MF Global sought bankruptcy protection on Halloween after an effort to sell the troubled firm unraveled. The firm is now in liquidation.
In his prepared testimony submitted before the hearing, Corzine said he could not explain what happened to “many hundreds of millions of dollars” that the firm was holding for customers. He said he was “stunned” to learn shortly before the firm sought bankruptcy protection at the end of October that MF Global could not account for the money.
“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said, according to the testimony.
The firm was required to keep clients’ money separated from its own. But more than $1.2 billion might be missing, the trustee overseeing the firm’s liquidation said last month. An attorney for the trustee confirms that assessment in testimony submitted for for hearing.
The FBI, the Commodity Futures Trading Commission and other authorities are investigating and trying to determine what happened to the missing funds.
Meanwhile, the firm’s collapse has become a major disruption for customers and others who depended on MF Global.
The Republican-led House Agriculture Committee, whose jurisdiction includes agricultural commodities and one of the federal agencies that regulates MF Global, subpoenaed Corzine to testify on the firm’s bankruptcy. The committee turned down Corzine’s request to testify voluntarily in January, he said.
Corzine began his testimony Thursday with an apology, saying that he was “devastated by the enormous impact” the firm’s bankruptcy has had on many people’s lives.
“As the chief executive officer of MF Global at the time of its bankruptcy, I truly apologize to all those affected,” he told the House members.
Questioned first by committee chairman Frank D. Lucas (R-Okla.), Corzine — wearing a gray suit, white shirt and dark tie and flanked by his lawyer — gave some strained and cautious answers.
Asked why there was a shortfall in customer funds, Corzine said that “many transactions… occurred in those last chaotic days.” He said he was not aware of all of those transactions and that “as a consequence it would be very hard for me to speculate why or where that shortfall took place.”
Asked if he authorized a transfer of customer funds, Corzine responded, “I never intended to break any rules, whether it dealt with the segregation rules or any of the other rules that are applicable.”
When Lucas asked if Corzine was aware of any transfers, authorized or unauthorized, out of customer accounts, Corzine said, “I’m not in a position, given the number of transactions, to know anything specifically about the movement of any specific funds.”
“And I will repeat, I certainly would never intend to direct or have segregated funds moved,” Corzine added.
Corzine said that the “first that I heard of the many millions, hundreds of millions, missing, was on Sunday night,” apparently referring to the hours before the bankruptcy filing.
Rep. Randy Neugebauer (R-Tex.) later pressed Corzine to clarify his statement that he never intended to authorize a transfer of customer funds.
If he did, “it was a misunderstanding,” Corzine said.
In response to a similar question later, Corzine said, “There is never any directed intent to commingle those funds.”
“So, in other words, you could have,” said Rep. David Scott (D-Ga.).
Asked to describe a situation in which his intent could have been misconstrued, Corzine said, “Someone could misinterpret, ‘We’ve got to fix this’ — which I said the evening of Oct. 30 – ‘We’ve got to find the money.’”
In his prepared statement, Corzine said that many people in his situation would invoke their Fifth Amendment right to remain silent. However, as a former senator, he said, he recognizes the importance of congressional oversight and believes “it is appropriate that I attempt to respond to your inquiries.”
Though anything he said could be used against him, Corzine hedged his testimony by saying he had too little time to prepare for the hearing and only limited access to records “essential to my being able to testify accurately.”
In his prepared remarks, Corzine told lawmakers, “I sincerely apologize, both personally and on behalf of the company, to our customers, our employees and our investors, who are bearing the brunt of the impact of the firm’s bankruptcy.”
CFTC Commissioner Jill E. Sommers said in a statement Thursday that her agency still “has a great deal of work ahead of it to get customer funds back where they need to be, to determine what went wrong with segregated funds at MF Global, to determine whether to prosecute any violations ... and to determine what needs to be done to prevent a similar circumstance in the future.”
Another witness slated to testify Thursday, CME Group Executive Chairman Terrence A. Duffy, shed more light on the missing money in his prepared testimony. CME Group runs markets for derivatives, including the Chicago Mercantile Exchange, and oversees MF Global.
Duffy said his group’s auditors found no sign that customer funds were missing as of Oct. 26. CME Group auditors returned to MF Global on Oct. 30, because it learned from the CFTC that a draft accounting report at MF Global showed a $900 million shortfall in customer funds caused by an “accounting error,” Duffy said.
The auditors found no accounting error.
Instead, about 2 a.m. on Monday, Oct. 31, MF Global informed the CFTC and CME “that customer money had been transferred out of segregation to firm accounts,” Duffy said.
“Transfers of customer funds for the benefit of the firm constitute serious violations of our rules” and of federal law, Duffy said.
James Kobak, attorney for the trustee, said MF Global’s records are a mess, mainly from the last week or two of intense trading before the bankruptcy filing.
If customer funds were misused, individuals could face criminal prosecution, Sommers said.
The journey to the witness table was a dramatic turnabout for Corzine, who made a fortune at the helm of the investment bank Goldman Sachs and then parlayed his wealth into a career in politics.
Corzine’s testimony is his first public statement on the demise of MF Global since he resigned as chief executive of the firm more than a month ago. On Nov. 4, days after the bankruptcy filing, he issued a brief statement saying he felt “great sadness for what has transpired at MF Global and the impact it has had on the firm’s clients, employees and many others.”
Coming three years after the world’s financial system nearly imploded, the collapse of MF Global exposed persistent vulnerabilities in the financial sector, some of which involve derivatives, the complex instruments that contributed to the crisis of 2008.
As the hearing got underway, Rep. Collin C. Peterson (D-Minn.), the panel’s ranking Democrat, said it was “pretty amazing that we’re in this situation.”
“It appears to me that nobody has learned a thing from what’s gone on here, that Wall Street is operating as if 2008 never happened,” Peterson said.
In his prepared statement, Corzine said that, though he “ultimately had overall responsibility for the firm,” he did not generally involve himself in the movement of cash and collateral or the mechanics of settling trades.
“Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global,” he said.
The firm was losing money when he stepped in last year and helped chart a new strategy to make it less reliant on declining revenue sources such as commissions on clients’ trades, Corzine said. Corzine said he strongly advocated investing in the debt of European governments — Belgium, Italy, Spain, Ireland and Portugal. The transactions were reviewed by the firm’s board, Corzine said.
On “a few occasions,” the firm exceeded limits the board had set on the amounts MF Global could invest in trades related to particular countries, Corzine said.
MF Global bet on European debt using deals known as repurchase transactions or “repos,” which essentially involved borrowing the money to buy the bonds and then putting them up as collateral for the loans.
During the hearing, Corzine acknowledged to lawmakers that there was dissent within the firm over his strategy on European debt. He said the firm’s chief risk officer had a different view of the risk and conveyed that to the board. Corzine said he agreed with the board’s decision to change chief risk officers.
Corzine denied that he threatened to leave the firm if the board did not trust his judgment. But he said he told the board’s lead director that he would be willing to step down if the board lost confidence in him.
By mid-June, FINRA, a self-regulatory group for the brokerage industry, was challenging MF Global’s handling of the European transactions, arguing that it needed to put capital in reserve to offset the risk.
Corzine said he went to the headquarters of the Securities and Exchange Commission to argue against FINRA’s position. The SEC sided with FINRA. Corzine recalled that he phoned an SEC official, who told him there was no further appeal.
To comply, MF Global shored up its capital. But by the fall, credit rating agencies were downgrading the firm, and investors were deserting it. In late October, the firm made frantic efforts to raise cash by unwinding bets on European bonds and trying to tap lines of credit. Corzine described “chaotic, sleepless nights.” On Oct. 25, MF Global reported that it lost $191.6 million during the quarter that ended Sept. 30. Corzine said the loss was not related to the firm’s investment in European debt.
“Despite our best efforts to sell assets and generate liquidity, the marketplace lost confidence in the firm,” Corzine said.
In his prepared testimony, Corzine also recounted that he lobbied against regulators’ effort to tighten restrictions on how brokerages such as MF Global could invest clients’ money.
The proposed rules change was championed by Gary Gensler, chairman of the Commodity Futures Trading Commission and a fellow alum of Goldman Sachs. Corzine said he argued against the change in a July conference call with Gensler. Gensler has recused himself from the agency’s probe of MF Global.
At the hearing, Corzine told lawmakers that he “did not exert undue or improper influence on regulators.”
This week, the CFTC finally adopted restrictions that Corzine and others in the industry had fought.
Corzine recounts that he also met with Gensler in May and December of 2010, and that he asked Gensler about the proposed rule in front of an audience during a June conference.
Corzine said he does not know which MF Global customer accounts remain “unreconciled” and whether they were subject to the rules about keeping client funds separate from those of the firm.
Lucas said at the hearing that the mystery has caused serious damage. “The very cornerstone of the futures markets, customer funds segregation, has been severely and suddenly called into question,” Lucas said in his opening statement. “Dozens of my constituents have been left not only without their property, but also without answers about why and how this happened,” Lucas said.
Testifying before the panel, Sommers, the federal regulator, said the CFTC relies on an industry self-regulatory group to serve as the front-line auditor of firms like MF Global. The firms self-report whether they are in compliance with the requirement that they keep customer funds segregated, she said.
“Why would one self-report their own wrongdoing?” asked committee member Rep. Martha Roby (R-Ala.)
“That does happen,” Sommers said.
In his Nov. 4 statement resigning from MF Global, Corzine said stepping down was “a difficult decision.”
But by then, Corzine was merely a spectator to the firm’s liquidation. A spokesman for the trustee overseeing the liquidation said at the time that Corzine had “no role within MF Global” since the trustee was appointed Oct. 31.
Corzine served as chairman and chief executive of Goldman Sachs but, according to published accounts, was forced out.
He used the personal fortune he built at Goldman to fuel his ascent to the U.S. Senate, where he served on the Banking Committee. He later won the New Jersey governorship. In 2007, he was badly injured in a car crash.
He ran for reelection as governor of New Jersey in 2009 but was defeated by Republican Chris Christie. As Corzine receded from the public eye, Christie gained national prominence and recently considered jumping into the presidential race.
At MF Global, Corzine was returning to his Wall Street roots. The job could have served as a step toward a political comeback. As recently as last spring, he hosted a fundraiser for President Obama.
Now, Corzine’s disastrous tenure at MF Global has left him in a harsh spotlight. The House Agriculture Committee isn’t the only congressional panel eager to question Corzine.
The Senate Agriculture Committee on Tuesday voted unanimously to subpoena him for a Dec. 13 hearing, and the House Financial Services Subcommittee on Oversight and Investigations voted 15-0 Wednesday to subpoena him for a Dec. 15 hearing.
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