WASHINGTON, Dec. 15- Former MF Global CEO Jon Corzine denied the accusation that he was aware of a $175 million loan made to a European affiliate from segregated customer accounts.
“I did not in any way know about the use of customer funds on any loan or transfer,” Corzine said.
Corzine testified before the House Committee on Financial Services Subcommittee on Oversight and Investigations today. The hearing came two days after CME Group Inc. executive chairman, Terrence Duffy, said an MF Global employee told his colleagues on a conference call that Corzine was aware of using customer funds for foreign loans.
“I don’t know the source of the suggestion,” Corzine said. “Let me be clear, I did not instruct customer funds to be loaned to MF Global or any of the affiliates nor was I told that anyone had done so.”
Corzine insisted that he did not knowingly break any rules regarding customer funds. However, the oversight and very nature of those rules may be the problem, according to some Congress members.
“There may well have been very little here that was technically illegal,” said Rep. Capuano (D-Mass.). “There are still a lot of questions on what was allowed, and should it have been allowed.”
“The last I heard, MF Global was subject to 20 different regulators,” he added. “That’s ridiculous. It just doesn’t work.”
The CME chairman claimed during today’s hearing that a significant change occurred on the Thursday or Friday before the bankruptcy on Oct. 31, because MF Global records previously showed preserved customer accounts.
“We have done things to make sure our system never fails,” Duffy said “Our system has never failed in 75 years. In our opinion, somebody broke the law.”
Rep. Barney Frank (D-Mass.) appeared at today’s hearing to defend the Dodd-Frank Wall Street Reform and Consumer Protection Act, saying that although this MF Global disaster occurred after its adoption, the Act’s regulations are not yet fully implemented by the CFTC.
“Members have said regulators didn’t do good enough job,” Frank said. “But my Republican colleagues consistently resist funding when what we have is a significant lack of funding for the CFTC.”
Rep. Edward Royce (R-Calif.) retorted that Republicans in Congress are not opposed to regulations in general, just incompetent regulation.
“Customer segregation rules have been around in this country for over 75 years,” he said. “They’re not convoluted; they are simple and easy to enforce and yet the CFTC failed.”
The CFTC recently approved a rule that updated CFTC regulation 1.25, which limits the type of securities for which a firm can use customer funds. The regulation allowed customer funds to be used under specific circumstances, but to be simultaneously reimbursed, according to CFTC Commissioner Jill Sommers in previous testimony.
“Securities that qualified as 1.25 eligible could be financed with those client funds,” Corzine said. “There were very strict rules on that and we observed those.”
These types of securities are commonly financed on Wall Street, leading Capuano to question, “if you were doing it and not doing anything wrong, then who else is doing it and what else is at stake?”
Corzine claimed, as he did in the previous two Congressional hearings on the MF Global collapse, that in the week before the firm’s bankruptcy on Oct. 31, he was not aware of any deficits in customer segregated accounts. He emphasized the high number of transactions made during the firm’s last few hours. However, since he accepted a request to resign on Nov. 3, he has no access to MF Global documents or investigations.
“If you were a customer of MF Global would you accept the story that you’re telling that you simply don’t know where the funds are?” asked Rep. Stephen Fincher (R-Tenn.). “Should hardworking farmers and ranchers accept this?”
“I would be frustrated….angry,” Corzine said. “According to what I have heard, they have an almost 24/7 approach to those investigations. I’m sure it is frustrating, but it needs to be resolved with facts, not speculation.”
“In the last days, we sold $1.3 billion worth of commercial paper, all 1.25 eligible,” Corzine said in response to questions about where funds could possibly go astray. “As those were liquidated, that money should have been back into segregated accounts. That would be one of those places I would look very carefully.”
CFTC general counsel, Dan Berkovitz, said the CFTC investigation is in the process of determining whether MF Global performed any illegitimate transactions. However, if the investigations do trace where exactly the missing money went, the significant size of the missing funds make it difficult to ever fully distribute the money to former MF Global customers.
“It seems highly probable that customer funds were transferred out of segregated accounts and comingled with MF’s own funds, probably to meet margin calls on European bond positions,” Posey said. “Assuming that is in fact what happened, it would mean that the missing customer funds will not be found in some overlooked or unreported account somewhere as had been hoped for by many customers. And if the funds were used to back those bond positions, those bonds were sold in mid- November.”
Subcommittee Chairman Randy Neugebauer (R-Texas) ended the day’s hearing by reminding his colleagues that the ultimate product for the Committee to deliver is a published finding, “then ascertain if there’s additional things we can do to ensure nothing like this happens again in the future.”
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