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Catching a Falling Financial Knife

MF Global Implosion: Congressman Grimm Sends a Message

Companies / Credit Crisis 2012 May 03, 2012 - 01:24 PM GMT

By: Janet_Tavakoli

Companies

Best Financial Markets Analysis ArticleIn my previous post, I quoted from MF Global's crisis plan, a document called "Stress Scenario Analysis -- Downgrade Potential Impact on MF Global." Work on that document began in January 2011, although it apparently wasn't completed until around 18 days before the bankruptcy. MF Global worried that it wouldn't have enough cash and liquid assets of its own to meet calls for collateral (margin calls), among other things, in the event of a ratings downgrade.


"Reads Like a Fraud Play-Book"

The document poses a question:

How quickly do we want to send cash back to clients, what is the message if we do not send immediately... -- page 11

I'll get back to the answer to MF Global's question about the message later. To every finance professional I know that has read the entire document, this looks as if MF Global planned to misuse, i.e., to steal clients' money to see it through a period when it anticipated being short of its own funds. One financial professional, who has no economic interest in MF Global, asserted MF Global's crisis plan "read like a fraud play-book."

In the week prior to MF Global's bankruptcy, MF Global did not immediately return clients' funds and the money went to its creditors instead. Unfortunately for MF Global's clients, it collapsed into bankruptcy and never did return missing funds.

That's just one example of the grave issues posed by events throughout 2011 at MF Global. (See my previous posts.)

Investigations or Cover-ups?

The Trustees' handling the bankruptcy looks like theater of the absurd. They've withheld documents and information. In January 2012, The Wall Street Journal reported that the investigations (by trustees, justice, regulators and congress found $1.2 billion to $1.6 billion of customer money "'vaporized' as a result of chaotic trading." But Jill Sommers of the Commodities Futures Trading Commission, the CFTC, testified in December 2011 that it reviewed MF Global's transactions and knew where all the money went.

James Giddens, a Trustee, is trying to pass off MF Global's crime as the result of chaos (perhaps he meant "Kaos," the criminals in Get Smart) or sloppy bookkeeping, and no reasonable finance professional accepts that a firm can both escape prosecution under Sarbanes Oxley and claim this type of "sloppy bookkeeping" -- much less to the tune of a missing $1.2 billion to $1.6 billion.

Giddens claimed the computer systems and employees had trouble keeping up. I can assure Giddens that computers can more than keep up. As for what the employees were doing, note that "errors" did not result in a surfeit of cash being found in customers' accounts. Instead, an estimated $1.2 to $1.6 billion of customers' funds are missing, exactly the kind of outcome one would expect if MF Global's management had engaged in the kind of fraud apparently suggested in its crisis document.

James Giddens' excuses for MF Global sound to me like whitewash. If he genuinely believes he has put forward a reasonable explanation, then he appears to me to be incompetent. Yet his undisclosed fees will probably make your eyes pop out.

Rep. Grimm Calls for Independent Investigator

Jon Corzine, the former CEO of MF Global, is a former governor (D-NJ), a former U.S. senator (D-NJ) with a connection to the Senate Agriculture Committee Chairwoman that "investigated" him, a former CEO of Goldman Sachs with connections to a former colleague on the Fed board and the head of the CFTC, and is a top tier campaign contribution bundler for President Obama.

I've recently met with many Counsels General and a few Ambassadors from countries that are among our trading partners and allies. MF Global's stench is so offensive that they question the viability of our already compromised financial system. They've noted the lack of indictments in the wake of the September 2008 financial meltdown and massive ongoing bailouts. MF Global is another glaring example of our hypocrisy and cronyism and lack of will to restore rule of law to our financial system. The perception is that the needle has moved further in the wrong direction.

Rep. Michael Grimm (R-NY) is a member of the House Financial Services Committee, and he has reportedly circulated a letter in the House asking for an independent investigator and is seeking signatures and support. Obviously appearances are important, and the "investigation" into MF Global so far has every appearance of being broadly compromised. Given our ongoing financial crisis and bailouts, so far it's a shameful performance by Congress, Justice, regulators, and the bankruptcy trustees. The dialogue the financial community has heard so far lacks credibility and basic decency.

I promised I'd answer MF Global's question about "the message if we do not send [back clients' so-called segregated funds] immediately." Even to foreign diplomats the message is that you look like co-conspirators, albeit as yet unindicted.

Endnote: Jane Wollman Rusoff interviewed me for Research Magazine's May cover story, "Finding the Culprits of the Crisis," about the deep monetary connections of Wall Street and Washington and the corrosive effect it has had on the economy and the Republic.

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2012 Copyright Janet Tavakoli- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Catching a Falling Financial Knife