Former U.S. Senator and New Jersey Governor Jon Corzine faced questions from a skeptical congressional panel Thursday over his role in the collapse of MF Global and the disappearance of $1.2 billion from customer accounts.
“I hope you realize that I am as intent on finding this missing money as anyone in the room,” he told lawmakers at a House Agriculture Committee hearing.
Corzine led Goldman Sachs before he embarked on a political career. He took over the leadership of MF Global last year after he lost a re-election bid as governor. He left as chief of MF Global last month as the firm slid into bankruptcy after making risky investments in the sovereign debt of several troubled European countries (see MF Global’s Accounting Helped Cover Risky Bets).
MF Global employed questionable transactions known as repo-to-maturity, using the sovereign debt bonds as collateral for the loans it took out, while earning money from the spread between the rate on the bonds and the rate it paid to the counterparty on the financing.
Securities and Exchange Commission chair Mary Schapiro told Congress last week that the SEC and the Public Company Accounting Oversight Board are investigating the repo-to-maturity model. She noted that the Financial Accounting Standards Board has said that repo-to-maturity is the only type of repurchase agreement that qualifies for off-balance sheet treatment, but they may change that policy in the wake of the MF Global debacle. Corzine seemed uncertain whether money from the customer accounts had been used for the firm’s own proprietary trading in sovereign debt.
Asked whether the firm may have commingled the customer funds with the firm’s proprietary funds, Corzine said he did not know. “There is never any direct intent to commingle those funds,” he said.
“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said in his opening statement. “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.”
During his testimony, Corzine apologized repeatedly for the firm’s failure. “As the chief executive officer of MF Global, I tried to exercise my best judgment on behalf of MF Global’s customers, employees and shareholders,” he said. “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.”
Legislators probed him for answers about his contacts with the Commodity Futures Trading Commission when it was contemplating making changes in Rule 1.25, which outlines the permissible investments and uses for customer funds. They also asked about his contacts with Gary Gensler, a former Goldman Sachs employee who later chaired the CFTC.
He noted that the proposed rule change was the topic of a conference call in which he took part in July, in which 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.”
Corzine noted that the customer funds were generally invested in securities that are allowable under the 1.25 rule or in depositories. However, he explained that since leaving the firm, he did not have access to many of the necessary books and records.
“My expectation is that as we get farther down this path we will get access,” he said. “We have requested my emails, papers, files, things that potentially would shed light and allow me to be more precise in my answers.”
Lawmakers also questioned CFTC commissioner Jill Sommers during the hearing about what it was doing to sort through MF Global’s accounting. “We can’t overemphasize the complexity of these books and records, with tens of thousands of reports,” she said. “It’s very complex.”
James Kobak, lead counsel for the trustee for the liquidation of MF Global, noted that he had hired forensic accountants, but there were hurdles after a bankruptcy when computer vendors may not offer access to the files. “In the early days of these proceedings, one may not have perfect access to the books and records,” he noted. “System vendors may move to turn off access, and it may be a few days before one can get into the systems and records one needs to review.” He has put in a request with the bankruptcy court to get that access and estimated it might take two weeks.
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