There seems to be something still amiss with the regulatory groups that oversee the financial system. Apparently, MF Global had four different regulators overseeing it and none of them was able to prevent the losses with timely warnings. These regulators were CFTC, FRBNY (The Federal Reserve Bank of New York), the SEC and the UK's FSA and the CME. With so many different regulatory bodies, how did things end up going so wrong?
The Wall Street Journal's Deal Journal in its LIVE BLOG: MF Global Ex-CEO JonCorzine Faces Congress provides a summary and running commentary on Jon Corzine's testimony here.
Excerpts from the
Statement of Jon S. Corzine Before the United States House of Representatives Committee on Agriculture December 8, 2011Read the rest of the testimony here
Chairman Lucas, Ranking Member Peterson and Distinguished Members of the Committee:
Recognizing the enormous impact on many peoples’ lives resulting from the events surrounding the MF Global bankruptcy, I appear at today’s hearing with great sadness. My sadness, of course, pales in comparison to the losses and hardships that customers, employees and investors have suffered as a result of MF Global’s bankruptcy. Their plight weighs on my mind every day – every hour. And, as the chief executive officer of MF Global at the time of its bankruptcy, I apologize to all those affected.
Before I address what happened, I must make clear that since my departure from MF Global on November 3, 2011, I have had limited access to many relevant documents, including internal communications and account statements, and even my own notes, all of which are essential to my being able to testify accurately about the chaotic, sleepless nights preceding the declaration of bankruptcy. Furthermore, even when I was at MF Global, my involvement in the firm’s clearing, settlement and payment mechanisms, and accounting was limited.
The Members should also understand that the Committee turned down my request to testify voluntarily in January. I had hoped that, by that time, I would have obtained and reviewed relevant records so that I could be more helpful to the Committee.
As a consequence of my situation, not every fact of which I am or may have been aware that may be relevant to your inquiry is contained in this statement. While I intend to be responsive to the best of my ability today, without adequate time and materials to prepare, I may be unable to respond to various questions members might pose. Other questions, given my 2 specific role in the company, will be questions for which I simply have no personal knowledge.
Many of your questions may well be ones I myself have.
Considering the circumstances, many people in my situation would almost certainly invoke their constitutional right to remain silent – a fundamental right that exists for the purpose of protecting the innocent. Nonetheless, as a former United States Senator who recognizes the importance of congressional oversight, and recognizing my position as former chief executive officer in these terrible circumstances, I believe it is appropriate that I attempt to respond to your inquiries.
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MF Global’s Leverage
One of the recurrent themes in the media has been that MF Global took on too much risk during my tenure, in particular the amount of leverage that MF Global bore at the time of its bankruptcy. In fact, MF Global reduced leverage. In the quarter ended March 31, 2010, MF Global’s leverage was 37.3. During my tenure, it was consistently around 30.7
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My Communications Regarding Proposed CFTC Rules Changes
Sometime in late 2010 or early 2011, the CFTC proposed certain changes in 17 C.F.R. §1.25 (“Rule 1.25”). As far as I understand, roughly speaking, Rule 1.25 outlines the permissible investments and uses for customer funds, as that term is defined in the CFTC Rules and Regulations, held by a Futures Commission Merchant (“FCM”).
The proposed rule change was the topic of substantial discussion among regulated entities, industry organizations, associations, committees and even designated self-regulatory organizations. I understand that there were numerous letters received by the CFTC opposing various aspects of the proposed rule change.19 MF Global submitted a letter, along with Newedge, which was one of the largest FCMs in the United States, opposing the proposed amendments to the rule.
The proposed rule change was also the topic of the conference call in which I took part on July 20, 2011, in which CFTC Chairman Gary Gensler participated. As best as I can recall, there were others from MF Global who took part in the conference call, and the CFTC’s own records state that in addition to CFTC Chairman Gensler, four other officials from the CFTC were on the call. According to the CFTC’s records, I was not the only representative of the industry that had calls with members of the CFTC, including Chairman Gensler, regarding the proposed changes.
The principal topic of discussion was whether Rule 1.25 should be changed to prevent FCMs from engaging in repurchase transactions with related broker-dealers. As I understood it, the then-current version of Rule 1.25 permitted such transactions but the proposed version would not, or would somehow limit such transactions. Consistent with the letter that we had submitted 13 with Newedge, I argued, in substance, that such transactions should continue to be permitted because such transactions could be beneficial to the FCMs.
On the same afternoon, I spoke with another CFTC commissioner, Mr. Bart Chilton, to discuss the same matter. Mr. Chilton, who, according to the CFTC’s records was accompanied by another CFTC official, listened to the arguments. I was joined on the phone by the general counsel for MF Global.
Later, I came to understand that the CFTC deferred consideration of the new rule.
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The Unreconciled Accounts
Obviously on the forefront of everyone’s mind – including mine – are the varying reports that customer accounts have not been reconciled. I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account for many hundreds of millions of dollars of client money. I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others.
As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that 18 comprised MF Global. I had little expertise or experience in those operational aspects of the business.
Again, I want to emphasize that, since my resignation from MF Global on November 3, 2011, I have not had access to the information that I would need to understand what happened. It is extremely difficult for me to reconstruct the events that occurred during the chaotic days and the last hours leading up to the bankruptcy filing.
I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules. Moreover, there were an extraordinary number of transactions during MF Global’s last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global. I am sure that the trustee in bankruptcy, the SIPC receiver, and the regulators are working to answer these questions and to understand precisely what happened during the firm’s last days and hours.