WASHINGTON - After several hours of questioning by members of the House Agriculture Committee, Jon Corzine still could not explain why brokerage house MF Global is missing $1.2 billion in client funds.
"I simply do not know where the money is," Corzine, the Democrat and one-time U.S. senator and governor from New Jersey, said Thursday.
MF Global filed for bankruptcy protection on Oct. 31 after disclosing sizable exposure to derivatives and other investments related to European sovereign debt. Corzine resigned as CEO on Nov. 3 and hadn't spoken publicly until his appearance before the committee.
The missing funds have caused bankruptcy trustees to freeze tens of millions of dollars held in trading accounts for futures trading, impacting thousands of farmers across the country and in Minnesota. Apparently, MF Global moved funds that were suppose to remain segregated into the risky European investments. A bankruptcy official testified Thursday that he is not sure that farmers will ever get all of their money back.
Corzine told committee members he was "stunned" when, on Oct. 30, company officials told him they "could not account for hundreds of millions of dollars of client money." The next day, MF Global declared insolvency in what could be the eighth-largest bankruptcy filing in U.S. history.
"What did you do when you first found out?" asked Rep. Dennis Cardoza (D-Calif.). "Did you call the police? Did you run to the bathroom and throw up?"
Corzine replied that he told his management team, "Let's recheck the figures."
The numbers could never be reconciled. Desperate attempts to sell MF Global failed, and the company went under.
The agriculture committee is responsible for investigating the failure of MF Global because it has jurisdiction over the regulation of commodity futures broker firms, as well as farmers and ranchers who use futures trading as a hedging technique.
He didn't take the Fifth
Embroiled in investigations that could lead to civil and criminal charges, Corzine noted that "many people in my situation would almost certainly invoke their constitutional right to remain silent." He told the committee that he spoke "as a former United States senator who recognizes the importance of congressional oversight."
Government investigators and private, court-appointed bankruptcy officials are trying to determine if MF Global illegally raided farmers' accounts to buy bonds in European countries on the brink of economic collapse or to prop up loans taken by the company.
Corzine, the former head of Goldman Sachs, said he had "no intention to ever authorize the transfer of segregated moneys." But he could not assure the committee that the company never transferred money from segregated accounts in what Corzine called "chaotic" days leading up to the bankruptcy. He described an atmosphere of heated trading with many more transactions than usual taking place.
Asked what lesson he had learned, Corzine said that people might not respond as well in "moments of stress." There were, Crozine said, "a different set of conditions in place."
Terrence Duffy, executive chairman of the CME Group, which was responsible for auditing MF Global, said in the days before the bankruptcy MF Global reported "a $900 million shortfall" in segregated accounts. The company tried to explain this as "an accounting error." In fact, Duffy said, some of the funds appeared to have been transferred out of segregated accounts to broker-dealer funds.
Rep. Collin Peterson, a Minnesota Democrat and the agriculture committee's ranking minority member, challenged Corzine to explain MF Global's risky investment policies. Those policies included buying billions of dollars' worth of bonds issued by Italy, Spain, Portugal and Ireland, all countries struggling to pay their bills. Once it purchased the European bonds, MF Global used them as collateral to borrow money.
"I don't get this mentality on Wall Street about leverage," Peterson told Corzine.
'A significant drag'
By June 30, MF Global had used European debt to collateralize roughly $11.5 billion in loans. The bonds had a "net notional value" of $6.4 billion, according to the Securities and Exchange Commission. Rules did not require the bonds to appear on MF Global's balance sheet. But because of the riskiness of the bonds, lenders asked MF Global to make additional cash payments to cover potential losses in value. Regulators also asked MF Global to increase its on-hand capital.
The bond-to-loans deals were a "significant drag" on the company's ability to generate cash," Corzine said. But he insisted that European debt purchases did not force MF Global to declare bankruptcy.
Corzine blamed MF Global's losses principally on a $119 million asset write-down caused by accounting rules, as well as the repurchase of some notes and restructuring costs. Still, he acknowledged that reports of the foreign bond purchases and regulators' reactions to them caused people to close accounts and sell MF Global stock.
Corzine also conceded that MF Global fired a risk manager who objected to the increased investments in foreign bonds.
Rep. Tim Johnson, R-Ill., was critical of Corzine and Commodity Futures Trading Commission Chairman Gary Gensler for being part of a "Goldman Sachs fraternity" that left farmers, ranchers and small business people "holding the bag."
Corzine said he believed the missing funds might "be in the hands of" borrowers who had "held on to funds that should have been delivered to MF Global." Corzine also suggested that some funds may have been forwarded to the wrong people.
"I'm hopeful efforts will reveal where these moneys are."
Jim Spencer • 202-408-2752