Yesterday in a response to Aussie about the MF Global collapse I said this: Here is my guess. I think It boils down to this. Corzine was under the impression that Obama through Geithner would underwrite the EU bailout and join them in the debt issue. *Remember the mysterious Geithner trip to visit with the EU finance ministers in Sept.*
Corzine was obviously an administration insider, heck he was widely expected to replace Geithner as Treasury Sec. I believe the reason Corzine instructed his MF Global peeps to put so much in EU bonds was his anticipation of a resolution including the US-based on what he was hearing “inside closed circles” from Geithner and others. But what none of those folks knew was the extent of the total problem over there. They understood the individuality but not the totality. (*Remember, none of their individual central banks were ever stress tested, so they really had no way of knowing the contagion effect, it was all guesswork).
Then when the EU central banking system finally stepped up and openly told all the financial ministers to instruct their individual banks to take a 50% write down, meaning wipe out 50% of bond debt instantaneously, thereby providing additional room for more bailout borrowing, it literally crippled MF GLobal’s liquidity. The bond debt went from top of priorities, to bottom of priorities for structured repayment. MFG was screwed, they did not anticipate such an action because Corzine and the rest of the US contingent are used to, and expect, interventional bailouts.
The only way he could continue to operate in Global financial markets was to put more liquidity into his operations. In in essence the money/debt he now held in EU bonds was effectively frozen. So instead of taking a 50% loss, and going through the painful process of restructuring MF Global right then an there, he choose to reach into segregated customer account funds in an effort to fund his “longs”, and maybe even “shorts”, in the hedges that needed to be capitalized quickly.
As soon as he compromised the segregated fund accounts, he not only broke the law, but he risked everything, because if any of his hedges, or margins, were called then he had to use those customer funds to cover the losses or payouts. I think that is what exactly played out for about a month until all of the capital was exhausted and the entire thing exploded when he had to file the 3rd quarter SEC filing (October) and the assets were gone. He Was Busted.
That was yesterday. Then Today I read this….. Hat Tip – Doug Ross
Losses from the collapse of MF Global, John Corzine’s trading firm, may be double the original estimate — totaling a cool $1.2 billion. In the wake of this disclosure, Janet Tavakoli, president of Tavakoli Structured Finance, offers some fascinating forensic details that implicate not only Corzine, but Washington’s culture of crony capitalism.:
When MF Global collapsed on October 21, it was the biggest financial firm to collapse since Lehman in September 2008. Then Chairman and CEO Jon Corzine is connected 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 knows the Fed’s William Dudley, a key member of the Fed’s Open Market Committee, from their days at Goldman Sachs. The Fed approved MF Global’s status as a primary dealer, a participant in the Fed’s Open Market Operations, just before Jon Corzine took its helm and beached it on a reef called 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 reportedly employed 35:1 leverage—some reports are 40:1—against a portfolio comprised around 20% of European Sovereign risks including Belgium, Italy, Spain, Portugal, and Ireland… MF Global was so thinly capitalized that this trade alone could eat up half of its capital… From a risk management point of view, examiners have to consider the very strong possibility that MF Global had several negative equity days throughout 2011… How did MF Global meet margin calls throughout 2011? It seems an investigation into money flows throughout 2011 is in order.
…[Obama supporter] Jon Corzine resigned as Chairman and CEO of MF Global on November 4, just days after the October 31 bankruptcy announcement… The Financial Industry Regulatory Authority Inc. (FINRA) [had given] Jon Corzine a waiver from his Series 7 and Series 24 exams when he took the helm of MF Global in March 2010…
…The test waiver by regulators seems to be blatant cronyism, because Corzine not only hadn’t been involved in the day-to-day markets for more than a decade, his responsibilities at MF Global included active decision-making. The waiver wasn’t justified. Corzine reportedly authored the strategy for the MF Global killing trades, and he also had authority on the trading floor…
…MF Global’s financials were shaky ever since Man Group spun it off in 2005 and saddled it with a lot of debt. Yet MF Global was added to the Fed’s list of 22 primary dealers in February 2011, just before former Goldman CEO Jon Corzine officially came on board. Primary dealers buy and sell U.S. treasuries at auction and are a counterparty to the Fed’s Open Market operations…
…Why did the Fed award prestigious primary dealer status to a shaky operation like MF Global, an entity it does not regulate?
…In August, customers started pulling billions of dollars out of their segregated accounts with MF Global. It was the biggest outflow of funds since January 2009 [and] it is likely that employees within MF Global were well aware of the problems and tipped off-key customers.
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 a protégé of Jon Corzine at Goldman Sachs, one should question why Gary Gensler didn’t act…
…[Because of the collapse of MF Global, c]onfidence in the futures market has been shaken. No one knows if their money is safe, but what is more disturbing is the appearance of crony capitalism once again giving favored treatment, lax regulation, and absent oversight to a crony capitalist that abused all of these perks to blow up a large financial firm and damage a key global market.
• FINRA waived licensing requirements for Corzine
• No one is saying how MFG received a lucrative primary dealer designation
• And, despite numerous red flags, the CFTC didn’t act in time to prevent an implosion.
All right-thinking Americans, irrespective of party, should reject this kind of lawless crony capitalism. The time has come to throw out all of these bums and to replace them with Constitutional conservatives.