customers and call it a parade. And an obvious focus of inquiry is the self regulated derivatives exchange, the CME Group, which also oversaw futures commission merchants like MF Global. Worse, MF Global had gotten a clean bill of health from the CME in its last audit.

Smith quotes CME's response:

“In the case of MF Global, we did everything we could within our regulatory power, but MF Global broke exchange rules and government regulations designed to protect customer funds. Because the firm failed to comply with regulations, that does not mean the system failed,” the group said.

Note their defense: in essence, "It's not our fault because they fooled us," as if not getting fooled weren't the goal of regulation. (Even so, see below; they weren't fooled.)

■ CEO Jon Corzine's defense: I know nothing.
Earlier this week, Corzine testified before a Congressional committee (Agriculture, if you can believe it) that wants "answers on what happened". There Corzine offered the Sgt. Schultz defense: "I know nothing" (h/t Naked Capitalism):

Mr. Corzine told the House Agriculture Committee that he was “stunned” when he learned late on Oct. 30 that about $1 billion of customer money could not be located, a discovery that thwarted a sale of the firm and led to its filing for bankruptcy. Regulators and the Federal Bureau of Investigation are now hunting for the money and examining potential wrongdoing at the firm. ...

“I never intended to break any rules,” said Mr. Corzine, dressed in a dark suit but without his trademark sweater vest. [This is a fashion mag?] “I know I had no intention to ever authorize the transfer of segregated moneys. I know what my intentions were.”

The same article offers this grace note:

Mr. Corzine has not been accused of any wrongdoing.

Of course not.

■ MF Global was a concern of the NY Fed since 2009. This information comes from the Financial Times Thursday (December 15). You may need a (free) subscription to get the link to work. The key part:

The Federal Reserve Bank of New York expressed concerns over MF Global’s internal controls as far back as 2009, more than two years before the brokerage declared bankruptcy in October and an estimated $1.2bn in customer funds was discovered missing.

The New York Fed’s reservations led it to delay by one year MF Global’s application to become a so-called “primary dealer” and join a select group of 21 banks and investment firms authorised to trade directly with the central bank[.] ... Although the Fed eventually approved MF Global’s request, following a visit by Jon Corzine, the broker’s then chief executive, to the central bank’s branch in New York, the Fed’s concerns underscore the depth of regulators’ worries that the company lacked appropriate controls over risk-taking and effective oversight of traders’ activities.

I guess when you're a poster boy for the Top 0.1% like Jon Corzine, you swing serious pipe in meetings with the Fed. Mostly, it's the Fed swinging pipe.

■ MF Global told CME it used customer funds. Which brings us to Friday (December 16). From Bloomberg:

MF Global Holdings Ltd. used about $700 million of customer funds to “meet liquidity issues” in the days prior to its bankruptcy, according to CME Group Inc., which had auditing authority over the failed futures broker.

CME Group detailed its dealings with MF Global in documents released yesterday by the oversight panel of the House Financial Services Committee. Christine Serwinski, chief financial officer for North America at MF Global, and Edith O’Brien, a treasurer, told Mike Procajlo, an exchange auditor, at around 1 a.m. on Oct. 31 in Serwinski’s Chicago office that the customer money was transferred on Oct. 27 and Oct. 28 and possibly Oct. 26, according to a CME Group timeline.

“About $700 million was moved to the broker-dealer side of the business to meet liquidity issues in a series of transactions on Thursday, Friday and possibly Wednesday,” Serwinski and O’Brien told Procajlo hours before the firm filed for the eighth-largest bankruptcy following record quarterly losses and $6.3 billion in trades on European sovereign debt.

The same story says Corzine is sticking to his story:

The former senator and governor of New Jersey said he doesn’t know what happened to the money.

And that's where we are. CME, the "frontline regulator," says it knows nothing. Corzine says he knows nothing and ordered nothing. Documents show CME, in fact, did know something.

What's my point?

First, to bring you up to date. In a country with real Rule of Law, CME and its relevant execs would be brought to a court for trial. In addition, a case against Jon Corzine would be vigorously developed, and he'd be charged in an actual attempt to convict. The outcome would depend on his defense, not on his Top 0.1% Club Card (and sweater vest).

At the very least, he'd have to explain himself before a judge and jury, someone with power to incarcerate him for theft and lying. At most, he'd serve time like any other lying thief.

Second, and most important, this story is a poster child for actual Rule of Law (as opposed to the banana-republic, pretend kind). There's no question at this point the money was stolen. It's impossible to believe that Corzine "knew nothing."

But as noted, Jon Corzine has a Top 0.1% Club Card:

He's Top 0.1% in spades: a Goldman CEO, a senator, a governor, and a major Dem fundraiser in an election year. If he does see a jail or a courtroom, it will be revolutionary.

And that's my main point. This is an Occupy story, a rule of law story, and you should be watching it closely.

Will CME be charged? Will Jon Corzine be indicted? If he gets off with "public embarrassment" as his punishment, we'll have public pre-election proof that, no matter the party in power, there's no rule of law for the New Barons that own more and more of this country and its political structure.

(Why do I say "no matter the party in power"? Corzine is a major Obama/Dem fundraiser. If Obama & the Dems don't give him the Weiner's Wiener treatment, you'll know he's protected by ... guess who.)

GP