ICE

[parsley]

$1.2 Billion Vanishes From MF Global
In late October, the market suddenly realized that
the emperor had no clothes at MF Global (OTC:
MFGLQ). And as revelers all over the U.S. gutted
pumpkins in preparation for Halloween, the
centuries-old brokerage was financially gutted as
counterparties stepped away.
On Halloween, MF Global became a ghost itself,
but the week prior to the bankruptcy filing was
utter chaos for the company. As one former MF
Global employee recounted, CEO Jon Corzine
faced the distress head-on, pacing the trading
floor and directing his troops in hopes of finding a
way to save the company after the massive bet
on European debt that he championed effectively
doomed it.
Even as internal levers were pulled, MF Global
hired investment bankers from Evercore (NYSE: 
EVR  ) to work on finding a buyer with deep
enough pockets to save the flagging broker. Most
major financial companies thumbed their noses
at the possibility of buying it -- they figured they
could swoop in and pick over the pieces post-
failure. However, heading into the weekend it
looked like a deal would come together.
Electronic-exchange-focused broker Interactive
Brokers (Nasdaq: IBKR  ) was at the table, and
the talks looked promising. As an MF Global
employee that was present for those final days
recounted, "We all thought there was going to be
a deal and we were going to be saved."
But at the eleventh hour, disaster struck. It was
found that futures customer funds -- money
which is legally required to be carefully set aside
and clearly accounted for -- were missing. Initial
media reports suggested as much as $1 billion
was unaccounted for, but the number was quickly
dropped to $700 million, then $600 million. But
as far as the Interactive Brokers deal was
concerned, the exact amount of the shortfall
didn't matter one whit -- what was very clear was
that a lot of client money had vanished. Buying
MF Global was suddenly akin to buying real
estate on Three Mile Island in late March of
1979. The deal was quashed and MF Global was
left with no other choice than to file for
bankruptcy.
Following the bankruptcy filing, it would take
James Giddens -- the bankruptcy trustee of MF
Global's broker subsidiary -- a full three weeks of
working through the company's books to offer an
"official" estimate of the shortfall. On Nov. 21, he
announced that "$1.2 billion or more" had
disappeared from the segregated customer
accounts.
Sacrosanct
Whether we're talking about a bank, an equities
broker, or a futures broker like MF Global, it's
clearly bad when deposited customer money
goes missing. However, there are safety valves
for bank depositors and stock market investors.
The Federal Deposit Insurance Corp. protects
banking customers to the tune of $250,000.
Meanwhile, the Securities Investor Protection
Corp. steps in with up to $500,000 per customer
to help equity investors when a stock broker fails
and doesn't have adequate funds to make its
customers whole.
There is no such insurance backstop for futures
customers. What the futures industry has relied
on instead are "segregated accounts" that put
customer money in a safe side-pot that is legally
off-limits for the broker to use to directly fund its
operations or back its own proprietary trading
positions.
Ask futures customers about segregated
accounts, and nine times out of 10 they'll tell you
that those accounts are sacrosanct.
Where's the money, Corzine?
The possibility that Jon Corzine authorized the
customer funds to be pulled out of segregated
accounts to plug holes in the company's balance
sheet is in some ways a very logical scenario. As
we've detailed in this report, Corzine created an
atmosphere where serious challenges to his
power and decisions were basically nil. In the
turbulent scrum that took place as they tried to
save the company, it seems even less likely that
a Corzine directive would be denied.
This scenario would provide a tidy denouement
for those of us breathlessly waiting for resolution.
Corzine would be criminally culpable, civil suits
could plunder his personal assets, and
prosecutors could fit him for a new kind of striped
suit and send him on a long vacation with Bernie
Madoff.
This would also likely work out well for regulators,
including MF Global's primary self-regulatory
organization, CME Group (NYSE: CME  ) . If
Corzine acted criminally, it may let those
regulators off the hook to some extent. It doesn't
necessarily take a regulatory failure for somebody
to act criminally. After all, robbery is illegal, but if
a thief is bent on robbing a bank, he or she will
do it anyway.
This seems to be the scenario that the CME is
pushing -- according to congressional testimony
from CME Chairman Terry Duffy and a timeline of
events released by the CME, not only were there
potentially prohibited loans made from customer
accounts, but Corzine may have known about the
loans. However, at the time of this writing, the
CME's account was uncorroborated and the
details were under wraps on who from MF Global
was talking about Corzine's knowledge of the
loans and what exactly was said.
And while there are those who think it
inconceivable that Corzine would have acted
illegally, times of extreme stress can often drive
people to do things that they wouldn't otherwise
dream of doing.
Or not...
As cleanly as the Corzine-as-criminal scenario
would wrap up the MF Global case, there are
good reasons to doubt that that's how it went
down. Corzine was a wealthy and well-connected
man, which promised him a perfectly comfortable
life even if MF Global failed. And unless the
former senator was willing to add perjury to his
rap sheet, if he had criminally authorized the use
of client funds, there's no way he would have
said the opposite during multiple testimonies in
front of Congress.
It's important to remember, too, that in a large,
global organization -- financial or not -- the CEO
is responsible for setting up the right systems
and effectively delegating responsibilities.
This leaves open the very real possibility that,
without his knowledge, somebody at a level well
below Corzine made the decision to funnel client
funds to the company's balance sheet in a
desperate attempt to keep the ship from sinking.
This doesn't necessarily let Corzine off the hook,
though. As noted above, it's a major part of the
CEO's job to put the proper systems in place. In
fact, regulations implemented through Sarbanes-
Oxley -- a bill that Corzine co-wrote while he was
a senator -- require that the CEO and CFO sign
off on the effectiveness of the controls over
financial reporting. For instance, for fiscal 2011,
both Corzine and MF Global CFO Henri
Steenkamp signed off on the fact that they had:
Designed such disclosure controls and
procedures, or caused such disclosure controls
and procedures to be designed under our
supervision, to ensure that material information
relating to the Registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities.
If those proper "controls and procedures" were in
place, a breach of segregated client funds should
have set off loud, blaring, obnoxious alarms that
would have alerted management to that breach.
If it turns out that those proper controls weren't in
place, Corzine and Steenkamp could face both
civil and criminal charges.
It's also possible that the proper procedures were
in place, but an employee was simply determined
to illegally circumvent those systems -- perhaps
in some misguided belief that it would help save
the company and curry favor with Corzine or
other members of management.
Flabbergasted!
Of course there's also the possibility that
malfeasance isn't present here at all. Multiple
former MF Global employees that we spoke to
think that the missing money may simply be the
result of a bookkeeping error. They believe it's
unlikely that there was deliberate wrongdoing
involved, particularly on the part of Corzine.
Former MF Global trader Mike Fitzgerald
emphatically stated that he'd be "nothing less
than flabbergasted" if it turned out Corzine did
something nefarious. Even TV stock jock Jim
Cramer -- who was a former Goldmanite himself -
- stepped up to defend Corzine on CNBC, saying
Corzine is "not a bad man."
To be sure, in the best of days the accounting
and bookkeeping for a global brokerage firm is
complex. And these were anything but the best of
days for MF Global as it scrambled to pull out of
a tailspin. News reports have quoted people
close to the situation as describing MF Global's
books as "a disaster." In testimony before the
House Agriculture Committee, Corzine spoke to
the chaos that reigned in the final days before
the bankruptcy, and suggested that the amount
of money that was shifted around could make
things very difficult to pick through.
And yet the longer the process drags on, the less
likely the "bookkeeping error" scenario seems.
With forensic accountants and FBI investigators
working with former MF Global employees to
untangle the books, it seems highly unlikely that
an accounting misstep -- or even a series of
missteps -- would take more than a month to
ferret out. Furthermore, while the CME's timeline
shows that the missing funds were initially
thought to be an accounting mishap, it notes that
by the early-morning hours of Oct. 31, MF Global
reported to them that "the deficiency is real."
Flight of the red herring: Rule 1.25
In the wake of MF Global's collapse and, in
particular, the revelation of the missing customer
funds, a lot of focus -- particularly from
lawmakers in Congress -- has been put on the
Commodity Exchange Act's rule 1.25, which
dictates the way in which futures brokers can
invest customer funds. Much of the focus
appears to stem from confusion over what
exactly the rule means.
First of all, from a big-picture perspective, it's not
unusual at all for a financial company to earn
income for itself by investing customer funds. The
entire banking business model is built on
redeploying deposits in interest-earning
investments, including mortgage loans. Equities
brokers such as Charles Schwab (Nasdaq: 
SCHW  ) can also invest customer cash balances
to earn interest income. Even payroll giant ADP 
(NYSE: ADP  ) invests customer funds during the
short interval between when the client gives them
the money and when it has to go out to tax
authorities or the client's employees.
For futures brokers like MF Global, it is likewise
permitted for them to invest customer funds to
earn interest income. Rule 1.25 simply details
what types of investments are kosher. The only
reason that 1.25 should be an issue in the MF
Global case is if there was reason to believe that
overly loose parameters in the rule had
something to do with the missing client funds. At
the time of this writing, there has been no solid
evidence that client funds had anything to do with
the repo-to-maturity trade that led to the
company's collapse, or that the missing customer
funds have anything to do with overly risky
investments that were permitted under 1.25.
In fact, it seems that the only reason that 1.25 is
a hot topic among lawmakers -- besides their
lack of understanding of what the rule is -- is that
there was some appearance of fishy dealings
around proposed changes to the rule prior to MF
Global's collapse. Corzine and other high-level
executives at MF Global had met with regulators
from the Commodity Futures Trading
Commission to push back on changes that would
cut back on what was allowed under rule 1.25.
Today, those meetings look sketchy in light of MF
Global's collapse, but MF Global was one of
several futures brokers that was campaigning
against the rule change. Plus, just because
Corzine was pushing back on the rule change
doesn't necessarily mean that there was
something underhanded going on -- in fact, it
could be said that he wouldn't be doing his job
as CEO if he didn't advocate for the company
when regulations threatened to crimp the
business.
Not that the CFTC has been helpful in clearing
up the misunderstanding around rule 1.25. In a
very desperate-seeming move after MF Global's
collapse, the regulator passed the "MF Global
rule" which went ahead with the previously
considered changes and curtailed futures brokers'
ability to invest in sovereign debt or borrow
money from customer accounts via repurchase
transactions. We believe that it will eventually be
revealed that what was permitted under rule 1.25
was not the cause of MF Global's missing funds,
which will also show that the CFTC's rush to
implement the "MF Global rule" was a cheap ploy
to save face and make it look like the regulator
was doing something in response to MF Global's
collapse.
And all of the rest
In our conversations with MF Global customers,
former employees, regulators, lawyers, and other
experts, it seemed at times that there were as
many theories about the missing money as there
are sweaters in Jon Corzine's closet. Some were
simply variations of the scenarios presented
above. Others were far more creative and
sounded more like something out of a John
Grisham novel.
With significant facts still yet to be uncovered, it's
certainly possible that something surprising, or
even bizarre, happened here. As they say, fact is
often stranger than fiction. However, at the time
of this writing, we believe that one of the
scenarios presented above will eventually be
proven by investigators.
But no matter what happened to the money, MF
Global customers have had to deal with the fact
that a huge amount of money is missing and
much of the rest of their deposited funds were
frozen for an extended period of time. This has
created hardship for thousands of customers that
were directly involved with MF Global.

Furthermore, it has had a chilling effect that
reaches much more broadly than MF Global, as
futures traders all over the country wonder
whether this might be a sign that the system is
simply broken.

[parsley]

That is the last entry

Note what cotton noted. There is a an epidiemic
of contagious trading-skepticism spreading
throughout the world, isn't there.
Trust Greece? Italy? Yes, well.

Canada has a chance that comes in a million to
establish a global trading institution. There ia a
need. Opportunity. Canada has a good financial
reputation. Product. Alberta and Saskatchewan
both have supportive environments for the
establishment of a trading centre.
The ability of so many young educated farmers
to support and participate in a trading centre is a
huge asset.

[cottonpicken]

Lol,i'm glad i dont like apple pie.

[parsley]

You are lucky, Ridgerunner. I have an update
entry.

Before most of the world knew MF Global (OTC:
MFGLQ) was preparing to file for bankruptcy,
regulators knew that customer money had been
moved. Much of it, an estimated $1.2 billion at
last count, is still missing.

Former MF Global CEO Jon Corzine has sworn
before Congress that he doesn't know where the
missing money is. At least one regulator is now
challenging that story.

In explosive testimony during the House
Agriculture Committee hearings on MF Global
last week, CME Group (NYSE:CME  ) Executive
Chairman Terry Duffy said that at roughly 2 a.m.
on the morning MF Global declared bankruptcy,
the company told representatives of the U.S.
Commodity Futures Trading Commission and
CME that "customer money had been transferred
out of segregation to firm accounts."

In similar testimony before the Senate on Dec.
13, Duffy said an agency auditor participated in a
phone call where an MF Global employee
indicated Corzine knew the firm had loaned
customer cash to a European affiliate.

Unnamed sources pointed to missing customer
funds as early as two weeks after the bankruptcy,
but Duffy's testimony represents the first time a
high-level executive had gone on record to state
definitively that MF Global had commingled
accounts. More damaging? The CME knew
about it.

But who knew what, and when, goes far beyond
executives in a hearing. Customers, introducing
brokers, and MF Global traders paint a picture of
warning signs and weak-kneed regulators who
failed to take action in the days, weeks, and
years leading up to MF Global's death. This is a
closer look at what they witnessed.

Rich Ilczyszyn, a former MF Global trader who
now runs iitrader.com, arrived for work at the
Chicago office at 6 a.m. that Halloween morning.
From the outset, he was told that "offset only"
trades were being allowed that day; brokers could
only exit positions on behalf of their clients. An
email from the firm's back office verified the
order.

"It was a huge red flag," Ilczyszyn says. He and
several colleagues attempted to reach the New
York office to get clarification but the phone lines
were jammed. A short time later, the computer
system went down. "Clients couldn't get out of
the market at all," Ilczyszyn says, "which is a
dangerous proposition when you're talking about
leveraged futures positions that can skyrocket or
collapse within minutes."

Until arriving at the office that morning, Ilczyszyn
wasn't especially concerned about the bankruptcy
rumors he'd heard over the weekend. "We'd seen
this sort of thing before."
Ilczyszyn was in a good position to know. He had
been a trader with Lind-Waldock since 2002,
then went to Refco when the latter bought the
first. But then Refco went bankrupt and was
swept up by MF Global. Ilczyszyn was unaffected
because Lind-Waldock remained its own
operation, with its own CEO.
Corzine changed that by putting the MF Global
brand on every business unit. It would be the first
of many changes in the new regime. "I felt the
difference right away," Ilczyszyn says, but he
also never saw any signs that MF Global was
about to implode. "I can't even imagine how
something like this could happen."

Fingers are quick to point at Corzine. His
testimony on Friday, Dec. 8 in front of the House
Committee on Agriculture didn't help his case
much; Corzine gave vague, generic answers that
came just shy of taking Fifth Amendment
protection against self-incrimination.
Yet he also has supporters. Says one former
trader for the principal strategies desk: "Beyond
everything that happened, [Corzine] was the guy
who knew everyone's names, he was walking
around, smiling, saying hello to people ... I mean,
he was like the dear leader."
He says this without irony, not realizing it's a
name most often applied to North Korea's Kim
Jong-il.

For all the praise, there were criticisms of
Corzine as well, many of which centered on his
restructuring of the firm. By all accounts, MF
Global was a company with many silos. Mike
Fitzpatrick, a former MF Global oil trader, notes
this isn't unusual in older commodities firms.
"Cocoa, metal, wheat ... all are their own little
fiefdoms."

A series of mass hirings and firings over the past
two years had only exacerbated the problem. In
2009, MF Global had expanded its fixed income
team and created a new institutional sales team,
both of which brought on a slew of new hires.
The company had three chief financial officers in
four years.

Upon his arrival in March 2010, Corzine
continued to restructure the company and made
several of what multiple insiders describe as
questionable hires. "When I got the chance to
see Corzine and his people, I was not
impressed," says Ilczyszyn. "These were the
same people you always see who were 'good on
paper.'"

For customers, blame isn't as important as
restitution. Steve Meyers, owner of Grainbelt
Commodities, tried to get his business out of MF
Global the Friday before the bankruptcy. "I
ordered a bunch of wires sent out. They got back
to me when it was too late to do anything and
claimed they couldn't find wiring instructions for
my account," he says.

Later, instead of receiving the wire transfers he
had requested, Meyers received approximately
$500,000 in checks by mail, one of which was for
$350,000. "Nobody in their right mind would send
out a check," Meyers says. "In fact, if I had ever
ordered one, they wouldn't have done it."
The checks bounced.

There were other warning signs. In the weeks
leading up to the bankruptcy, MF Global
instituted what appears to have been a
crackdown on margin calls. "I generally don't
have margin calls but when I did, I'd get a call
immediately," Meyers recounts. "They started to
require 100% margin up at all times, even for day
trading. It was a telltale sign that they were either
really cutting back on risk or something's going
on here."

Others say MF Global had been changing for a
while. In 2008 and 2009, Jeff Malec, CEO and
founding partner of Attain Capital, says MF
Global staff became more difficult to work with;
there was more paperwork and red tape with
opening accounts. 

Commission payouts were rarely done correctly.
"We had customer assets in the tens of millions
with MF Global," Malec says. "So, perhaps not
small, but small in comparison to their large
business, and most importantly, made to feel
small." Attain severed its relationship with MF
Global in mid-2009.

But some customers, like Don Miller, didn't notice
anything different about the way MF Global was
operating. Miller dealt specifically with S&P
futures and equities, and maintained an almost
entirely cash account at MF Global. He was one
of the most affected when excess cash was
frozen.

"I've had to shut down my business," he says,
echoing Meyers. "I have no capital to work with."
His daughter's $30,000 tuition bill is due, and
Miller had expected to pull the money from his
business. "I'm scrambling now."

Peter Lamoureux, president of Everest Asset
Management and trustee for unwinding overseas
operations during Refco's scandal-tainted 2005
bankruptcy, states that in the case of MF Global,
small is an illusion. "The MF Global failure might
look small, but we're still talking about billions in
contracts that could have a material impact on
certain types of commerce," he says. "Not
solving this issue is tantamount to inviting
another fiscal crisis."
"Saying MF Global has 'just 30,000 accounts'
misses the point that some accounts could have
served 1,000 clients," Lamoureux says. "We
really don't know the multiplier effect at work
here."

On Friday, Dec. 9, a judge approved a $2.2
billion transfer of funds to MF Global commodities
customers. It was the third such distribution since
the bankruptcy, and brings the total of returned
funds to $4.1 billion. A petition from the early
days of the bankruptcy put MF Global's assets at
$41 billion.

JPMorgan Chase, (NYSE: JPM  ) MF Global's
primary lender, has filed for "super-priority"
creditor status for the $26 million credit line it
extended to MF Global Holdings to fund the
brokerage's bankruptcy. If granted, funds
released in the future would go straight to the
bank.

James Koutoulas is CEO of Typhon Capital and
lead counsel for the Commodity Customer
Coalition, or CCC, which represents more than
8,000 MF Global customers. Koutoulas filed an
objection to JPMorgan's request for super-priority
status on behalf of the group. "We're simply
asserting that if MF Global commingled funds
from customer accounts, or cannot properly
account for them, JPMorgan can't lay claim to
those funds as if they were their own," Koutoulas
says.

Several customers also object to MF Global
Trustee James Giddens' relationship with the
large bank. Giddens, a partner with the law firm
Hughes Hubbard & Reed, admits his firm
represented JPMorgan Chase in 2009 and 2010
but claims the bank's billings accounted for
roughly one-tenth of 1% of the firm's annual
revenue.

Though JPMorgan's connection to MF Global is
increasingly complex, it is but one of several
banks facing lawsuits for its potential role in the
brokerage's collapse. Bank of America (NYSE:
BAC  ) ,Citigroup (NYSE: C  ) , Deutsche Bank
(NYSE: DB  ) , Goldman, Jeffries Group, and the
Royal Bank of Scotland were also named in a
suit alleging the large banks covered up issues
that eventually led to MF Global's bankruptcy.
HSBC (NYSE: HBC  ) also finds itself in a tight
spot, as it's unable to determine whether a
customer or the trustee is the rightful owner of
gold bars and silver contracts it is storing for MF
Global.

Another battle, Miller says, is that the trustee
doesn't seem to understand the nature of the
case he's working. Meyers agrees, and says
working with the trustee's office has been an
endless source of frustration: "The claims forms
they put together don't even make any sense. It's
clear they don't have an understanding of the
futures market."

Giddens isn't the only official under fire, and
rightfully so. A timeline issued by the CFTC
detailing its involvement with the MF Global case
offers platitudes but little in the way of action. 

CFTC "worked with" the trustee, "addressed
questions," "has been in regular contact with,"
"encouraged," etc. Not the language of a
determined regulator demanding customer
restitution.
Perhaps it's to be expected. In the wake of MF
Global's disastrous quarterly earnings on Oct. 25,
CFTC officials spent several days on-site at MF
Global specifically to obtain segregated account
financials. On Oct. 31, when they learned of the
customer funds shortfall, rather than working in
tandem with securities regulators, CFTC kicked
the MF Global bankruptcy to the SEC and
Securities Investor Protection Corporation. 

The SIPC, in turn sought Giddens, who had
worked with the agency seven times previously --
most recently on efforts to unwind Lehman
Brothers. The decision was considered, made,
and implemented in less than three hours, from
2:30 a.m. until 5 a.m., according to the timeline.

As the document explains it, CFTC was "unable"
to initiate a bankruptcy proceeding for a
registered futures clearing merchant such as MF
Global. SIPC therefore had to be involved. What
isn't clear is why CFTC never asked to be
involved in the unwinding and return of futures
and commodity customer assets when Giddens,
the trustee, was being appointed.

Repeated attempts to get clarification from CFTC
officials have thus far been denied. In the
meantime, Commission Chairman Gary Gensler
has recused himself from the agency's
investigation into the MF Global bankruptcy, citing
a potential conflict of interest arising from an
association with Corzine that dates back to their
days working together at Goldman.
Getting back to even
"I'm not special," Meyers says. "I'm not unlike
thousands of brokers who are going through the
same thing. And we have lost faith in the system
because the industry was nowhere for us."

Ilczyszyn understands Meyers' frustrations, and
takes his customers' losses personally. "We're all
trying to help our clients. We're talking about
millions of dollars. It's our reputations on the line.
The reach of this thing is amazing."
Fitzpatrick says, "I was always under the
impression that the clearinghouse would make
everyone whole."
Dean Tofteland, the Minnesota farmer who's still
waiting for tens of thousands of dollars to be
unfrozen, understands the risk inherent in the
business. On balance, he believes business
failure is part of the economy and improves the
overall system.
"A bankruptcy is a bankruptcy," Tofteland says.
"When you fail, that's a fact of life, but there
needs to be an efficient outcome for the
customer."

"I feel that the industry had a moral obligation to
its current and future customers to ensure a
process is put in place to make sure that
customers are made whole," Miller says. "I ask
myself: What's the right thing to do?"

[bduke]

Holy smokes Parsley... you have been busier than the check-outs in Regina
today.... which were crazy.

So the info you have gleaned claims that MFG used the hypothecation of customer
accounts to secure loans at 1% to buy Italian and Spanish bonds which paid 5% at
maturity, and the loans and bond maturities were synchronized.. known as repos.

The 4% spread was easy money for MFG .. so it seemed.

However, the bonds were being downgraded by the rating agencies before
maturity, and the repo contracts required more collateral as the bond ratings
reduced.

BTW Repos are off balance sheet entities... by GAAP... but shouldn't be IMHO.

MFG was quickly running out of funds... known as becoming illiquid.. and
probably used more then the 140% of customer accounts which Cottonpicken
correctly pointed out.

MFG also had margin accounts and proprietary trading which was also requiring
greater margins, especially as their own ratings dropped.

BTW there is disagreement regarding the use of CDS insurance to cover their
trades.

I doubt if they could do the volume they did without hedging via CDS.

Regardless, the rating agencies were also downgrading MFG, which dropped their
share values...i.e. capitalization... and thereby quickly increased their leverage to
about 40%.

Without Eurozone support by the ESEF MFG insolvency was imminent.

So we now wait for forensics to "find the money".

Doesn't pass the smell test.

Cheers... Bill

[bduke]

Oops again Parsley... leverage should be 40 times...
not percent...... Bill