Streetwise Professor

November 14, 2012

For This We Need a Congressional Committee?

Filed under: Clearing,Economics,Exchanges,Politics,Regulation — The Professor @ 8:09 pm

Jon Corzine caused the demise of MF Global.

Poor management decisions by MF Global former CEO Jon Corzine triggered the brokerage firm’s collapse, while lax protections for customer funds contributed to the loss of an estimated $1.6 billion of customer money, congressional investigators have determined.

Evidence unearthed by the House Financial Services Subcommittee on Oversight puts the blame squarely on Corzine, the panel’s chairman, Rep. Randy Neugebauer, said in a preview of the report that will be released on Thursday.

“The responsibility for failing to maintain the systems and controls necessary to protect customer funds rests with Corzine,” the report says. “This failure represents a dereliction of his duty as MF Global’s chairman and CEO.”

Who knew?

Except anyone paying the slightest attention, I mean.  It has been beyond blindingly obvious since even before the implosion of the brokerage that Corzine was gambling for resurrection, and made the decisions that destroyed MF Global.  It was also clear that the firm was a managerial mess, a disaster waiting to happen.

But his “spokesman” says the failure was a collective one for which Corzine is not personally culpable:

A spokesman for Mr. Corzine said that “all of the firm’s significant business decisions…were subject to review, debate and approval” by MF Global’s board. “At all times, Mr. Corzine acted in good faith and did what he believed was necessary to turn around MF Global.”

Because boards are never, ever, ever the creatures of domineering, out of control CEOs.

The spokesman, Steven Goldberg, said that the panel didn’t find any evidence of “intentional wrongdoing” and that Mr. Corzine was working to turn around an already-failing business.

I see.  Taking huge risks-and running roughshod over risk controls to do so-is a turn-around strategy that only unintentionally results in mayhem.  His intentions were good, so everything’s just fine.  Big harm, no foul-because he didn’t mean it.

The fact that MF Global was “already failing” is precisely the motive for Corzine’s rashness.

The Neugebauer panel punts on the most important open question: who was directly responsible for the loss of customer money?  We all know that Corzine was the first mover who set of the chain of events that ultimately led to the looting of MFG’s not-so-segregated customer funds.  We knew that on Halloween, 2011.  But why, pray tell, we don’t know exactly who authorized this looting more than a year and two weeks after the firm’s collapse?

As I’ve written before, Edith O’Brien is essential to answering that question, but Edith O’Brien is silent because prosecutors refuse to grant immunity.

In the scheme of things, she doesn’t matter.  It is highly unlikely that she would have taken it upon herself to throw good customer money after bad Corzine bets.  And even if she did, letting her escape legal punishment would have no effect on the odds of a future recurrence of such a debacle.  It is more likely that someone else higher up in the firm made the call.  Given Corzine’s dominance, he is the most likely candidate for making that call.  Letting him skate would set a bad precedent that would encourage other CEOs to engage in such misconduct.  The balance of costs and benefits is clearly on the side of getting Ms. O’Brien’s testimony.

And indeed, this is Federal Financial Crime Prosecution 101: go for the big fish by catching and releasing the little ones.  The failure to follow this tried-and-true strategy is quite revealing, given the identity of the biggest fish: a made man in the Democratic Party, a former Senator and governor, and fund raiser for Obama.

Because of this pointed refusal to do something that would put Corzine at risk, the MF Global collapse remains the Immaculate Destruction, and the firm remains the Financial House Not Destroyed by Human Hands.  And the House Financial Services Subcommittee on Oversight does nothing to resolve that mystery.

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  1. […] For this we need a Congressional […]

    Pingback by Further reading | FT Alphaville — November 15, 2012 @ 2:25 am

  2. Why did the congress not have Enronesque or WorldCom hearings before the election and drag Corzine through the mud, hopefully burying Obama at the same time? Republican congressmen are pathetic. They are spending pigs like their democratic colleagues, but they lack the Machiavellian spirit of democratic prosecutors. Do they really think Corzine should get a “fair trial”? Corzine’s lack of culpability is an example of everything that is wrong with America, he is wealthy and free while value creators rot without credit or in a ball of red tape. Immaculate destruction for MF Global? no… Obama is the king, and Corzine is just a effective lieutenant who lost a battle. The king is busy covering up many losses, MF Global, Solyndra and now Benghazi.

    Comment by scott — November 15, 2012 @ 2:55 pm

  3. There’s a lot more going on here than is surfacing, Prof.

    I’m normally not a reader of Breitbart News, but they did post an intriguing social-network map of the MF sit back in Aug12:

    “The Government Accountability Institute revealed last month that MF Global was a client of Attorney General Eric Holder and Assistant Attorney General Lanny Breuer’s law firm, Covington & Burling.

    “Breitbart News discovered that the attorney representing MF Global Treasurer Edith O’Brien is Reid Weingarten, Eric Holder’s “best friend” and his own personal attorney. Weingarten and Holder also co-founded a non-profit together, the See Forever Foundation.

    “MF Global’s trustee for the Chapter 11 bankruptcy retained as its general bankruptcy counsel Morrison & Forester, Associate Attorney General Tony West’s old firm.

    “Former FBI Director Louis Freeh is the trustee overseeing MF Global’s bankruptcy. Freeh was a character witness at Holder’s Senate confirmation hearing. Freeh also previously retained Holder to do legal work when he was General Counsel for MBNA America Bank in Wilmington, Delaware.”

    The big question is why are Holder and West, et al, allowing this — and everything connected to the financial crisis — to fade away? It would be worthwhile to see if, in the history of the Republic, there has ever been a more inert AG or DoJ … ever. They do absolutely nothing as the foundations of the markets crumble from beneath their feet. It’s as if they’re protecting everyone with any remote connection to the crisis at any cost.

    Guess it really pays to be a huge fundraiser for this administration, huh.

    Oh, btw, Weingarten is the heaviest of heavy-weights in the D.C. legal milieu.

    Comment by markets.aurelius — November 17, 2012 @ 7:43 am

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