[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                   THE COLLAPSE OF MF GLOBAL, PART 1

=======================================================================


                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 15, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-94




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 15, 2011............................................     1
Appendix:
    December 15, 2011............................................    87

                               WITNESSES
                      Thursday, December 15, 2011

Abelow, Bradley, Chief Operating Officer, MF Global..............    11
Baxter, Thomas C., Jr., General Counsel, Federal Reserve Bank of 
  New York.......................................................    59
Berkovitz, Dan M., General Counsel, Commodity Futures Trading 
  Commission (CFTC)..............................................    50
Cook, Robert, Director, Division of Trading and Markets, U.S. 
  Securities and Exchange Commission (SEC).......................    52
Corzine, Hon. Jon S., former Chief Executive Officer, MF Global..    10
Duffy, Terrence A., Executive Chairman, CME Group Inc............    54
Ketchum, Richard G., President, Chairman, and Chief Executive 
  Officer, Financial Industry Regulatory Authority (FINRA).......    55
Kobak, James B., Jr., Chief Counsel to James Giddens, Bankruptcy 
  Trustee for MF Global, Inc.....................................    57

                                APPENDIX

Prepared statements:
    Abelow, Bradley..............................................    88
    Baxter, Thomas C., Jr........................................    91
    Berkovitz, Dan M.............................................   107
    Cook, Robert.................................................   115
    Corzine, Hon. Jon S..........................................   126
    Duffy, Terrence A............................................   148
    Ketchum, Richard G...........................................   153
    Kobak, James B., Jr..........................................   159

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Letter from CME Group dated December 13, 2011................   164
King, Hon. Peter T.:
    Written statement of Tariq Zahir, Managing Member, Tyche 
      Capital Advisors LLC.......................................   184
Abelow, Bradley:
    Written responses to questions submitted by Representative 
      Posey......................................................   185
Corzine, Hon. Jon S.:
    Written responses to questions submitted by Chairman 
      Neugebauer and Representative Posey........................   187
Duffy, Terrence A.:
    Written responses to questions submitted by Representative 
      Posey......................................................   189
Kobak, James B., Jr.:
    Written responses to questions submitted by Representative 
      Posey......................................................   191


                   THE COLLAPSE OF MF GLOBAL, PART 1

                              ----------                              


                      Thursday, December 15, 2011

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 1:08 p.m., in 
room HVC-210, Capitol Visitor Center, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Fitzpatrick, 
King, Pearce, Posey, Hayworth, Renacci, Canseco, Fincher; 
Capuano, Lynch, Baca, Miller of North Carolina, Himes, and 
Carney.
    Ex officio present: Representative Frank.
    Also present: Representatives Hensarling, Royce, Garrett, 
Luetkemeyer, Huizenga, Dold, Grimm; Green and Perlmutter.
    Chairman Neugebauer. The subcommittee will come to order. I 
remind Members that we previously agreed there will be 10 
minutes of opening statements on each side. I ask unanimous 
consent that members who are on the Financial Services 
Committee--but not on the Oversight Subcommittee--who have 
joined us today will be entitled to participate: Mr. 
Hensarling, Mr. Royce, Mr. Garrett, Mr. Luetkemeyer, Mr. 
Huizenga, Mr. Dold, Mr. Grimm, Mr. Green, and Mr. Perlmutter.
    Without objection, it is so ordered.
    What we are going to try to do is do the Members' opening 
statements. We may have an opportunity for the witnesses to 
give their opening statements. But we are told that somewhere 
around 1:30, we may have a series of votes. We think there are 
three or four votes in that series. We were going to try to 
continue the hearing during that period, but it looks like that 
would be difficult to do since there are three or four votes. 
So I think the best thing for the committee to do, unless the 
ranking member has a different idea, is for us to adjourn 
briefly, go make those votes, and then come back.
    I also ask unanimous consent that if any other members of 
the Financial Services Committee arrive, they be allowed to be 
a part of the hearing as well. At this time, I will now 
recognize myself for an opening statement. This is a very 
important hearing. We are here to find out exactly what 
happened at MF Global and with their bankruptcy.
    I think we want to accomplish three things in this hearing. 
Number one, we are very alarmed, and a lot of people are 
alarmed that we still have customers' funds that are missing. 
And that number jumps around anywhere from over $1 billion to a 
number less than that. It is very disturbing. This is very 
historic that these funds, segregated funds--I think it is the 
first time since the law was put in place that segregated funds 
have caused customers to suffer a loss.
    The second thing that we want to look at is, well, was 
there regulatory failure during this process? This is an entity 
that has a number of regulators. And we know that some 
regulators showed early concerns about what was going on in 
this organization. Others were caught by surprise. That is a 
very disturbing fact.
    The third thing that we want to look into is the corporate 
behavior within this organization during this time. What we 
know is that during the period of time where these 
transactions, these positions were put on the books, there were 
people within the organization who were saying that these were 
risky and in fact, if the market went a different way, that 
could actually take this firm down. And in fact, that is 
exactly what happened.
    This is all important because as we look at trying to put 
this puzzle together, what we need to ascertain is where the 
failures were. Because there will be those who will call to 
say, we needed more regulations. I would remind you that we had 
Sarbanes-Oxley and Dodd-Frank in place, and this event actually 
happened anyway. So when we look at the regulatory side, we 
need to see if we had regulators who weren't communicating, 
regulators who weren't doing their job, exactly what was the 
reason that some of these regulators were caught by surprise.
    I think the other thing is internally, when we look inside 
the corporate structure of this company, what we saw was that 
one person had an extreme amount of authority, Mr. Corzine. He 
was the chairman of the board. He was the CEO of the company 
and, according to some people that we have interviewed, one of 
the principal traders of this company. And so, therefore, there 
was no real barrier or firewall for protecting the investors 
and the customers of this company. So I hope that we will have 
a very robust hearing today. And we look forward to hopefully 
finding some of the answers to some of these unanswered 
questions.
    With that, I now yield to the ranking member, Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, I know that the obvious question everyone 
wants to know is, where is the money? I don't expect that we 
will be able to get an answer today or any day. There are other 
people who are in a better position and more intelligent than 
we are to be able to chase that down. But there are an awful 
lot of questions left here for me, as far as I am concerned.
    First of all, I would like to talk about some of the 
conflicting statements that have come out over the last couple 
of days, the last week or so with different hearings. Different 
people have said different things. I just want to know what the 
truth is. I particularly am interested to know whether there is 
anyone else out there who has similar exposure doing either the 
same things or different things. Does anybody know about it? 
And does anybody care? I say that because the more I look into 
this, the more I am coming to a, not a conclusion, but at least 
a suspicion that there may well have been very little here that 
was technically illegal. I have read through the testimony. The 
word ``misuse'' has been used a lot. But to me, that is a legal 
statement, not a statement as to where we want to go, where we 
want to be.
    There are still a lot of questions of what was allowed, 
should it have been allowed? Is it now closed off for future 
people going forward? There are all kinds of things here that I 
think we need to talk about. We need to ask what the ratings 
agencies were doing. We need to ask what the auditors were 
doing, whether we have too many regulators. The last I heard, 
MF Global was subject to 20 different regulators. That is 
ridiculous.
    I am not afraid of regulation, but that can't possibly 
work. It does nothing but allow for forum shopping. It does 
nothing but allow somebody to point fingers at someone: ``It 
wasn't my job; it was his job or her job.'' We have a 
significant degree of self-regulation in this particular case. 
I think it is a fair question of whether self-regulation is 
still applicable in today's world. It was one thing in the 
1880s; it is another thing today. So for me, again, where the 
money is, that is going to be the headlines. That is what 
everybody wants to know. And I don't think we are going to find 
out. But I hope that this is the first of a series of hearings 
over the next several months, because I just can't imagine we 
will be able to get the answers to the real questions I have 
today. But hopefully, we will be able to do so in the future. 
With that, Mr. Chairman, I will yield back.
    Chairman Neugebauer. I thank the gentleman.
    The vice chairman of the subcommittee, Mr. Fitzpatrick, is 
recognized for 2 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    What we are here to examine today is not simply a headline 
in a financial newspaper. The collapse of MF Global was one of 
the largest bankruptcies in our Nation's history. This failure 
has changed lives, impacted businesses, and most certainly will 
cost American jobs.
    I look forward to hearing today's testimony. I also look 
forward to reviewing the actions of the relevant regulatory 
agencies: Did they provide proper oversight? And what could 
they have done to prevent the extensive risk-taking that 
apparently occurred at MF Global, reportedly against the advice 
of its own chief risk officer. Once again, the confidence in 
our financial markets has been shaken.
    But the biggest frustration of all is that these are real 
people who have lost real money. This is something more than a 
loss on a balance sheet. They are farmers. They are regular 
everyday people, including constituents of mine in Bucks 
County, Pennsylvania, who have been harmed. The trustee 
continues to work with regulators on identifying the various 
transfers and trying to locate missing funds. I certainly hope 
that is true. The victims need to be made whole. And anyone who 
acted improperly certainly needs to be punished.
    My hope is that today's hearing helps to ensure that this 
doesn't happen to another family in Bucks County, or in the 
heartland, or anywhere in the United States. People are tired 
of opening their newspapers and reading stories about failures 
on Wall Street and failures of our regulators to identify and 
catch problems. I share the frustration that many Americans 
feel reading stories about a major financial institution 
failing. And I sympathize with the hardworking Americans whose 
lives have been negatively impacted by the flaws in the Federal 
Government's regulatory regime. There was a breakdown in 
corporate leadership, which I think has been acknowledged in 
some of the previous hearings. Clearly, there was also a 
failure in our regulatory structure. Multiple agencies had 
jurisdiction in this case, and there was a lack of 
communication and coordination that might have identified the 
problem sooner. I expect that this hearing will help us to 
continue to bear out the facts of what happened at MF Global, 
and allow us to implement the necessary reforms.
    Finally, Mr. Chairman, I hope that as we identify these 
problems, it helps us to map out a way forward that restores 
confidence in our financial markets, especially as our 
regulatory system undergoes its largest restructuring in over 
80 years. And I look forward to the testimony.
    Thank you for calling the hearing, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now, the ranking member of the full committee, Mr. 
Frank.
    Mr. Frank. Thank you, Mr. Chairman.
    This is an interesting switch. For some time now, I have 
been hearing my Republican colleagues complain about 
overregulation and interference with the private sector. Today, 
we are hearing complaints about underregulation and 
insufficient interference with the private sector.
    The facts are clear that whatever was done incompetently, 
incorrectly, perhaps dishonestly--although no one has 
established that yet--was done in the private sector. The 
complaint is that the public sector didn't do enough 
regulation.
    It is true that the financial reform bill is now in place. 
But it was signed into law in July of 2010. We have not yet 
seen its full implementation. In fact, one very important rule 
that is relevant to trying to deal with the problems here was 
just adopted earlier this month.
    And the way in which it was held up is relevant. The 
Chairman of the Commodity Futures Trading Commission (CFTC), 
Chairman Gensler, who I think does a very good job, couldn't 
get the third vote he needed. This was not the first time. We 
had the same problem with regard to the anti-speculation rule.
    And I say that because this Commission structure, which can 
lead to delay in the adoption of important rules, is exactly 
what my Republican colleagues want to engraft onto the consumer 
bureau, hoping, I believe, for similar results: much less 
effective action.
    But let's go back to the whole question of regulation. 
Members have said, well, the regulators didn't do a good enough 
job. This is partly because the extent to which we can expect 
our regulators to rely on volunteer help is limited. The 
regulators are not the Salvation Army.
    What we have are my Republican colleagues consistently 
resisting the funding that the Commodities Futures Trading 
Commission, the primary regulator--and while people have said 
there were too many regulators, there was clearly a primary 
responsibility on the CFTC. I don't think regulatory diversity 
was the serious problem here. What we have is a significant 
lack of funding for the CFTC. These are complicated matters. 
They require intelligent people to do this.
    The President asked for $308 million, $117 million to be 
funded through a user fee, that is, the President wanted the 
additional money to come from those in the business. But my 
Republican colleagues decided to defend the financial interests 
of those in the business and rejected that so that it all comes 
from the taxpayer. So, first, they make sure that we don't get 
money from the industry, and it all comes from the taxpayer. 
Then, they use the fact that because of them it is all coming 
from the taxpayer as a reason not to fund it adequately because 
they say the taxpayer can't afford it. Although $100 million 
extra from the taxpayers, from people who support the wars in 
Afghanistan, Iraq, Moonshots and everything else, is somewhat 
hard for me to accept too seriously.
    Let me ask you how much time I have left, Mr. Chairman?
    Chairman Neugebauer. The gentleman's time has expired.
    The ranking member of the subcommittee has yielded you 
additional time.
    Mr. Frank. Thank you.
    They are inadequately funded. The Republican Appropriations 
Committee this year voted them $172 million, less than they 
have in the current year. That is for the next fiscal year. The 
Democratic appropriators did help to get it up to $205 million, 
but $55 million is kept from personnel and put only into IT, 
over the objection of the CFTC. So the CFTC has been hampered.
    I also believe that a law that has been in effect only a 
little over a year, not fully a year when some of these events 
started, is not an adequate test of the law. A fully funded 
CFTC, able to adopt regulations, would do the job. And I think 
my Republican colleagues have this dilemma. They are opposed to 
regulation in general. They are now saying, the regulation 
should be better. But I invite people to do a little content 
analysis, in which we are told that these regulators are 
interfering with our private enterprise. You cannot logically 
and sensibly be for regulation in the particular when you have 
opposed regulation in general and in fact have disabled the 
regulators from doing it.
    And then, there is one other question I want to raise, and 
that is the self-regulatory model. Much of this was self-
regulatory model followed. And I have been skeptical of some 
proposals we have had to increase that. I want to talk 
particularly about the CME. And I have a great deal of regard 
for people at the CME. It is a very well-run organization. When 
we drafted the legislation, I was interested in their input. 
But I do want to raise a question as to whether or not there is 
a conflict of interest. The National Association of Securities 
Dealers, which FINRA is the self-regulator for the securities 
part, they spun off the regulatory agency from the people 
running the exchange.
    At CME, no such spinoff has taken place. And I don't mean 
to suggest in the slightest that there was any conscious 
softening by CME. I have too much regard for the people there 
to believe that. But human beings are human beings. And I 
believe one of the things we have to look at is if you are 
going to have an SRO, should it be spun off in the way that 
FINRA was spun off from the National Association of Securities 
Dealers in that exchange? Should we ask for a similar degree of 
spinoff if the CME and people in that area are also going to be 
an SRO?
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman. And now the 
gentleman from California, Mr. Royce, for 1 minute.
    Mr. Royce. Yes. It is not that Republicans are opposed to 
regulation in general.
    We are opposed to incompetent regulation. We are opposed to 
the kind of regulation that would not allow, for example, the 
systemic risk regulation of the GSEs. So what Republicans want 
to see is competent regulation, including over at the CFTC. 
Customer segregation rules have been around in this country for 
75 years. And these rules are not convoluted. They are rather 
easy to understand and to enforce. Yet, the CFTC failed. And 
why this happened is one of the many questions we hope to get 
answered here today.
    Another concern we have is what happened at MF Global in 
terms of the $1.2 billion in missing funds. And on top of that, 
the concern that we have in terms of why the Federal Reserve 
would grant to this organization the status that it was given 
in terms of primary dealer, given the weak credit rating, the 
bleeding of cash, the $137 million that it was lost the year 
prior by the firm, the 80 regulatory actions taken against it 
since 1997. Is the Democrat answer for regulation leading us to 
a situation where political pull and political interference 
intercedes and prevents the rule of law and prevents the right 
kinds of decisions being made by the New York Fed because of 
the connections of people politically? Those are some of the 
questions we want answered.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Baca is recognized.
    Mr. Frank. Would the gentleman yield for 10 seconds?
    Mr. Baca. Yes.
    Mr. Frank. I would just say to the gentleman from 
California, he said that Republicans are for GSE reform. That 
leaves me to question why in the 11 months of this Congress, 
they haven't done it. Of course, the answer may be for the same 
reason they didn't do it in the 12 years before that. My 
Republican colleagues are all for GSE reform when they are in 
the Minority, but when they are in the Majority, somehow they 
can't seem to do it.
    Mr. Royce. Reclaiming my time, you and I have debated this 
issue--
    Mr. Baca. Excuse me, it is my time.
    I had yielded time to him.
    Chairman Neugebauer. I think we need to separate the time 
here.
    Mr. Baca. Getting between the rings here.
    Chairman Neugebauer. Mr. Baca, you are recognized.
    Mr. Baca. Thank you very much, Mr. Chairman, and Ranking 
Member Capuano, for calling this hearing.
    I also want to thank the witness, Governor, Senator, Mr. 
Corzine, for being here.
    I have to say I wish it was under better circumstances, and 
you wish it was under better circumstances. But with $1.2 
million in customer funds completely missing, I think it is 
clear to everyone why we are here today.
    Where is the money? Where did it go and why? We want 
answers. Over the past 5 years, the American people have had 
their share of disappointment with the financial system. There 
has not been enough oversight and accountability. And that is 
why the Frank-Dodd legislation came into existence, to make 
sure that we had a lot more oversight and accountability.
    And it seems like now we want to do away with a lot of the 
accountability and oversight, yet we want to get back to these 
answers. That is why I really believe that we should continue 
to have the oversight and the funding that is there. From the 
near economic collapse to the massive frauds like the one 
orchestrated by Bernie Madoff now to the failure of MF Global, 
it is clear that the need for improvement in oversight and 
accountability still remains.
    And at the heart of it, that is what is so troubling to 
Members of Congress and the American public. Not the regulators 
or executives who dropped the ball in their responsibilities--
and I state not the regulators or the executives who dropped 
the ball in their responsibilities--but that the American 
public, innocent investors are left with the check.
    I do think it is curious that at a time when we are seeing 
a need to increase oversight and enforcement, as displayed in 
this case, some of my colleagues are intent on defunding some 
of our regulators who are charged with these same goals. And it 
is very curious in terms of why is it at a time that we need to 
have more? Today, I am hopeful that we will get the answers.
    This is the third congressional hearing on this matter. And 
I don't think anyone has been overly impressed with what has 
happened at the previous two.
    I am hoping that can change today. Again, I want to thank 
the chairman and the ranking member for calling this hearing. I 
thank the witnesses for being here.
    And I yield back the balance of my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Texas, Mr. Canseco, will be 
recognized for 1\1/2\ minutes.
    Mr. Canseco. Thank you, Mr. Chairman, for calling this 
meeting.
    Companies go bankrupt in the United States every day. And 
while I do not believe it is the role of Congress to examine 
every bankruptcy that occurs in the private sector, the case of 
MF Global is an exception.
    Given that MF Global's bankruptcy is the 8th largest in the 
United States' history, it is hard for Congress to not ask, 
what happened? It is extremely important for this committee to 
examine the consequences for the financial sector of MF 
Global's bankruptcy, as well as the impacts on end users, such 
as farmers and ranchers, who access futures markets in order to 
hedge their risks.
    There are also several questions that MF Global's 
bankruptcy raises that need to be answered. First, MF Global 
received a number of regulatory sanctions throughout the years, 
yet was still allowed to dramatically increase its risks, 
notably in its exposure to European sovereign debt.
    The most important question that needs to be answered, 
however, is what happened to $1.2 billion of client money that 
has gone missing and nobody seems to know what happened to it? 
The first time customers have suffered losses from the improper 
handling of customer funds by a clearing member, the case of MF 
Global shows not just a failure of company management, which I 
would say demonstrates as much concern for its risk as did the 
captain of the Titanic, but also a profound failure in our 
regulatory structure that needs to be addressed.
    Nine years ago, we were told that Sarbanes-Oxley would put 
an end to accounting gimmickry. And last year, we were told 
that Dodd-Frank would lead to regulatory coordination that 
would make our financial system safer and sounder. Despite the 
massive increase in the government's authority, neither of 
these promises held in the case of MF Global. And yet, the 
private sector continues to pay the enormous regulatory tab of 
these two bills. I look forward to hearing from our witnesses 
today just how this breakdown happened and what can be done to 
fix it.
    Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from New York, Mr. Grimm, is 
recognized for 2 minutes.
    Mr. Grimm. Thank you, Chairman Neugebauer.
    I appreciate you calling this meeting. As unfortunate as it 
is, really, to have a need for this hearing, I am eager to hear 
exactly and explicitly how the events that led to the collapse 
of MF Global actually transpired.
    I am anxious to know exactly who was involved in 
commingling funds if that occurred. Who gave the order for such 
approved transfers? Who else was involved in that approval? Who 
actually executed this apparent illegal transfer?
    Moreover, details about and insight into what happened and 
what appears to be an institution that did not have a strong 
internal compliance control, but rather possibly had a CEO who 
controlled most aspects of the firm, ranging from trading 
strategy, essentially betting the farm on European sovereign 
debt, to possibly ignoring chief risk officers' repeated 
warnings, and also to possibly having a controlling influence 
over the board of directors. Therefore, I look forward to 
hearing with some specificity the answers to the questions that 
other committees and the media have not been able to extract. 
Although many reports and investigations--aspects of the 
investigation I have had the opportunity to read, I would 
rather not assume any facts, none of this case, but rather, I 
would like to learn it firsthand, to be educated today as much 
as we can about the entire truth. And the one person that I 
believe can shed as much light on this is our witness today, 
Mr. John Corzine.
    And with that, I yield back the balance of my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlelady from New York, Ms. Hayworth, is 
recognized for 30 seconds.
    Dr. Hayworth. Thank you, Mr. Chairman.
    Governor Corzine, Mr. Abelow, I serve the Hudson Valley of 
New York, and I know former partners at Goldman Sachs who know 
both of you and respect you greatly.
    I don't imagine that anything we will ask at this hearing 
will be new to you. I do have the strong impression that 
someone at MF Global knows what happened. And I hope merely 
that in the fullness of time, you will apply your talents and 
your minds to enlightening us as to how we can prevent 
something like this collapse from ever happening again. And I 
thank you for your testimony today.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from New York, Mr. King, is 
recognized for 1 minute.
    Mr. King. Thank you, Mr. Chairman. Thank you for bringing 
the witnesses here today, for holding this hearing. Senator 
Corzine, it is good to see you again, although it is 
unfortunate that it has to be under these circumstances.
    As my colleague Mr. Grimm said, this hearing today 
addresses the most serious questions both about management and 
about the extent to which we have control, we have 
jurisdiction. The fact that $1.2 billion can be missing and not 
accounted for, the fact that at a time when every taxpayer is 
trying to account for every penny, we can have persons such as 
yourself, Governor Corzine, who made your reputation in this 
field. This is your world, not mine. And yet you not being able 
to account for the money raises the most serious questions. I 
don't know if they will be answered today. They really haven't 
been answered up to now. There have been some differences in 
the testimony.
    But I think it is important to keep our eye also on the 
innocent people out there being hurt. I have a constituent of 
mine, Tariq Zahir, who is the managing member of a commodity 
trading advisory company in my district. Right now, he is 
himself on the verge of losing his business because of the 
actions that were taken by MF Global.
    And Mr. Chairman, I would, if I could just submit this 
statement for the record from my constituent, Mr. Tariq Zahir, 
managing member of Tyche Capital Advisors LLC in New York, to 
put a human face on the suffering this has caused. And 
hopefully, we will find out what happened, why it happened, and 
how to prevent it from ever happening again. With that, I yield 
back.
    Chairman Neugebauer. Without objection, it is so ordered.
    I remind all Members that your opening statements will be 
made a part of the record.
    Without objection, I would like to enter into the record 
materials sent to the committee from the Chicago Mercantile 
Exchange.
    Without objection, it is so ordered.
    Now, I am going to introduce our first panel, the Honorable 
John Corzine, former chief executive officer of MF Global; and 
Mr. Bradley Abelow, chief operating officer, MF Global.
    Gentlemen, I want to remind you that your written 
statements will be made a part of the record. And we ask you to 
summarize that testimony in 5 minutes.
    Before you do that, I would ask both of you to please 
stand. I am going to ask you to raise your right hand.
    [Witnesses sworn.]
    Chairman Neugebauer. Please be seated.
    As I stated, your written statements will be made a part of 
the record.
    You are recognized for 5 minutes. Mr. Corzine, you are 
recognized.

    STATEMENT OF THE HONORABLE JON S. CORZINE, FORMER CHIEF 
                  EXECUTIVE OFFICER, MF GLOBAL

    Mr. Corzine. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and distinguished members of the subcommittee. Let me 
begin with the fact that, as I have said at each of the 
congressional hearings, every day I think about the fact that 
MF Global bankruptcy has been devastating to people's lives.
    Chairman Neugebauer. Mr. Corzine, I am going to interrupt 
you. Is your button on?
    Mr. Corzine. It is, sir.
    Chairman Neugebauer. Okay. You may need to talk just a 
little bit louder.
    Mr. Corzine. I recognize that my concerns about their 
anguish--are you hearing me now, Mr. Chairman?
    Chairman Neugebauer. Yes, sir.
    Mr. Corzine. I recognize that my concerns about the anguish 
of those affected provide no solace for their losses and 
hardship, whether those hurt are customers, employees, or 
investors. As the chief executive officer of MF Global, I truly 
apologize to all those affected.
    As you know, I have provided a written statement to the 
subcommittee, and I have previously testified before the House 
and Senate Committees on Agriculture. I am here to answer your 
questions as well.
    Before I do, I wish to make a few additional points in 
light of my earlier testimony. First, I have been repeatedly 
asked over the last week whether I directed or authorized the 
improper use of customer funds. I have tried to answer those 
questions to the best of my ability.
    But once again, let me be clear, I never gave any 
instruction to misuse customers funds, I never intended anyone 
at MF Global to misuse customer funds, and I don't believe that 
anything I said could reasonably have been interpreted as an 
instruction to misuse customer funds.
    And as I have repeatedly stated, I was stunned on Sunday 
night to learn that there was a problem with many hundreds of 
millions of dollars of customer funds.
    Second, after I testified on Tuesday, Mr. Duffy of the CME 
suggested he recently learned that someone heard someone else 
say that they understood that I knew that customer funds may 
have been improperly loaned to the MF Global affiliate in 
Europe during the last days of the firm's operation. I don't 
know the source of the suggestion.
    Let me be clear: While the last few days of MF Global were 
chaotic, I did not instruct anyone to lend customer funds to MF 
Global or any of its affiliates, nor was I told that anyone had 
done so.
    Third, Mr. Duffy's comments may relate to the overdraft 
situation at JPMorgan Chase, about which I have previously 
testified. I became aware of that situation on the morning of 
Friday, October 28th. At that time, I was trying to sell 
billions of dollars of securities to JPMorgan Chase in order to 
reduce our balance sheet and generate liquidity. JPMorgan Chase 
told me that they would not engage in those transactions until 
overdrafts in London were cleaned up. I contacted the firm's 
back office in Chicago and others, and asked them to resolve 
this issue, which I understood they did.
    Later on Friday, JPMorgan Chase contacted me again and said 
they needed assurances that the transfer of funds did not 
violate CFTC rules. Since I had no personal knowledge of the 
issue, I asked senior people in the back office and the legal 
department to become directly involved in responding to 
JPMorgan Chase's request. The back office in Chicago explicitly 
confirmed to me that the funds were properly transferred. And I 
understood that JPMorgan Chase was satisfied, since they 
executed billions of dollars of trades with MF Global.
    Fourth, while I obviously share many of the same questions 
that you have about what went wrong at MF Global regarding our 
controls on segregated accounts, I did not have such concerns 
prior to Sunday night. During my tenure, we hired many people, 
employed dozens and dozens of highly regarded and highly 
trained professionals in the area of risk, finance, compliance, 
legal, internal audit, and back office operations. We also 
retained prominent outside auditors, consultants, and 
attorneys, to make sure MF Global operated lawfully.
    Indeed, we were subject to reviews, audits, and inspections 
by internal and external auditors, consultants, and regulators. 
To the best of my recollection, none came to me with any major 
issues or concerns about the quality of our people, systems, or 
procedures.
    Finally, before I respond to your questions, I want to 
offer two apologies. First, I want to apologize to the 
subcommittee in advance. Because I have not been able to review 
many relevant records, I cannot be as helpful to the 
subcommittee as I would like to be.
    And second, and frankly more important, I want to again 
apologize to our customers, our employees, and our investors. 
My pain and embarrassment do not blind me to the fact that they 
bear the brunt of the impact of the firm's bankruptcy.
    I look forward to the questions.
    [The prepared statement of Mr. Corzine can be found on page 
126 of the appendix.]
    Chairman Neugebauer. Thank you.
    Now, Mr. Abelow, you are recognized for 5 minutes.

STATEMENT OF BRADLEY ABELOW, CHIEF OPERATING OFFICER, MF GLOBAL

    Mr. Abelow. Thank you, Mr. Chairman, Ranking Member 
Capuano, and members of the subcommittee. The bankruptcy of MF 
Global was a tragedy for our customers, our employees, and our 
shareholders. For many of our customers, including many of your 
constituents, who have still been unable to retrieve funds that 
are rightfully theirs, it has imposed extreme financial 
hardship.
    More than 2,500 employees have already lost or will soon 
lose their jobs through no fault of their own. Shareholders 
have seen the value of their investments reduced to almost 
nothing overnight.
    As the president and chief operating officer of MF Global 
Holdings, I am deeply sorry for the hardship they have all 
endured. While I know nothing I say can ease their pain, I hope 
that through my testimony today, I can help this committee 
understand what happened at MF Global and how we are attempting 
to unwind the company in a manner that provides maximum value 
for all parties.
    I joined MF Global in September of 2010 as the chief 
operating officer. I was given the additional title of 
president in March of 2011 and served in that capacity through 
the bankruptcy filing this October. After the filing, the 
firm's board asked me to remain in my position to work with the 
various trustees and administrators to close the firm's 
operations, which I have attempted to do over the last 6 weeks.
    From my perspective, based on what I was able to observe at 
the time, there were a number of factors that led to MF 
Global's demise. First, it appeared that by mid-October of this 
year, the market had become increasingly concerned with the 
firm's exposure to European sovereign debt.
    Second, beginning in late October, the ratings agencies 
rapidly and repeatedly downgraded the firm's credit ratings.
    Third, the company reported disappointing earnings on 
October 25th.
    The combination of those three events increased concern 
about exposure to European sovereign debt; a series of ratings 
downgrades and disappointing earnings created an extremely 
negative perception in the market, resulting in a large number 
of the firm's trading and financing counterparts pulling away 
from MF, which dramatically reduced the firm's liquidity.
    That reduction in liquidity, a classic run on the bank, led 
MF Global to attempt to sell all or part of the firm in order 
to provide liquidity and protect the interests of our 
employees, shareholders, creditors, and customers.
    When those efforts failed, MF Global filed for bankruptcy 
on October 31st.
    I know this committee is interested in finding out what 
amount of segregated client funds went missing in the final 
days, how it happened, and where those funds are and what might 
eventually be returned to the firm's clients. I am deeply 
troubled by the fact that customer funds are missing. And I can 
assure you that I share your interest and the public's interest 
in finding out exactly what happened.
    At this time, however, I do not know the answers to those 
questions. They are being investigated by the trustees who have 
taken over management of MF Global and have control over its 
records and accounts, and a host of regulatory and 
investigative agencies.
    While I do not know what they have found, I do know that 
all of the parties are working hard to find answers. And I hope 
they are able to get to the bottom of the issue as soon as 
possible.
    Since the company filed for bankruptcy, I have focused 
every day on minimizing the effect on customers and employees. 
There is no way to turn back time and undo all the damage 
caused by the collapse of MF Global. But in the last 6 weeks, I 
have worked day and night to reduce costs and maximize the 
remaining value in the business. Because MF Global was a global 
firm, with operations on exchanges in more than 70 countries, 
there are separate entities with separate systems and books 
around the world. And I have worked to foster cooperation and 
communication among those entities. There are a number of 
different parties now responsible for unwinding the firm's 
operations. It has been an enormous effort to coordinate with 
them to generate the maximum possible recovery of assets. While 
it is only a small measure, given the number of people who have 
lost their jobs, I am also doing whatever I can to help former 
employees find new employment.
    I believe it is important to examine the issues that led to 
MF Global's demise. The firm has attempted to be as open and 
transparent as possible. I hope I can provide some assistance 
to the committee today in its investigation. As I said, there 
is no way to undo the damage that has been done by MF Global's 
bankruptcy. But it is my hope that efforts such as this one to 
gather facts and provide a clear picture of what occurred will 
assist policymakers, regulators, and participants in the 
financial service industry in avoiding such tragic events in 
the future.
    I look forward to answering your questions.
    [The prepared statement of Mr. Abelow can be found on page 
88 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And we will now go to the question-and-answer period.
    Mr. Corzine, you made some efforts today to kind of clarify 
some of your previous testimony and indicated that this will be 
your third time to testify.
    We have been collecting a lot of information and talking to 
a lot of different people. And I want to maybe see if some of 
these facts will help you with your recollection. It appears, 
in the early morning hours of October 31st, MF Global's 
treasurer and the CFO of the global North American operations 
informed the CME that deficiency in customer accounts, not an 
accounting error, but roughly $700 million in customer 
segregated funds had been moved to the broker-dealer side of 
the business to meet the liquidity needs of the firm. Were you 
aware of that transfer?
    Mr. Corzine. I am aware of the phone conversation with 
regulators that I think you are speaking to at roughly 2 or 
2:30 on that morning of the 31st. I am not aware that we used 
the terms that you used.
    I am aware that we made very clear that there was an 
unreconciled imbalance in segregated funds. And frankly, I 
thought the number was higher than the $700 million also.
    Chairman Neugebauer. I think in that same meeting, it was 
represented that a $175 million loan advance was made to the 
global, MF Global UK. Were you aware of that loan?
    Mr. Corzine. Mr. Chairman, I am not aware of that 
conversation as a part of that meeting. And it is possible for 
two things. First of all, we were operating very late in the 
day, and after many, many days. I would also say that I stepped 
in and out of that meeting on a regular basis, both to consult 
with counsel and also speak to the board. So that may have been 
said.
    I don't have a recollection of that.
    Chairman Neugebauer. Yes.
    Two hours later, in a separate conference call, it was 
represented that you knew about the loans from customer 
segregated accounts. The CFO of MF Global's North American 
operations stated in a conference call that, ``Mr. Corzine 
knows about the loan.''
    Mr. Corzine. Mr. Chairman, as I said very clearly in my 
opening remarks, I did not in any way know about the use of 
customer funds on any loan or transfer.
    Chairman Neugebauer. Mr. Corzine, you knew you were having 
liquidity problems. Is that correct?
    Mr. Corzine. We knew we were in a difficult position.
    Chairman Neugebauer. Yes. And did you say, we have to fix 
this? We have to find the money?
    Mr. Corzine. I think I am responding, you are quoting back 
to me something that I said at the time when the CFO of the 
global entity informed I think a group of us, in which Mr. 
Abelow and I were both a party to, that there was an 
unreconciled difference with our segregated accounts.
    Chairman Neugebauer. And so, I think one of the things that 
is perplexing, Mr. Corzine, you have been with Goldman Sachs, 
you have been governor, you have been a Senator, your 
recollection of these events, or your lack of recollection is 
somewhat puzzling to a lot of us. Because you had to know that 
things were not going well and that these positions were 
unraveling. And you, all of a sudden, just find out that there 
is money missing from customers' accounts? You are the CEO of 
the company. You are the chairman of the board. How is it that 
all of a sudden, these people acted out of your instruction to 
make these transfers?
    Mr. Corzine. Mr. Chairman, we had policies, procedures, and 
I believe qualified personnel who had the responsibility to 
make sure that customer funds were protected.
    Chairman Neugebauer. Were these competent people?
    Mr. Corzine. From every element of the information that I 
had gained up to this point, and I think I put that in my oral 
statement, there was no reason that I could think of that they 
weren't competent. I relied upon them.
    Chairman Neugebauer. The thing I am troubled by, Mr. 
Corzine, is when you look at how this company got to this 
point, basically you had a chief risk officer who was telling 
you that these trades could cause a liquidity crisis for this 
firm. You were repeatedly told that. And yet, you disregarded 
that. And in fact, that gentleman was then replaced, and the 
positions doubled from then. So when you talk to me about how 
you had procedures in place to protect the interests of the 
company, yet in many ways there was no firewall built in place 
for the transactions that you were actually the primary trader 
on. So I am having a hard time believing that you were relying 
on a firewall when basically you were operating without a 
firewall.
    Mr. Corzine. Mr. Chairman, the issue with regard to trading 
positions was fully vetted with our board of directors, with 
risk officers, both the one you spoke about and his successor, 
with regard to the nature of the risks that were a part of 
those positions. And they were authorized by the board.
    That is different than the clearance and settlement and 
money transfer aspects, which there are controls that I think, 
in my written testimony, I say I had little experience nor 
little involvement in, in my time at MF Global.
    Chairman Neugebauer. I hear what you are saying, that may 
be different functions, but I think it is indicative of the 
corporate culture that if people were taking money and sending 
it around without your authorization, without--you have the 
chief financial officer, the treasurer of the company, they 
don't know about money being transferred around? That is a 
little perplexing to me.
    Mr. Corzine. Mr. Chairman, I know that we had policies, 
procedures, and people in place.
    Chairman Neugebauer. Obviously, they were not being 
followed or--that is what we are all trying to figure out is if 
you had competent people in place, you had the top people here 
saying that we took money out of customer accounts, and we have 
people saying that you knew that they had taken money out of--
    Mr. Corzine. First of all, as I said in my opening 
statement, I don't know how to respond to something that 
somebody said to somebody else to somebody else who is 
unidentified and I can't speak to.
    I do know that I never authorized anyone to use customer 
funds, to make a loan or a transfer of funds. I never intended 
to. Nor do I think I said anything that could have been 
construed to do that.
    Chairman Neugebauer. I now yield to the ranking member of 
the subcommittee. And after the ranking member's questions, we 
will recess for votes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Corzine, I am going to take you at your word that you 
never gave instructions to misuse customer money, because 
again, that would be somebody else who makes that decision, 
whether that is accurate or not. But I am going to take you at 
your word. My concern is exactly, how did you get to 40 to 1 
leverage in the first place? Whose money was it?
    Mr. Corzine. As I think I have conveyed in my written 
testimony, we were bringing down the leverage.
    Mr. Capuano. But how did you get to 40 to 1?
    Mr. Corzine. First of all, that was the number we were at 
before I joined MF Global. And I think, as you will see if you 
look at the reporting on the quarterly filings, we were closer 
to 30 to 1 or even sometimes in the 20s.
    Mr. Capuano. I know where you were, and I know you were 
coming down, but you were still in the 30 to 1 ratio when you 
left the firm as well. Whose money was it? Somebody had to loan 
this money to you.
    Mr. Corzine. There were many--
    Mr. Capuano. Or to your predecessors.
    Mr. Corzine. There are many different ways that a firm goes 
about financing itself. Probably the most important element 
with regard to how those kinds of leverage numbers can be 
produced is through repurchase agreements.
    Mr. Capuano. There we go. In-house repos for the most part. 
Is that accurate?
    Mr. Corzine. More of it was likely done with repurchase 
agreements from the broker-dealer side of the firm with 
clients, where proprietary positions that the firm had--
    Mr. Capuano. Repos to maturity?
    Mr. Corzine. Not repos to maturity, repos of inventory 
positions that the firm--
    Mr. Capuano. But even for a repo, I guess what I am getting 
at, as I understand, and this really is not just MF Global, as 
I understand it, under the rules of the CFTC a week ago, or 2 
weeks ago, whatever it was, everybody talks about segregated 
funds, that somehow the customers' money is locked away never 
to be touched. Yet under the CFTC rules, for 10 years, or 8\1/
2\ years, that is not true.
    For all intents and purposes, as long as you went through a 
few steps and put a piece of paper on the books that said, ``I 
promise I will pay you back, and here is the piece of 
collateral that I claim to be right,'' you actually could 
legally, under recently passed rules, basically invade those 
funds of customers and not break any rules doing so. Is that an 
unfair statement?
    Mr. Corzine. It is not an unfair statement.
    Mr. Capuano. That is what I wanted to know.
    Mr. Corzine. I would say that--
    Mr. Capuano. I am not suggesting that you were doing 
anything other than what everybody else was doing.
    Mr. Corzine. Rule 1.25 set out by the CFTC designates or 
identifies specific securities--
    Mr. Capuano. And that is what I am suggesting. You were 
doing exactly what 1.25 said you could do. I am not blaming you 
for that. The rules said you could do it. But by doing that, I 
guess the next question is, okay, you do a repo, you move 
customer money out, perfectly legally under then current rules. 
And then, as I understand it, you moved that money to the U.K. 
And the U.K. would then put it on the street for additional 
repurchase. Now, again, I am kind of jumping around here 
because I am trying to follow this as everybody else. And I am 
not suggesting up until this point that anything wrong or 
illegal or against the rules was done. Is that a fair way to 
put this?
    Mr. Corzine. I would be speculating if I tried to say that 
money produced by repo, legitimate 1.25 collateral was moved to 
London. It could very well have just been the financing vehicle 
for the securities themselves.
    Mr. Capuano. It is my understanding the reason it would be 
moved to London, and again, I want to be very clear--I am not 
suggesting you did anything different than anyone else, which I 
am going to get to in a minute, that it goes to London because 
the rules in England are significantly different than here. You 
were allowed to take larger risk. You were allowed to do 
different things with those repos.
    Mr. Corzine. To the best of my recollection, that is not 
what we were doing.
    Mr. Capuano. That is not what you were doing. But I guess, 
let me ask it another way then. To the best of your knowledge, 
were you doing anything differently than most people in your 
business were doing?
    Mr. Corzine. Congressman, that is a very broad question. We 
clearly had repos to maturity in our broker-dealer on European 
sovereigns that seemed to be different than some of the other 
firms. But the kind of repo financing, general repo financing, 
match books, are relatively common--
    Mr. Capuano. Relatively common. Bingo. Hence the problem. 
And by the way, am I wrong to think that the CFTC, for all 
intents and purposes, has just shut down this relatively common 
approach towards borrowing customers' money?
    Mr. Corzine. Congressman, I believe they have narrowed the 
available assets--
    Mr. Capuano. So that you can't use foreign debts and you 
can't use in-house--
    Mr. Corzine. You were not able to use foreign debt before, 
unless there were deposits of foreign currencies--
    Mr. Capuano. One of the reasons why the money would be 
moved offshore because those rules are different there. So I 
guess what I am trying to get at, as I said earlier, if you did 
anything wrong, the criminal investigators will find that, I 
won't. I am trying to find out, and my concern is the things 
that you were doing, that is, you by your own statement said 
nobody intended to misuse anything, again, I am taking you at 
your word on that, the things you were doing are relatively 
common in the industry. The 30-to-1 ratio is relatively common 
in the industry. The regulators didn't find a serious problem 
with it, just a little bit of a problem.
    You are talking more than $6 billion, $16 to $17 billion of 
exposure there, and the regulators told you to put $200 
million, a mere pittance. So you were doing at the time, at 
least as I read it, pretty much what everybody else was doing. 
I guess my question is--which I know you won't be able to 
answer--who else was doing this? And how much is at stake? 
Because if it happened to you and you did nothing wrong, then 
it could happen to anyone tomorrow, and maybe up until this 
point, they are not doing anything wrong. And that is the 
problem to me. I am less interested in one company, though, 
again, you have customers who were seriously hurt, than I am in 
the system, and whether there is a systemic risk. And if one 
company does it, that may not be a systemic risk. But if 
everyone is doing it, and the regulators allow it, and the 
people who are enforcing those regulators think it is normal, 
the credit rating agencies think it is normal, the accountants 
come up with rules to be able to have a loan basically booked 
as a sale, that opens up this whole thing to a massive mess. 
And by the way, the company that you were looking at to buy 
your company at the end, aren't they deeply involved in the 
same types of activities?
    Mr. Corzine. Sir, I could not respond to that. I don't know 
their balance sheet.
    Mr. Capuano. So you were going to sell the company to a 
company you didn't know anything about?
    Mr. Corzine. There would be a period of due diligence after 
there was an agreement if it were a standard merger agreement.
    Mr. Capuano. I think my time has expired.
    Thank you, Mr. Corzine.
    Chairman Neugebauer. Thank you.
    And now, the committee will recess until the votes are 
over. And we will reconvene probably in about 30 minutes.
    [recess]
    Chairman Neugebauer. The committee will come back to order. 
Some people thought this might be somewhat of a heated session, 
and it has turned out to be very hot in here. We apologize for 
that, but we have some folks hopefully working on the air 
conditioning or the temperature as well.
    We will now resume the question-and-answer period. The vice 
chairman of the subcommittee, Mr. Fitzpatrick, is recognized 
for 5 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Mr Corzine, we asked the Federal Reserve Bank of New York 
whether you had ever called them to talk about MF Global, and 
they reported that there were a number of calls made during the 
week of October 24, 2011. For instance, on October 26th, you 
made two calls to the New York Federal Reserve Bank and spoke 
with a Mr. Dudley.
    On October 27th, you made five calls to the New York Fed 
and discussed the situation of MF Global with Mr. Dudley. And 
on the 28th, there were more calls to the New York Fed.
    What was the substance, or what came up during those 
conversations? What was the purpose of making the calls?
    Mr. Corzine. Congressman, first of all, I was called by Mr. 
Dudley, I think, preceding that first series of calls that you 
identified, to keep the Federal Reserve posted on how we saw 
our liquidity position, how our clients were reacting to us, 
and what other steps we were taking, given the stress that was 
being exhibited in the marketplace.
    Mr. Fitzpatrick. So you identify stress in the marketplace, 
is it safe to assume that, at that point in time, you were 
discussing that MF Global was in trouble?
    Mr. Corzine. We weren't discussing that we were in trouble. 
We were discussing how we were managing our liquidity position 
and what kinds of steps we were taking in that context.
    Mr. Fitzpatrick. Was MF Global in trouble at that point?
    Mr. Corzine. In my view, we were having stressful 
conditions in the market, but I thought we were going to be 
able to manage those.
    Mr. Fitzpatrick. On October 24th, your assistant controller 
called the Chicago Mercantile Exchange and told CME that MF 
Global was in trouble, that you were going to be downgraded and 
that you were going to report losses.
    There is a press release--I think it is dated October 25th, 
and it may be on the screens in front of the Members--about 
your second quarter earnings. And in that press report, you 
said, ``Over the course of the past year, we have seen 
opportunities in short-dated European sovereign credit markets 
and built a fully financed letter of maturity portfolio that we 
actively manage. We remain confident that we have the resources 
and expertise to continue to successfully manage these 
exposures to what we believe will be a positive conclusion in 
December of 2012.''
    So my question, Mr. Corzine, is, why do you make a public 
statement about your confidence that MF Global has ``the 
resources and expertise to continue to successfully manage that 
situation,'' when your company previously told the CME that you 
were going to be downgraded, and when the very next day, you 
were in frequent communication with the New York Fed about MF 
Global's position as a going concern?
    Mr. Corzine. Congressman, the conversations with the New 
York Fed were stimulated by a call from them to us to keep them 
posted. So that would not have been in contemplation of this 
statement.
    And while a downgrade is not comforting news for an 
organization, it is not indicative that we were approaching 
bankruptcy or that we were in the kind of stress that I think 
one would have described the situation on by Friday.
    Mr. Fitzpatrick. Your company, in fact, filed a Chapter 11 
bankruptcy on October 31st, 6 days later, correct?
    Mr. Corzine. That is true, sir.
    Mr. Fitzpatrick. Your own securities filings are clear that 
downgrades are a huge risk factor and would lead to margin 
calls and liquidity problems for the organization. And yet, 
knowing that you were going to be downgraded, you still made a 
public statement to the effect that all is well.
    Why did you do this, and how can you reconcile private 
remarks about trouble at MF Global with your public statements 
on October 25th?
    Mr. Corzine. Sir, I think the statement you are giving to 
me to review deals specifically with the repo-to-maturity 
portfolio and that we would be able to manage that, and we 
thought we had the capacity, including the morning of the 25th, 
we were actually liquidating some of those RTM positions.
    Mr. Fitzpatrick. But you thought, on the 25th, you could 
manage successfully to a successful conclusion in December 
2012, and 6 days later, you filed for Chapter 11 bankruptcy?
    Mr. Corzine. We thought we would have to take adjustments 
to deal with the realities of the downgrade and the potential 
reactions of the marketplace, but that was what we were 
alluding to. We had the capacity to manage that. We thought we 
did.
    Mr. Fitzpatrick. So when was the first time the potential 
of a Chapter 11 bankruptcy was discussed with the board at MF 
Global? Was it before October 25th?
    Mr. Corzine. To my recollection, there was no discussion of 
bankruptcy before October 25th.
    Mr. Fitzpatrick. Okay, I have nothing further.
    Thank you.
    Chairman Neugebauer. Mr. Baca is recognized for 5 minutes.
    Mr. Baca. Thank you very much. Mr. Corzine, we all want to 
make sure that someone didn't have an early Christmas, and we 
want to find out where this money went, especially $1.2 
billion, where it has gone.
    You said that you had internal and external controls in 
place to ensure the security of the customer funds. Can you 
elaborate on the functions of these controls?
    Mr. Corzine. There are arrangements, Congressman, in our 
Treasury operations area which have, to the best of my 
knowledge, thresholds of how money can move, size of amounts of 
money that can move. There are cross checks with Treasury 
functions that are responsible for making sure liquidity is in 
place.
    So all of those, starting with the CFO, global level, 
moving to a global treasurer, to regional organizational 
structures where money could move, all of those had checks and 
balances in them to the extent that any of the respective 
internal audits and external audits and reviews of those 
procedures were in place. I had reason to believe the people, 
the policies and procedures would work.
    Mr. Baca. Thank you.
    Were any of these controls approved or signed on by any of 
your regulators?
    Mr. Corzine. I would have to actually have that question 
answered by the regulators. We know that we are subject to 
their periodic review and all of the various venues and self-
regulatory organizations and others periodically check the 
policies and procedures and the actions.
    And to my knowledge, at least up until that evening of 
October 30th, I am not aware of where we had major challenges 
to that by the regulators.
    Mr. Baca. Maybe we need to find out. But to your knowledge, 
is there a common control that other firms have in place?
    Mr. Corzine. Congressman, I am not familiar with other 
firms, and actually, some of the day-to-day specifics is not my 
experience, and detailed knowledge even of our own 
organization, other than the kind of description that I tried 
to give to you.
    Mr. Baca. Okay, to your knowledge, were your counter 
partners engaging in the same purchase agreement with other 
entities similar to MF Global?
    Mr. Corzine. As I responded to the ranking member's 
question, I think repurchase agreements, broadly spoken, are 
fairly common. Repurchase agreements to maturity are relatively 
common for U.S. Treasury securities, agencies, and corporates, 
although I don't have specific knowledge about what other 
companies have. I think the repo-to-maturity concept applied to 
Euro sovereigns is somewhat different.
    Mr. Baca. Okay. In your opinion, had MF Global not run into 
the problems it did, would this level of finance and 
participation have continued, or would there have been changes 
in regulations, criteria or procedures to make sure that 
hopefully we didn't have this. You didn't have a crystal ball, 
but if we had a crystal ball, you probably would have changed 
everything, is that correct?
    Mr. Corzine. Not unlike what I responded to Congressman 
Fitzgerald. We were adjusting our positions given the changing 
perspectives that credit agencies were bringing and the 
availability of credit.
    And so we would have, we were adjusting our balance sheet 
and our off-balance-sheet items to produce greater liquidity 
and less exposure to liquidity calls, if you would, post the 
downgrade.
    Mr. Baca. Okay, thank you, I know that my time is running 
out, so I appreciate your response, thanks.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from New York, Mr. King, is recognized for 5 
minutes.
    Mr. King. Thank you, Mr. Chairman.
    Senator Corzine, as I mentioned earlier, this is really 
your world, not ours. And if you could just go through this 
with me.
    When you came to MF Global, you pretty much dramatically or 
intended to dramatically change its business model, make it 
more like Goldman Sachs, which would inherently involve more 
risk, which there is nothing wrong with, per se, but because of 
the increased risk, what new compliance procedures did you put 
in place when you came to MF Global, and can you tell me how 
many personnel that involved, what the cost was, and how 
closely you followed the implementation of those new compliance 
procedures?
    Mr. Corzine. Congressman, first, I would say that I was not 
trying to recreate Goldman Sachs, although we wanted to be a 
broker-dealer.
    Mr. King. But more like Goldman Sachs than what MF Global 
traditionally had been.
    Mr. Corzine. It was clear, and I think I have tried to 
outline that in quite some detail in my written statement that 
we wanted to be in principal broker dealing activities to serve 
clients, and that there was some proprietary element that we 
would take that typically hadn't been done before, that is 
true.
    And it is actually in that area that the biggest issue, I 
think, developed over a course of time with the initial chief 
risk officer because the experience of that individual had been 
more on the commodities side of the business, or the FCM 
customer credit area, a concern not only of myself but of the 
board. And we wanted to look for someone and did a search, a 
personnel search, to try to find someone who could bring the 
kind of experience.
    Mr. King. But if you are changing the business model to any 
extent, doesn't it require more than just getting a new risk 
officer? Did you put procedures in place yourself? Did you have 
any frame of reference to yourself as to what you wanted in 
place and how that would be done?
    Mr. Corzine. We had to have different compliance 
supervision. We expanded our compliance positions. We actually 
had some serious concerns.
    Mr. King. Can you tell me how many?
    Mr. Corzine. Clearly, we had concerns in Asia.
    Mr. King. Concerns--you said you brought in new personnel, 
I think.
    Mr. Corzine. We brought new personnel to bear on our 
compliance functions.
    Mr. King. Is that hiring new people?
    Mr. Corzine. New people.
    Mr. King. Do you have any idea what the number is?
    Mr. Corzine. I will have trouble giving you the exact 
statistics because I don't--it was numbers, and as I said in my 
oral remark, there were dozens and dozens of people dedicated 
to this. We made changes, upgraded.
    We also installed a new technology--
    Mr. King. But you can't say, you can't say whether it was 
dozens and dozens of new personnel or just reprogram of old 
personnel?
    Mr. Corzine. No, no, there were new people added.
    Mr. King. Do you have any idea what that cost was?
    Mr. Corzine. Congressman, without being able to look at my 
records, I would be speculating.
    Mr. King. Okay, you testified you first became aware of the 
missing customer funds on October 30th, the day before MF 
Global declared bankruptcy. Now had MF Global not been in the 
middle of trying to sell itself to another commodities broker, 
when do you think, as CEO, you would have become aware of the 
missing funds?
    Mr. Corzine. Congressman, we are on premises basically 24/7 
for the previous few days, so I probably, as soon as anyone had 
known that, it would have been elevated because all of this or 
most of this--
    Mr. King. But if this crisis had not come about, would you 
have known--if the crisis did not become as critical as it did, 
would you have any knowledge at all of the funds--
    Mr. Corzine. In the normal course of events, I probably 
would have been informed early on the morning of the 31st.
    Mr. King. Okay. You have repeatedly said that you don't 
know where the missing funds are. If I were a lawyer in a civil 
case, and I was trying to recover those funds for a client, and 
I hired you as an expert witness, what would your expert 
testimony be as to where you think those funds would be, based 
on your years of experience in the business?
    Mr. Corzine. Congressman, I have tried to lay out in my 
written testimony some places where I would look, where 
movements of money in large positions had moved, I think I 
cited $1.3 billion--
    Mr. King. Between October 30th and now, you have not been 
able to narrow it down at all?
    Mr. Corzine. Congressman, I have not had access to any 
records. I have made testimony to what I think I would have at 
least considered, but I don't have any specific knowledge and 
I--
    Mr. King. My time has expired. Basically, I was going to 
say, just based on the knowledge you had, if you could have 
somehow used, the use of expertise and your experience at MF 
Global, to somehow deduce where the funds may be.
    With that, I yield back. My time has expired.
    Chairman Neugebauer. I thank the gentleman.
    With that, Mr. Miller is recognized for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    The transaction that seems to have caused all the trouble 
was the $6.3 billion purchase of European sovereign debt that 
was purchased through the repo market or financed through the 
repo market, is that correct?
    Mr. Corzine. The European sovereign position was?
    Mr. Miller of North Carolina. Yes.
    Mr. Corzine. Financed to maturity through repurchase.
    Mr. Miller of North Carolina. But it was purchased through 
the repo market, the repo--
    Mr. Corzine. The original sovereigns' position, the 
underlying debt of those particular sovereigns, was purchased 
in the market, and there was a repurchase agreement arrived at 
roughly the same time as the purchase of the underlying 
securities, and they were put together. So repo to maturity.
    Mr. Miller of North Carolina. Under the securities, the 
securities were their own collateral, is that correct?
    Mr. Corzine. The securities were collateral for the 
repurchase agreement.
    Mr. Miller of North Carolina. Were there any client assets 
used as collateral for that purchase?
    Mr. Corzine. To my knowledge, none.
    Mr. Miller of North Carolina. The amount of the transaction 
was 5 times your book value, but all of the security was 
actually from the sovereign debt that you were purchasing 
through the repo market?
    Mr. Corzine. There are initial margin requirements for 
financing.
    Mr. Miller of North Carolina. Right.
    Mr. Corzine. And then variation margin periodically that 
you have to put up--
    Mr. Miller of North Carolina. Okay. Your client contracts 
do allow you to use client assets as collateral to purchase 
securities for your own account, though, that is right, isn't 
it?
    Mr. Corzine. Very specific kinds of securities. That is 
what Rule 1.25, Congressman specifies. European sovereigns, 
except in those cases where there are deposits of European 
currencies, are--
    Mr. Miller of North Carolina. Okay. In the last 2 weeks, 
the last month before MF Global's bankruptcy, did you pledge 
any client assets as security for any lending to MF Global?
    Mr. Corzine. Could I ask you to repeat the question? I 
apologize.
    Mr. Miller of North Carolina. In the last days of MF 
Global's existence before bankruptcy, did you use any client 
assets as collateral for any purchases of securities or any 
loans to MF Global?
    Mr. Corzine. Congressman, on an ongoing basis, you would 
use client funds for 1.25 eligible securities, yes.
    Mr. Miller of North Carolina. Okay, were any--let me ask 
the other side, then, I think Mr. Capuano's question got at 
this, did you borrow money from client funds using repo 
transactions? Where client funds had cash, did you use repo 
transactions to put--
    Mr. Corzine. Over the normal course of business, securities 
that qualified as 1.25 eligible could be financed with those 
client funds, but there are very strict rules on that, and we 
observed those.
    Mr. Miller of North Carolina. Okay, were any assets that 
were pledged as collateral liquidated?
    Mr. Corzine. Taken in the last days, this is one of the 
reasons I responded to Congressman King's question, we sold 
$1.3 billion worth of commercial paper, which was 1.25 
eligible, and I certainly--I am not trying to answer his 
question while I am answering yours--but as those were 
liquidated, that money should have been put back into 
segregated accounts, and that would be one of those places that 
I would look very carefully.
    Mr. Miller of North Carolina. Were any of the assets that 
you used for repo transactions with your own clients, as 
allowed by the CFTC rule, assets that you had as collateral for 
other transactions with another party?
    Mr. Corzine. To my recollection, I can't think of any.
    Mr. Miller of North Carolina. Mr. Abelow, can you?
    Mr. Abelow. Congressman, the daily activity of funding the 
firm was not something that fell under my control, and so I am 
not intimately familiar with those structures.
    Mr. Miller of North Carolina. Were any, I am sorry, were 
any of the assets that were in client accounts as part of repo 
transactions liquidated, taken as collateral by anybody?
    Mr. Corzine. To the best of my recollection, any of those 
kinds of transactions were done according to the rules as we 
would have known them, and there was a whole set of people, 
policies, and procedures on how that should have been executed.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from New Mexico, Mr. Pearce, is 
recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Thank you, Mr. Corzine, and Mr. Abelow.
    I am fascinated about the continuing response that, ``Day 
to day is not my responsibility. It is not my experience.''
    In 2003, you offered an amendment to Defense Appropriations 
to hold the Bush Administration accountable, with a comment 
that the credibility gets weakened each day we fail to have a 
full accounting of the facts about what happened, facts such as 
who knew what, that certain information was false. When did 
they know it? Why was it expunged from one Administration's 
speech and not the other.
    And then we hear today, ``Oh, I am sorry, I didn't know 
about the $117 million loan. I didn't know about the window 
dressing, seven quarters consecutively, five in my time.''
    You have a question--window dressing, in a Wall Street 
Journal article, it says that you just lowered debt right 
before the reporting period and then you bounce it back up 
right after so that it looks better. It is not technically 
illegal, but it sure looks better. It is misleading, but it 
looks better, and it is not your day-to-day experience.
    Where did you spend the last--what hotel are you at here in 
the city?
    Mr. Corzine. The Ritz-Carlton.
    Mr. Pearce. At the Ritz-Carlton, did I hear that correctly?
    Mr. Corzine. Yes, sir.
    Mr. Pearce. How many of the 36,000 clients who were 
defrauded have you called personally? One?
    Mr. Corzine. None. I have called none.
    Mr. Pearce. Mr. Abelow, have you called anyone? I see both 
of you have real anxiety and sorrow, sadness, I think is the 
word, for the people who were hurt. We have a guy coming in 
here, with a $600 million net worth. Have you created a 
scholarship for any of the families who have been 
disadvantaged? Just to help them out with maybe their college 
funds? Yes or no?
    Mr. Corzine. Congressman, the answer is no.
    Mr. Pearce. I am sorry?
    Mr. Corzine. The answer is no.
    Mr. Pearce. No.
    Mr. Abelow?
    Mr. Abelow. No, sir.
    Mr. Pearce. ``But we are so sorry. We are desperately 
sorry. We want to apologize, at the beginning and end of the 
transaction.''
    Mr. Corzine, you said that there were no warning signs, and 
yet, I have three warning signs here from Mr. Roseman, saying 
that we were pretty concerned. He even took his concerns to the 
board of directors, did you not--I know it wasn't your day-to-
day responsibility, but did you ever communicate with the board 
of directors? Did they tell you, Mr. Roseman, the risk manager, 
came and said, whoa, we are doing some things that kind of 
frighten me?
    In fact, the testimony that other people have brought was 
that Mr. Roseman may have left the company under duress. Yes, 
he left voluntarily, and he was replaced by a guy who also, as 
risk manager, was raising questions about what was going on, 
and yet I think I heard you say that you had never heard any 
questions about anything that was going on at the company from 
internal sources.
    Mr. Corzine. Congressman, I don't think I said that with 
respect to risk management--
    Mr. Pearce. So you were aware? You were aware Mr. Roseman 
was deeply concerned with risk management things, and you 
didn't have to go through standard risk management practices. 
You could go straight to the board and you could buy and sell 
in your client, in your portfolio, without going through risk 
management, one of the basic things of internal controls.
    Mr. Corzine. Congressman, risk limits were set at the 
board. The risk manager observed those and where we stood 
relative to those and would have reported to the board if we 
broke those limits.
    Mr. Pearce. The risk manager was right on those concerns, 
and somebody else was wrong. Who made the decision that you 
were not going to concern yourselves with the risk manager's 
concerns about where you stood?
    Mr. Corzine. No one was uninterested or wasn't willing to 
listen to the risk manager present his case to the board.
    Mr. Pearce. No, I didn't say no one is disinterested; they 
just ignored his advice.
    We have ``rainmaker,'' I hear the term ``rainmaker'' used a 
lot in your presence. We have rainmakers out in the dusty, 
barren sand hills of New Mexico. They drive around in pickup 
trucks with 55-gallon drums brought out of the oil field, 
cleaned up. Pour a few chemicals in, light them up, create 
rain. It is not much different than what they do on Wall 
Street.
    Thank you, sir.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Florida, Mr. Posey, is 
recognized for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Corzine, who advised you that the transfers were legal?
    Mr. Corzine. The overdrafts that I addressed on Friday, as 
I put in my oral statement, I directed my inquiry to whether 
they were proper to senior people back in our Chicago office.
    Mr. Posey. Would that be Laurie Ferber?
    Mr. Corzine. Ultimately, Laurie Ferber was aware that we 
had questions about this, and I referred that also to her, she 
is our general counsel. But the assurance that I received was 
from our back office people in Chicago.
    Mr. Posey. Can you give me a couple of names?
    Mr. Corzine. The woman that I spoke to was a Ms. Edith 
O'Brien.
    Mr. Posey. But Laurie Ferber agreed it was legal, too?
    Mr. Corzine. Ms. Ferber was looking at the letter that was 
requested by JPMorgan to ensure that we were CFTC-compliant.
    Mr. Posey. And she said you were?
    Mr. Corzine. Once I submitted the letter that I was 
supposed to sign, I did not hear back from Ms. Ferber. As I 
suggested in my opening remarks, I had explicit statements that 
we were using proper funds, both orally and in writing, to the 
best of my knowledge. Since I don't have all my records, I 
don't have that, but I believe I have it in writing. And I 
conveyed that to JPMorgan. And JPMorgan asked later, at a later 
period of time, for confirmation that we were using CFTC 
compliant funds, and that is when I spoke with Ms. Ferber.
    Mr. Posey. And what was her response?
    Mr. Corzine. She took the issue, and was reviewing the 
letter, and I never heard anything back about it.
    Mr. Posey. So you asked if it was legal to do this, and she 
never answered you?
    Mr. Corzine. I had confirmation from the people that we 
relied upon--
    Mr. Posey. Back office people.
    Mr. Corzine. People in the Treasury function that we relied 
upon.
    Mr. Posey. Okay. Have any of your assets or your passport 
been frozen?
    Mr. Corzine. No, sir.
    Mr. Posey. Do you agree with the assertion of the Wall 
Street Journal that JPMorgan Chase and Soros benefited from the 
fall of MF Global?
    Mr. Corzine. I only read the article, and I have no idea.
    Mr. Posey. You have no idea?
    Mr. Corzine. No.
    Mr. Posey. Did you sell them stuff? Do they generally make 
money when you sell them stuff or they broker stuff for you?
    Mr. Corzine. I was not involved in those sales.
    Mr. Posey. Okay. Do you think there is anything in Dodd-
Frank that would have prevented this?
    Mr. Corzine. I am really not in a position to speculate 
about that.
    Mr. Posey. Do you have an opinion, just a personal opinion? 
I am just curious. We have heard a lot of talk here. If we had 
had Dodd-Frank, this would have never happened, and I don't see 
it. I just wonder if you saw anything in Dodd-Frank that would 
have stopped this from happening? This is bad behavior. 
Somebody basically stole essentially out of an escrow account. 
You can have all the regulation in the world if somebody is 
going to steal somebody else's money--but unless the regulators 
catch you, if they get off their bus and do their job and catch 
you, it is not going to make any difference.
    The only way this bad behavior, I am getting on another 
subject, but this is going to be changed by putting people in 
prison eventually.
    Mr. Abelow, are you still employed by MF Global?
    Mr. Abelow. I am employed by MF Global Holdings, the 
holding company, not MF Global Inc., the entity in which--the 
regulated entity.
    Mr. Posey. Were you ever employed by the regulated entity?
    Mr. Abelow. I was employed by MF Global Holdings, of which 
the regulated entity was a subsidiary.
    Mr. Posey. So is that a yes?
    Mr. Abelow. I believe that I was employed by MF Global 
Holdings as a technical matter. That is who I got my paycheck 
from, sir.
    Mr. Posey. What do you think should be done differently? If 
we could roll back the clock, what do you think could be done 
differently that would prohibit this from happening?
    Mr. Abelow. Congressman, I am waiting to see the results of 
the investigation, and I assume that when we do and when you 
do, that you, together with regulators, will be better informed 
and able to take a view as to what can be done.
    At the moment, absent the information as to what happened, 
I am not sure how to answer the question.
    Mr. Posey. Mr. Corzine, same question.
    Mr. Corzine. I think this will be fact-dependent, 
Congressman.
    Mr. Posey. Thank you.
    My time has expired. Thank you, Mr. Chairman.
    Mr. Chairman, I yield back. My time has expired.
    Chairman Neugebauer. Thank you, just a quick follow up.
    Mr. Corzine, did you say you signed the letter for JPMorgan 
before it was verified that those funds were, and you just told 
them to go check it out?
    Mr. Corzine. Mr. Chairman, I did not sign the letter.
    Chairman Neugebauer. Okay, thank you.
    I now recognize the gentleman from Ohio, Mr. Renacci, for 5 
minutes.
    Mr. Renacci. Thank you, Mr. Chairman.
    Mr. Corzine, MF Global had a history of compliance, 
failures, internal control problems, incomplete disclosures. 
With all of that, when you took over, did you make any effort 
to look at enhancing internal controls in the company?
    Mr. Corzine. As I responded, I think, to Mr. King or 
Congressman King, we had broadened out our compliance 
activities. We brought in consultants.
    Mr. Renacci. So you were trying to enhance internal 
controls?
    Mr. Corzine. Yes.
    Mr. Renacci. So you do understand internal controls?
    Mr. Corzine. As a CEO, you have to sign the Sarbanes-Oxley 
verification that you have policies and procedures and people 
in place.
    Mr. Renacci. And you have to understand internal controls 
to sign that; correct?
    Mr. Corzine. You have to have the assurance that you can 
rely on those things that happen.
    Mr. Renacci. Right.
    Mr. Corzine. And you need to be able to have those tested 
by auditors and others.
    Mr. Renacci. I agree, so you have to be able to understand 
it to sign it; otherwise, you wouldn't be able to sign that, 
correct?
    Mr. Corzine. You do, but you can't be as detailed, as 
experienced and in the execution of that as someone who might 
have a specialty on some of those areas.
    Mr. Renacci. I understand. As part of your internal control 
procedures, who made the decision to allow you complete 
authority over trades which only the board of directors could 
block? That is a pretty significant internal control issue.
    Mr. Corzine. Any of the trades that I think you are 
speaking to, the European sovereign trades that were repo-ed to 
maturity, were in the context of limits established after 
debate and discussion at the boards.
    Mr. Renacci. But you do agree the board was the only one, 
the board of which you were chairman, was the only one, the 
group that could block your trades?
    Mr. Corzine. They certainly could have blocked them up to 
the limits unless we got authority to go beyond those limits, 
which we did.
    Mr. Renacci. But they were the only ones that could block 
it, yes or no? There was nobody in the company who could block 
those trades. The board could block them.
    Mr. Corzine. The board could block them, yes, sir.
    Mr. Renacci. Right. So no matter what anybody said below 
that--and I go back to Mr. Pearce's questions for you, Mr. 
Roseman raised serious concerns. Mr. Stockman raised serious 
concerns--and it is another interesting thing on internal 
controls, when Mr. Stockman took over, someone took away his 
authority to determine the liquidated risks of trade you were 
making. Who did that, was that you, or was that the board, or 
was that the board based on your recommendation?
    Mr. Corzine. Congressman, I am not aware of anyone taking 
away authority from Mr. Stockman and, in fact, I would think 
that we broadened his authorities.
    Mr. Renacci. But clearly, he had no authority to stop you 
from making trades because everything rolled back up to the 
board. He could, when he went to the board, they didn't really, 
it was up to the board to stop you from making some of these 
trades?
    Mr. Corzine. Mr. Stockman, like Mr. Roseman, had access to 
the board, reported to the board, could have and did have 
individual meetings with the board members, and had full 
ability to state his position, his concerns, his comfort.
    Mr. Renacci. Comfort, right. Of course, you were chairman 
of the board, so I think I read somewhere at one point in time, 
you told the board you were considering leaving because they 
were just coming down on--
    Mr. Corzine. Congressman, to my recollection, that is not 
the fact.
    Mr. Renacci. Okay. You indicated earlier that these types 
of situations were consistent with other companies similar, and 
would you say that type of internal control was similar, that 
other companies similar, similar, would only have the board of 
directors be able to overrule them? Yes or no?
    Mr. Corzine. Congressman, I don't really want to speculate, 
and I don't really know.
    Mr. Renacci. Okay. We talked about the significance of 
internal controls of financial reporting given through the 
Sarbanes-Oxley certifications. Did you sign those on March 
31st, June 30th, and September 30th?
    Mr. Corzine. I signed them on, actually, I think the 
timeframe is later than that when the---
    Mr. Renacci. Right.
    Mr. Corzine. When the auditors came back with--
    Mr. Renacci. Did you believe that MF Global had sufficient 
internal controls over financial reporting given the breach of 
segregated funds that occurred subsequent to that? Did you 
believe that when you signed those?
    Mr. Corzine. When I signed those agreements or those 
certifications, I believed we had the policy and procedures and 
people in place. And, as I have said, there are no significant 
notices, either from regulators or others, that I would notice 
with regard to those controls.
    Mr. Renacci. So you believe that you were being truthful 
with your auditors when you signed the Sarbanes-Oxley 
certifications and assured investors and regulators of the 
adequacy of internal controls over financial reporting. You 
believed that when you signed them?
    Mr. Corzine. Yes, sir.
    Mr. Renacci. Thank you, my time is up.
    Chairman Neugebauer. I thank the gentleman. And now the 
gentleman from Texas, Mr. Canseco.
    Mr. Canseco. Thank you, Mr. Chairman.
    Thank you, Mr. Corzine, for being here. Back in July of 
2002, while you were serving in the Senate, you made a 
statement regarding financial regulation, and you said, ``We 
need real reform, and we need it now. We do not need the 
rhetoric. We need to be able to restore the confidence the 
American people want to see, move away from the era of Enron 
and WorldCom and get to an era where we have markets that are 
balanced and fair, where they have the checks and balances in 
them to give people the confidence that when they make an 
investment, that investment is what they thought. It is when 
they entered into it.''
    Unfortunately, the bill which you were then speaking in 
strong support of was the Sarbanes-Oxley bill, which has cost 
the private sector billions of dollars to comply with and is a 
direct cause of the lack of public offerings in recent years.
    Yet even with all the provisions of Sarbanes-Oxley, $1.2 
billion of customer money could supposedly just vanish into 
thin air at MF Global. A lot of this money belongs to 
hardworking farmers and ranchers across the country who trusted 
MF Global and the customer segregation laws that have been in 
place for years.
    The farmers and ranchers whose assets are frozen, or lost, 
are no different than the rank and file workers at Enron who 
lost some or all of their retirement savings. They are all 
innocent victims of failed corporate management and failed 
regulation, and certainly, the investments that customers made 
in MF Global aren't what they thought they were.
    So, a question to you, you had specific responsibilities in 
your role as mandated by Sarbanes-Oxley law. Yet, according to 
your testimony, you seem to have made little or no effort to 
acquaint yourself with the firm's primary business. Were you 
failing as a CEO to perform the due diligence as required by 
law?
    Mr. Corzine. Congressman, we have a whole staff of 
individuals and checks that are performed to make sure that 
senior management has knowledge of deficiencies and elements of 
our control systems that would have been reported, not only to 
me, but to the audit committee before we would sign those 
Sarbanes-Oxley certifications.
    Mr. Canseco. Let me ask you this, because I have limited 
time here. You as CEO have a responsibility to monitor the 
internal controls at MF Global. Who at the company was 
responsible for ensuring that customer accounts were 
segregated?
    Mr. Corzine. There was a team of people in our Chicago 
office, led by the North American CFO and people on that staff 
who had the oversight of the functions of the segregated 
accounts.
    Mr. Canseco. And you know who they are?
    Mr. Corzine. I do.
    Mr. Canseco. Let me move on a little bit here to a 
different line of questioning. MF Global's Web site states, 
``MF Global is a well capitalized and diversified intermediary 
with a strong, conservatively managed balance sheet. We take 
measured principal risk to support client activity and offer 
financing to facilitate client transactions. Because of our 
financial strength and comprehensive risk management, clients 
can have confidence that they are trading with a strong 
counterparty.''
    So, please tell us, Mr. Corzine, in your own words, what 
the following terms mean. First, ``well capitalized.''
    Mr. Corzine. ``Well capitalized'' means that we were 
meeting our regulatory requirements, that we had capital that 
would allow us to believe that our positions were sustainable 
for the timeframe that we were to hold them.
    Mr. Canseco. Second, ``diversified intermediary.''
    Mr. Corzine. ``Diversified'' would mean that we were in 
more than one business, that we had different ways that we 
could approach producing revenues.
    Mr. Canseco. Third, ``strong, conservatively managed 
balance sheet.''
    Mr. Corzine. As you know, we were, or as I suggested in my 
written statement, that we were actively reducing the leverage, 
and we were in the midst of looking for a strategic sale or 
partnership with regard to our FCM so that it would come down 
even more dramatically.
    Mr. Canseco. All right, and finally, ``measured principal 
risk.''
    Mr. Corzine. The measured principal risk has to do with how 
we look, how, generally, people are required to report their 
risk, its valuation at risk, and those numbers were really 
quite small by comparison of any of our competitors and didn't 
grow under my watch.
    Mr. Canseco. All right. I see that my time is just about to 
expire, so let me ask you this, where were Sarbanes-Oxley and 
Dodd-Frank in preventing the collapse of MF Global? Could they 
have prevented it?
    Mr. Corzine. I don't know that I can answer that question, 
Congressman.
    Mr. Canseco. Do you have an opinion?
    Mr. Corzine. I believe that when you have internal 
controls, and they work the way they are supposed to, you have 
the right people, policies, and procedures in place, which we 
believe we did, they should have prevented the kind of problem 
that we had.
    Mr. Canseco. So, obviously, Dodd-Frank and Sarbanes-Oxley 
couldn't help you and couldn't have helped MF Global survive. 
Thank you very much, and I yield back the balance of my time.
    Chairman Neugebauer. I thank the gentleman, and now the 
gentleman from Colorado, Mr. Perlmutter, is recognized for 5 
minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman, and I guess that sort 
of gets to where I want to start. There is an old adage: 
Desperate people do desperate things, desperate companies do 
desperate things.
    So, in these final days, just some basic questions and 
maybe you have answered these, who were your top three secured 
creditors, say a week in advance of the bankruptcy? And I am 
asking both gentlemen.
    Mr. Corzine. Secured creditors, probably JPMorgan, which 
ran a secured credit facility for us.
    Mr. Perlmutter. Okay.
    Mr. Corzine. And there were a number of banks in that, most 
of the major financial institutions.
    Mr. Perlmutter. And did they cash their collateral in that 
last week?
    Mr. Corzine. I have no knowledge on whether they did or 
they didn't. They continued to allow us to fund against that 
secured facility.
    Mr. Perlmutter. I guess my question is, over the course of 
the last week, how did the company get so upside down?
    Mr. Corzine. I think, as I have stated in my written 
testimony, the downgrade, the reported loss and the concern 
that was expressed by the rating agencies, in particular, with 
regard to this sovereign position created a fairly negative 
environment for investors and people who were making judgments 
about the company.
    Mr. Perlmutter. Look, there are going to be plenty of 
courts to look at this, from the bankruptcy court to who knows 
what else. So, I am with Mr. Capuano. I am trying to figure 
out, in times where there really is a run on the bank, where 
there really is desperation, ordinary protocols sometimes go 
out the door.
    Now, whether there needs to be a third party who holds the 
money in trust, kind of slows down the whole process in good 
times, but definitely slows it down in bad times, is that 
something that would have helped here to protect folks who seem 
to have lost their investment?
    Mr. Corzine. If segregated accounts were held outside, it 
might have. I don't want to speculate on that. The depositories 
now hold some of the customer funds, and they are already held 
outside the firm. Some are; some aren't.
    Mr. Perlmutter. Mr. Canseco's questions, though, he was 
focusing on Sarbanes-Oxley, he was focusing on Dodd-Frank, we 
have the 33 Act, we have the 44 Act, we have all sorts of 
things, but the thing we don't have is some specific 
requirement, in my opinion, and maybe I am wrong, that there be 
a segregated account.
    That may be too harsh on the system, and it won't operate 
very efficiently, but in this instance, it would have 
potentially blocked or been a firewall to slow down the 
movement of the money. And so I am just trying to figure out, 
as Mr. Capuano was, how could we have prevented this, because 
in those last days it was, in your word, ``chaotic.''
    Mr. Corzine. Congressman, until the facts are peeled back 
on literally thousands of transactions, I am moving into a 
speculative forum, and I could be misleading.
    Mr. Perlmutter. Okay. Mr. Abelow, do you have any response 
to that, because we are here as legislators. I am not here to 
judge what happened.
    I am just trying to hear--a lot of people lost a lot of 
money and I am trying to figure out, is there a way that could 
be--we could deal with it in terms of the law to stop this from 
happening?
    Mr. Abelow. Congressman, at the risk of repeating myself 
and the Governor, I think that we will, in the fullness of 
time, when we understand exactly what happened, we will be, you 
will be and the regulators will be better positioned to 
identify what additional safeguards, if any, would prevent 
whatever happened from happening again.
    Mr. Perlmutter. Okay.
    Thank you, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentlewoman from New York, Ms. Hayworth, is 
recognized for 5 minutes.
    Dr. Hayworth. Governor Corzine, on page 18 of your written 
testimony, you state you were not an expert on the complicated 
rules and regulations governing the various operating 
businesses that comprise MF Global, that you had little 
experience or expertise in those operational aspects of the 
business.
    Now, on page 4, when you are describing your initial tenure 
at MF Global, you do say that you initiated, obviously, you had 
a strategic review with the Boston Consulting Group, very well 
respected, and you looked into obviously a range of businesses 
and determined that you would take MF Global from being a 
fairly stodgy 230-year-old brokerage firm and 3-to-5-year plan 
that you would ultimately convert it into an investment bank, 
which obviously carries more risk but more potential 
profitability, one presumes. That is why you would have done 
that, although I don't mean to impute motives.
    But if it had remained simply a broker, obviously, 
presumably, we wouldn't all be here.
    But I am just, you can understand the discrepancy, and you 
can understand from your, again--I have spoken with former 
colleagues of yours who have the highest respect for your 
gifts. It is hard to imagine. And we have found ourselves in 
this sort of situation, unfortunately, all too frequently in 
the recent past, where there is a highly talented man or woman 
who experiences or leads an organization that unfortunately 
comes to grief in one way or another, and then there is a 
contention of ignorance.
    So, I am wondering how we resolve those things, and how can 
any awareness in that way or any perception in that way help us 
to prevent this kind of event from happening in the future?
    Mr. Corzine. It is a challenging question, Congresswoman. I 
believe that the vigorous application of the checks and 
balances that come from things like Sarbanes-Oxley's review of 
internal controls are a positive ingredient to bring some sense 
of security to those that look at organizations externally, 
certainly give one a greater sense that the financial numbers 
are what they are supposed to be.
    It is absolutely essential that leaders within an 
organization set a culture that people attend to those terms 
and conditions of operating within the spirit and letter of the 
law. Until that evening, as it relates to customer funds, I 
believed we were doing that.
    Dr. Hayworth. Do you think, sir, that there might have been 
excessive deference toward your position given that you had had 
a rather stellar career, to say the least?
    Mr. Corzine. Sometimes, the kind of career that I had had 
might not bring deference.
    Dr. Hayworth. I assume you are talking about the political 
side. Don't forget your audience.
    Mr. Corzine. But I leave it to your conclusion. It is a 
risk when someone new comes into an organization.
    Dr. Hayworth. I wonder, as I listen, because we try to come 
up with--the 111th Congress passed a massive law that was meant 
to try prevent tragedy, and yet we find ourselves at risk of 
suffocating the very mechanisms that create growth and jobs.
    And what I think we need is better tools that will allow 
the effective application of the laws that existed prior to 
Dodd-Frank. Would you say better tools might help us, better 
analytics?
    Mr. Corzine. Better analytics always help. More 
information, more transparency, in my view, are positive, and 
certainly, better analytics are important.
    Dr. Hayworth. I yield back.
    Mr. Chairman, thank you.
    Chairman Neugebauer. I thank the gentlewoman.
    And now, the gentleman from Tennessee, Mr. Fincher, is 
recognized for 5 minutes.
    Mr. Fincher. Thank you, Mr. Chairman.
    Thank you, Senator, Governor for coming here today.
    I represent a very heavily agricultural district back in 
Tennessee. A lot of constituents had money tied up in MF 
Global, and they are calling me and asking me, what happened? 
What is going on? If you were a customer of MF Global--I have 
just a couple of statements, a couple of questions, and then I 
will let you comment. If you were a customer of MF Global, 
would you accept the story that you are telling that you simply 
don't know where the funds are, that $1.2 billion is 
unaccounted for, and the CEO and the COO and the CFO of this 
firm simply don't know where the money is and can't help find 
it, because they quit and don't have access to the records? 
Should hardworking farmers and ranchers who have their money 
tied up accept this, and would you?
    Mr. Corzine. If I were one of those customers, I would be 
very frustrated and angry. I would expect that we will get the 
answers to this as the multiple investigations that are looking 
at all of the facts lay those out. And people, according to 
what I have heard, have almost a 24/7 approach to those 
investigations. I am sure it is frustrating, but it needs to be 
resolved with facts, not speculation.
    Mr. Fincher. Why did you resign?
    Mr. Corzine. I was asked to resign by implication.
    Mr. Fincher. You repeatedly state that you are unable to 
answer specific questions because you do not have access to the 
books. Why not help the investigators find this money? And can 
you point to any instances where you have assisted in the 
ongoing search for these funds after you left?
    Mr. Corzine. I have not, other than my testimony, which I 
am sure has been reviewed.
    Mr. Fincher. Who had the right to approve transfer of money 
between firm accounts?
    Mr. Corzine. As I said in my testimony, it was in our 
Treasury function. And there are checks and balances on that. 
There are Treasury operations where people physically move 
securities and cash, and there are people who do the financing 
part, operate and interface with banks in the repurchase 
markets and other things.
    Mr. Fincher. Would it be safe to say that maybe the reason, 
and just in layman's terms, if you will, that you were just, MF 
Global was just shorting the market and couldn't cover the 
margins, and that is why the money is gone?
    Mr. Corzine. Congressman, to my recollection, on the 
evening of October 27th, there were substantial hundreds of 
millions of dollars in cash and free collateral that should 
have allowed us to meet margin calls.
    Mr. Fincher. Do you think any laws have been broken here?
    Mr. Corzine. Congressman, I would be speculating, because I 
don't know the facts. And I think it is fact-dependent.
    Mr. Abelow. I do not know, sir. I have not--I don't have 
access to the ongoing investigations and what they have 
uncovered to date.
    Mr. Fincher. It is just really, to commonsense business 
people, farmers who take risks--and I am a farmer--every day 
trying to deal with all sorts of variables, to have some 
stability and presence knowing that their capital is safe, and 
then to have these hearings--and I have watched the Senate and 
then the House Agriculture Committees, and then today--and it 
just, no answers, it is just beating around the bush so to 
speak, as we say back in Tennessee, no clarity, no one knows 
anything, everybody has done something, and it is really a 
shame. I am sure we will get to the bottom of it; someone will. 
But I hope no laws have been broken here, because this is 
really a disservice to a lot of American farmers. Thank you, 
gentlemen.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentleman from California, Mr. Royce, is 
recognized for 5 minutes.
    Mr. Royce. Thank you. Mr. Corzine, you took the helm of MF 
Global in March of 2010. But a couple of months prior to that, 
you lobbied or argued before the New York Fed on behalf of MF 
Global, seeking to become a primary dealer. It has been noted 
that you believed that this status was a critical part in 
shifting MF Global toward a Goldman-like institution, a mini-
Goldman, I think was the wording. Can you explain why that was 
the case?
    Mr. Corzine. Congressman, I did join MF Global in the last 
few days of March of 2010. And I did not, previous to that 
time, meet with the Federal Reserve on MF Global or on any 
matter, or anyone else with regard to an MF Global matter.
    Mr. Royce. So the reports about joining the select club as 
primary dealers, you did not play a role in that, you did not 
envision that as an advantage and suggest that and try to--go 
ahead, sir.
    Mr. Corzine. After I joined MF Global, I certainly 
continued the pursuit, which had actually begun I think as much 
as a year and a quarter before I had joined, believed that it 
was important for us in a development of our business. We were 
active market makers in U.S. Treasury and agency securities 
before I came to MF Global. It is part of my own history at 
some place I actually had expertise. And we certainly did not 
step back from seeking that recognition after I came.
    Mr. Royce. At the time of your approval as a primary dealer 
at MF Global, the institution had a weak credit rating, MF 
Global was bleeding cash, the losses in the prior year, I 
believe, were $137 million. There was a history of compliance 
failure, at least 80 regulatory actions taken against it since 
1997. Looking at that period in the spring of 2010, does it 
make sense to you that MF Global was approved to be a primary 
dealer by the New York Fed?
    Mr. Corzine. Congressman, we were approved in, if I am not 
mistaken, in 2011, either January or February, I can't remember 
the specific date. But it was a 2011 approval.
    Mr. Royce. Would you have approved an institution with 
those problems?
    Mr. Corzine. I would have, as we did, make the case that we 
were a meaningful provider of liquidity to the underwriting of 
U.S. Treasury debt, that we were providing liquidity to our 
clients through the repurchase agreement markets, that we had 
insights because we were active in futures markets around the 
globe that could be important to the capital markets desk about 
what was happening in markets.
    Mr. Royce. At the same time, if you were in the shoes of 
the New York Fed, and you had been through Bear Stearns, 
leveraged at 30 to 1, if you had been through Lehman at 30 to 
1, and arguably the leverage here of your firm was 40 to 1, I 
guess I am asking, do you think you got special treatment 
because of your connections in terms of this decision to give 
this designation to MF Global given some of the concerns out in 
the financial press about the institution?
    Mr. Corzine. Congressman, I don't believe we got special 
treatment. We never asked for special treatment.
    Mr. Royce. Then let me ask you about CFTC, because, as you 
know, Mr. Gensler has recused himself from the case because of 
your past relationship. Do you believe MF Global, specifically 
the segregation of customer funds, was properly overseen by the 
CFTC? And do you believe that your firm might have been given 
special treatment because of your connection to Mr. Gensler, 
who has now recused himself?
    Mr. Corzine. I do not believe we were given special 
treatment. And I need to understand as we--as I have 
communicated to the committee, that when we know the issues 
that caused this element, then I think you can make better 
judgments about whether the CFTC or anyone else actually, 
including internally, we performed our responsibilities.
    Mr. Royce. My time has expired, Mr. Chairman. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentleman from New Jersey, Mr. Garrett, is 
recognized for 5 minutes.
    Mr. Garrett. I thank the chairman, and I thank you, 
Governor, for being here.
    Governor, you go to great lengths in your testimony to 
explain that in your opinion, none of the firm's European 
sovereign debt trade ever lost money. I understand that. But 
obviously, you would also had to have known that the downgrades 
and other concerns could lead to margin calls, which is what 
occurred, and a loss of liquidity risk as well. And I think you 
allude to this in your testimony. So the question then becomes, 
isn't it your job, as CEO and chief risk officer, and I believe 
your testimony or one of your statements someplace was, ``I 
consider one of my most important jobs to be chief risk 
officer,'' isn't one of your jobs then to take this seriously? 
Isn't this also really what got AIG, for example, which you 
talk about all the time, in trouble? Is it maybe that the bets 
were appropriate bets, all things considered, but it is the 
liquidity and the potential for downgrades that had to be 
considered and in this case were not?
    Mr. Corzine. Congressman, it is not that they weren't 
considered, but they probably weren't measured, certainly after 
the fact, to the degree that they should have been factored in.
    Mr. Garrett. I see. In the course of extensive interviews, 
we have learned from your former chief risk officer, Michael 
Roseman, that he expressed significant concerns with the 
liquidity risks associated with the growing repo market that 
you have already talked about tied to European sovereign debt. 
He said liquidity risks associated with these risks that we 
just talked about might ultimately sink the firm. First of all, 
do you think that he was right in that sense?
    Mr. Corzine. First, Congressman, I believe that, by my 
recollection, that Mr. Roseman's chief concern was the default 
risk, or restructuring risk, as opposed to liquidity risk. Mr. 
Stockman was much more focused on the liquidity risk than I 
think Mr. Roseman was.
    Mr. Garrett. Was Mr. Stockman correct then, in that sense?
    Mr. Corzine. The facts speak for themselves.
    Mr. Garrett. Mr. Roseman apparently was uncomfortable with 
position limits. And you were talking about the process as far 
as going to the board for that. He was concerned apparently 
when they were set at $2 billion. I understand that you had to 
go to the board at least twice to approve limits above that 
level. And as the position went above that level, eventually, 
it went to $4 billion in late October of last year. I guess at 
that point in time, according to Mr. Roseman, you sought to 
draw a proverbial line in the sand against any other increases 
and made that presentation to the board in November of 2010. Is 
that a correct assessment of what he was trying to do?
    Mr. Corzine. I am not certain of the timeline, but I do--
    Mr. Garrett. Generally.
    Mr. Corzine. I accept that Mr. Roseman did not want to 
increase this. I would add that it was in the context of not 
only sovereigns, but other activities that we did in those 
countries with private investors and other credit arrangements.
    Mr. Garrett. Gotcha. The board apparently, after those 
concerns, ultimately agreed to put a hard cap at $4.5 billion 
and revisit the position in February or March of this year. Mr. 
Roseman eventually was replaced in early January of this year. 
The question then is, when did you begin, if it was you, your 
search to replace him? Was it at this time of his departure or 
prior?
    Mr. Corzine. This is to the best of my recollection--
    Mr. Garrett. Sure.
    Mr. Corzine. --we started a search sometime around the 
first of February.
    Mr. Garrett. Immediately or sometime after his departure?
    Mr. Corzine. Mr. Roseman and I had a conversation about 
whether there were other things that he might want to do, and 
would we want to have additional folks, and would he help us in 
a transition.
    Mr. Garrett. Okay. Now, you mentioned Mr. Stockman before, 
and he was more concerned about the liquidity risk aspect of 
it. But it was under him, I guess, then, that the board decided 
to go past that $4.5 billion cap that just previously had been 
set on a previous review date in February or March. How did it 
happen that they went once again above the limit they had set 
upon themselves, or for the company I should say?
    Mr. Corzine. I would, to my recollection, suggest that I 
went and asked for specific sovereign authority on individual 
countries.
    Mr. Garrett. Okay.
    Mr. Corzine. And to my recollection, the board was more 
comfortable with some sovereigns than they were others, ones 
that had higher ratings and were more comfortable having larger 
size--
    Mr. Garrett. So, collectively, they decided that they could 
go beyond that?
    Mr. Corzine. My request actually was for smaller size, but 
to take into consideration what the European community had put 
in place to back up Ireland and Portugal.
    Mr. Garrett. If the Chair would allow just one last 
question then. In the interview--see if this is correct in my 
understanding of the interview with Mr. Stockman--he mentioned 
that he did not have liquidity risk in his portfolio. First of 
all, is that correct? And if that is correct, why was that 
decision made to take out of his portfolio of responsibility?
    Mr. Corzine. Congressman, I really--I don't know how to 
respond to that. Liquidity risk was certainly something that we 
constantly depended upon our risk department to address. 
Whether he had limit authority, I can't speak to it.
    Mr. Garrett. Thank you. I will yield back to the Chair with 
that.
    Chairman Neugebauer. I thank the gentleman.
    And now, the gentleman from New York, Mr. Grimm, is 
recognized for 5 minutes.
    Mr. Grimm. Thank you, Mr. Chairman.
    Mr. Corzine, you just testified a moment ago, my colleague, 
Mr. Royce, asked you a question, and you responded in part, at 
some place I actually had expertise. And I assume you were 
talking about at your time at Goldman.
    Mr. Corzine. Congressman, I grew up in the government 
securities business, and I was responding to the fact that Mr. 
Royce raised this issue about the primary dealership. And this 
had been something that I probably had spent 15 years, had been 
very, very active in that marketplace.
    Mr. Grimm. Okay. But you would say that as the CEO at MF 
Global, you had some expertise. Is that correct?
    Mr. Corzine. Certainly with regard to the government 
securities markets.
    Mr. Grimm. Okay. And you were asked a little bit about your 
deference. Do you think you could have gotten any special 
treatment because of deference because of the positions that 
you have held? And I just want to note that you were granted a 
3-year extension of your employment agreement in 2011. And two 
of the reasons they cited were success in securing primary 
dealer status and improving the posture with regulators, the 
company posture with regulators. Do you think that would 
definitely have something to do with maybe some deference to 
who you are and your status? I mean, plausibly?
    Mr. Corzine. Congressman, it is plausible. But I think 
what--
    Mr. Grimm. That is all I needed to know. Thank you very 
much.
    Let me ask this: You mentioned before in your statements 
that you actually came in when the leverage was about 40 to 1, 
and brought it down to say 30 to 1. Is that correct?
    Mr. Corzine. Yes, sir.
    Mr. Grimm. Okay. Mr. Pearce started to hit on it, but he 
didn't let you answer the question, so I am going to let you 
answer the question. When you analyze the records for seven 
quarters in a row, you run up your leverage right after the 
quarter ends. So you delever right before the filings for seven 
quarters in a row. That I am sure you know is known as window 
dressing. But let's go through that. These are the repos 105, I 
believe. Right? These are 105? Or--
    Mr. Corzine. To my knowledge, Congressman, there were no 
repo 105s executed at MF Global.
    Mr. Grimm. There weren't. Okay. Then what repos did you 
use? Is it not true that after each filing, for seven quarters 
in a row, the leverage went dramatically up?
    Mr. Corzine. Congressman, because our systems were not as 
strong as we would like them to be, we only netted positions at 
the close of a quarter. That is if you were long in a security 
in one account and shorted in another--
    Mr. Grimm. Thank you for the explanation, but ultimately if 
I look at your seven quarter filings in a row, at the end of 
each filing, your leverage is one place, and then right after 
that filing, your leverage is much higher. Regardless of why, 
is that a factual statement or not?
    Mr. Corzine. I can't actually answer that question.
    Mr. Grimm. Okay. Maybe the CFO can answer that question. 
Would a strict analysis of someone who knows nothing, say like 
me, who is not involved in MF Global, if I look at your 
quarterly filings, is that statistically a fact, regardless of 
why?
    Mr. Abelow. Congressman, the CFO isn't here today. I 
apologize.
    Mr. Grimm. I am sorry. You are the acting president?
    Mr. Abelow. I was the president. And I don't have those 
records with me, so I can't verify. I was not at the company 
seven quarters ago. And I don't know what happened the day 
before or the day after.
    Mr. Grimm. Okay. And Mr. Corzine, you don't recall seven 
quarters in a row? There was an article about this. So I am 
assuming it was brought to your attention. It was written in--I 
am sure you read the article.
    Mr. Corzine. Congressman, I am not familiar with the 
article.
    Mr. Grimm. You are not familiar with that article?
    Mr. Corzine. I am not familiar with that article.
    Mr. Grimm. Okay. Outstanding. Let me ask you this. I think 
there are millions of people who are familiar with that 
article. I am going to just say, I don't believe that answer, 
Mr. Corzine. If I am the CEO of a company and a major national 
newspaper writes an article about my company alleging that I 
did something that is unethical, window dressing, maybe not 
illegal but unethical, I would know about it. I can't believe 
that no one said to you, called you and said, ``Hey, you see 
that article they wrote about you?'' I get that now as a Member 
of Congress: ``Hey, did you see that article they wrote about 
you?'' You don't know about that article. You just testified 
under oath you did not know about this article.
    Mr. Corzine. I don't know the date.
    Mr. Grimm. Fair enough. That is your testimony.
    Mr. Corzine. I don't know the date or what newspaper.
    Mr. Grimm. The Wall Street Journal. It is a small little 
tablet. You testified before about unreconciled differences in 
segregated accounts. Unreconciled differences. I am not a CEO. 
I haven't been a Senator. What is ``unreconciled differences?'' 
Does that mean there is money missing in the account?
    Mr. Corzine. It means that there are not the assets that 
were supposed to be held against the segregated dollars that we 
were responsible for.
    Mr. Grimm. And do you reconcile every day at the end of the 
day?
    Mr. Corzine. Absolutely.
    Mr. Grimm. Every day broker-dealer and so on?
    Mr. Corzine. Have to submit to the CFTC that you are in 
reconciliation.
    Mr. Grimm. So unreconciled difference means something is 
missing?
    Mr. Corzine. Either that or--
    Mr. Grimm. No. I mean in your case, not in the abstract. We 
are talking about MF Global, the company you were in charge of. 
What did that mean, ``unreconciled differences?''
    Mr. Corzine. We were not in balance in our segregated 
accounts.
    Mr. Grimm. Not in balance? What does that mean, ``not in 
balance?''
    Mr. Corzine. It could mean we didn't have control of 
collateral, it could mean we had money that moved that 
shouldn't have moved.
    Mr. Grimm. You had money that moved that shouldn't have 
moved. Who other than you, is it the Treasury Department within 
that has the authority to move that money?
    Mr. Corzine. Yes, sir.
    Mr. Grimm. My time has expired.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Michigan, Mr. Huizenga, is 
recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And I am, frankly, intensely interested where my friend 
from New York was going. So if it is all right, I am going to 
give you 30 seconds of my time so you can quickly finish that 
up.
    Mr. Grimm. Thank you. I appreciate that.
    At the end of each day, you just testified that they 
reconciled. Prior to this time that we are talking about now, 
the demise, the explosion here, were you ever--did you ever 
have unreconciled differences in your account.
    Mr. Corzine. Not to my knowledge.
    Mr. Grimm. Never. Okay. That is good to hear. What is the 
first thing that would happen when they found out that there 
was something out of balance, something was unreconciled? Would 
you get a call, as the CEO, from treasury?
    Mr. Corzine. If it was a serious imbalance, yes.
    Mr. Grimm. And is that what happened, you got a call?
    Mr. Corzine. There was work trying to reconcile this, and I 
know this after the fact, not before the fact, on that Sunday.
    Mr. Grimm. But this is a serious unbalance, this is a 
pretty serious difference, correct?
    Mr. Corzine. From only what I have been able to discover 
afterwards from reading some of the press reports--
    Mr. Grimm. Okay. So as soon as they found out, treasury 
found out that it was unreconciled, did they call you or not?
    Mr. Corzine. I was notified on Sunday evening--
    Mr. Grimm. Okay. So they didn't call you, they did not call 
you then when they--when they closed the books at the end of 
the business day, it was not reconciled, but they did not call 
you.
    Mr. Corzine. It was normal operating procedure to have the 
calculation done the following business day, which was Friday 
to Monday. And so folks were working on this reconciliation 
through the weekend. I think there was a--
    Mr. Grimm. Who ultimately notified you then that there were 
unreconciled differences?
    Mr. Corzine. The CFO.
    Mr. Grimm. The CFO.
    Mr. Huizenga. I would like to reclaim my time at this 
point. It quickly turned into 10 minutes. Kind of along that 
line, do you recall making this statement: ``Our positions and 
the judgment about risk mediation steps are my personal 
responsibility.'' That is according to Bloomberg regarding an 
October 25th conference call regarding these quarterly losses 
and the debt downgrade. You then saw a 67 percent loss in value 
there. Do you recall making that statement?
    Mr. Corzine. I recall something of that nature made.
    Mr. Huizenga. Okay. That was the quote in the article.
    And I am just curious, we all get here, you sat on this 
side of the microphone, I am sure you are wishing you weren't 
sitting on that side of the microphone today, but are you a 
hands-on kind of guy, a detailed kind of guy?
    Mr. Corzine. In markets and clients' activities, I think 
most people would--
    Mr. Huizenga. But in general life? Because I know I am here 
and I like asking questions. I like knowing about what is going 
on. Are you a control freak type, or are you the, hey, we will 
let things kind of play out and see what happens?
    Mr. Corzine. When it comes to the things that I understand 
and have expertise in, I am very hands on.
    Mr. Huizenga. Okay. It seems to me that in the things that 
you have done in life, you have maybe had to strike a balance. 
I know I do. I have to know some details; I have to know about 
details on legislation. Do I know about every detail about 
every piece of legislation? Probably not, but I have people who 
follow that, and I have to go get it when a constituent asks. 
That is fair, right? I don't think we are expecting you to know 
everything that every single employee is possibly doing during 
the day. But I think what my friend from New York is getting at 
is when you have some major issues like this, it would seem 
that responsibility lies in your office. That is what you said 
on October 25th.
    I can tell you, having some personal experience with 
attorneys and real estate brokers--I am a former REALTOR 
myself--when you start commingling funds, when you start 
pulling funds that don't belong to you to go do things, no 
matter how valiant, no matter how beneficial to you personally 
or the firm or whatever else, people lose their law licenses; 
people lose their brokerage licenses. I think that is why you 
are seeing such frustration, anger, and hostility at this.
    My phone started blowing up November 1st and late on 
October 31st by people whom I had no idea in my district, whom 
I couldn't even fathom had some sort of connection to MF 
Global, but they did, predominantly through the agricultural 
community. And it just seems to me that when you are claiming 
not to know details about some major, major issues that have 
been brought up here, it just doesn't ring true. It just 
doesn't ring like it is heartfelt.
    And Mr. Abelow, I know both of you were employed by the 
Global Holdings. I am assuming that this isn't the only asset 
that Global Holdings had. I know you have operations in Canada, 
and Hong Kong, and England, and a number of places around the 
world. Correct?
    Mr. Corzine. Yes, sir.
    Mr. Huizenga. And are they all much like this structure, a 
separate entity operating in these other countries?
    Mr. Corzine. Each country has its own regulatory structure, 
each country has its own finance structure. And there is 
cooperation across the global--
    Mr. Huizenga. And you communicate on a regular basis with 
those other entities?
    Mr. Corzine. Yes, sir.
    Mr. Huizenga. And that seems to maybe get at, and I know my 
time is almost up here, but it seems like I think that is some 
of the concern is we are seeing this money get passed around. 
The fiduciary element feels like it is lost. Now, it might be 
there legally technically, but I can tell you as someone who 
had a fiduciary responsibility as a REALTOR and a developer, 
and having those dollars come in, this certainly doesn't feel 
or look like you were caring for those other people's money the 
way that you should have, and certainly were expected to. One 
last question: Did you have personal dollars yourself in those 
segregated fund accounts?
    Mr. Corzine. I did not.
    Mr. Huizenga. You did not. So this was not any of your own 
money. You were just out with everybody else's money. It was 
other clients.
    Mr. Corzine. I didn't have a futures account, didn't trade 
for my own account. I thought it would be a conflict to be an 
active trader for my own purposes while I was leading a 
company.
    Mr. Huizenga. But you certainly were active in trading 
personally, correct?
    Mr. Corzine. No. I bought shares in MF Global, which I 
think I have reported in my written statement.
    Mr. Huizenga. Yes. But you weren't involved in the day to 
day choosing where things were going to be going?
    Mr. Corzine. There were things that I traded through--we 
set up a very complex compliance structure, extra supervision, 
to make sure that when I executed a trade, first of all, I 
didn't write a ticket, but somebody else did, that they were 
both observed and those procedures were followed.
    Mr. Huizenga. I know my time is up, but Governor Corzine, 
you have thousands of hardworking people around this country 
who feel cheated. And frankly, it is hard not to disagree with 
them. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Dold is recognized for 5 minutes.
    Mr. Dold. I thank the chairman. And certainly I want to 
thank the Governor. I appreciate your appearance and testimony 
here today and at other House committees and Senate committees 
as well. I am particularly interested in this issue. For the 
first time in 150 years, the Chicago Mercantile Exchange had 
customer funds missing. I represent the Northern District of 
Illinois and the 10th District, and I probably have more 
traders in my district than perhaps any other district in the 
country.
    So my first question for you is, when we look at the $1.2 
billion missing, did you have any communications, whether in 
person, by telephone, by email, or text message, or any other 
means that specifically contemplated, addressed, or approved 
sending segregated customer funds to serve as loans to, 
collateral for, or liquidity for broker-dealers whether or not 
they were MF Global affiliates or nonaffiliates?
    Mr. Corzine. I believe the answer to that is no.
    Mr. Dold. So today here, before this committee, you are 
saying that--
    Mr. Corzine. I believe that--
    Mr. Dold. I am just clarifying.
    Mr. Corzine. --the moving of customer funds I never 
authorized, I never intended to authorize, nor do I think 
anyone could misconstrue anything I said that would authorize 
the moving of customer funds in an improper way. And so I 
don't--you put a lot of--
    Mr. Dold. Let me try to be more specific then, and not put 
so many of those caveats in there, because it was really trying 
to get to the point of certainly in today's technology, did you 
receive any emails where you may have been CC'd that talked 
about moving customer funds?
    Mr. Corzine. To my knowledge, and I haven't been able to 
review all my records--
    Mr. Dold. This is a pretty big deal, so I assume it would 
stick out.
    Mr. Corzine. If someone sent me a memorandum, or an email, 
or a PDF off of an email that suggested we use customer funds, 
I wouldn't have authorized it.
    Mr. Dold. And you do not--at this point in time, you are 
saying that you do not remember receiving any of those?
    Mr. Corzine. At this moment, I don't recollect receiving 
any of those.
    Mr. Dold. If segregated customer funds were used for MF 
Global's purposes, wouldn't you expect U.S. Treasuries or 
similar securities to be placed in the segregated accounts as a 
substitute for customer funds?
    Mr. Corzine. That would be how the rule 1.25 requirements 
would work, on that basis.
    Mr. Dold. Now, I do have just a couple more questions. You 
talked before about being notified that there was an imbalance. 
Correct? Just moments ago?
    Mr. Corzine. Yes. Yes, sir.
    Mr. Dold. Okay. Did any customer statements ever show that 
there was an imbalance in their account?
    Mr. Corzine. Congressman, I can't answer that question. I 
don't know the answer to that.
    Mr. Dold. My understanding is that no customer ever 
received a statement--do you have any knowledge of that? No 
customer ever received a statement that their account was in 
imbalance?
    Mr. Abelow. I don't know about that. Again, that I learned, 
as the Governor has stated, I learned on the evening of the 
30th that there was an imbalance in customer funds. I don't 
know if any statements went out subsequent to that date to 
customers because the filing for bankruptcy was the next 
morning.
    Mr. Dold. Governor, you talked before about having the 
right people and the right policies in place. And I understand 
that is important. Do you know Stephen Grady, Dennis Klejna, or 
Joseph Murphy?
    Mr. Corzine. The first two gentlemen I know.
    Mr. Dold. Okay. And the reason I bring up those names 
specifically is I think they were involved with the Refco 
bankruptcy, where a number of folks went to jail, and I think 
there were some significant fines paid in connection with 
related Justice Department consent orders. Do you know how they 
were connected to MF Global and what role they played in the 
weeks leading up to the bankruptcy?
    Mr. Corzine. Mr. Grady was responsible for trying to bring 
about this joint venture or the sale of our FCM. He was 
actively involved in those negotiations and framing that 
activity in the days that led up to the bankruptcy and well 
before that.
    Mr. Klejna, Dennis, I couldn't always pronounce his name, 
was in our general counsel's office. I think he had previously 
served with the CFTC.
    Mr. Dold. Were you aware of their roles with Refco?
    Mr. Corzine. I was aware they were a part of the Refco 
acquisition that preceded my joining MF Global.
    Mr. Dold. Any background checks, anything along those lines 
that would have highlighted the fact that they were involved 
and had some issues potentially with some fines through the 
Justice Department?
    Mr. Corzine. I am not aware of those.
    Mr. Dold. Mr. Chairman, my time has expired.
    Chairman Neugebauer. I thank the gentleman. I have 
consulted with the ranking member, and we are going to have 
what I would call a lightning round. And if we could ask 
Members to keep those questions maybe to one question, or short 
questions so that we can move through that process. And I now 
recognize the ranking member.
    Mr. Capuano. I thank the chairman.
    Mr. Corzine, just one question, a ballpark, I would never 
hold you to exact numbers. It wouldn't be fair. Approximately a 
week before the bankruptcy, a week, 10 days, whatever, do you 
know who the biggest creditor of MF Global was? And the 
creditor could be either a customer or somebody who was on the 
counterparty through a repo or any other instrument.
    Mr. Corzine. I am glad you say that. I couldn't give you 
specifics. I would suspect it was JPMorgan, but I don't know 
it. They were our clearing bank. They were also responsible for 
our unsecured lending facility, and also responsible for our 
secured lending facility.
    Mr. Capuano. Would you have a ballpark idea how much that 
might be? And again, I am not trying to nail you on it. Just a 
ballpark.
    Mr. Corzine. Well, 10 days before the bankruptcy, we hadn't 
drawn on any of those facilities.
    Mr. Capuano. Okay.
    Mr. Abelow, the same question for you now, not 10 days 
before, but now, who is your biggest creditor? Again, with the 
same caveats.
    Mr. Abelow. I apologize. I simply don't know.
    Mr. Capuano. Okay. Thank you.
    Chairman Neugebauer. Mr. Corzine, you testified in the 
House Agriculture Committee hearing last week that it would be 
inappropriate for you to promote the designation as a primary 
dealer. In fact, you said it probably would have been 
criticized by the Fed if you did so. Is that a fair assessment?
    Mr. Corzine. As I recall what I said, that is--and I would 
believe that using it as an advertising tool would be--
    Chairman Neugebauer. On February 2nd, you sent out a press 
release stating, ``Being designated a primary dealer by the 
Federal Reserve in New York is consistent with our global 
strategy of expanding our broker-dealer activities as we seek 
to serve our clients with broader execution services and 
greater market insight and ideas.'' Would you say that was 
promoting your--
    Mr. Corzine. That was just part of the announcement that we 
were recognized. We had to say something. And I don't believe 
that is implying a Good Housekeeping Seal from the Federal 
Reserve.
    Chairman Neugebauer. In fact, the board, in a proxy 
statement, said, ``In granting Corzine a 3-year extension of 
his employment agreement in 2011, the board compensation 
committee noted that his performance had been exemplary since 
joining the firm over a year ago. The board also noted that 
Corzine's accomplishment in near-term building blocks, 
including significant improvements in the reputation of the 
firm as demonstrated by its ability to hire quality officials, 
the company's success in securing primary dealer status, its 
growing client balances, and improving posture with the 
regulators.''
    So it seems that was a big deal.
    Mr. Corzine. Internally, there is no question that people 
felt good about having that designation. But it was not 
something that we advertised or promoted to our clients. There 
were many clients who will not do business with people who are 
not designated primary dealers. And so, the mere fact that 
designation exists is a good thing, which I think the board was 
trying to recognize.
    Chairman Neugebauer. Did that give you borrowing power at 
lower--having that dealer status, did that allow you to access 
credit at a cheaper rate?
    Mr. Corzine. If it did, I am not aware of it. There are--
the more lenders there are, the more likely it is that you will 
have marginally better rates. But we didn't see a meaningful 
element in that.
    And as you know, Mr. Chairman, we are at very low interest 
rates in the short-term markets today anyway. And I don't think 
those were impacted by that.
    Chairman Neugebauer. Thank you.
    Mr. Perlmutter?
    Mr. Perlmutter. Thanks. I guess my questions are similar to 
Mr. Capuano's as to who got paid and who didn't get paid here. 
Just as simple as that. Secured creditors. I am just trying to 
figure out what happened in that week advance. Because if you 
hadn't drawn on the facilities 10 days in advance of this 
thing, everything kind of cratered in the last 10 days.
    So did the secure creditors come in and sweep these 
accounts and then assets that you thought were assets just sort 
of evaporated because sovereign debt went down? And that has a 
question mark at the end.
    Mr. Corzine. Congressman, I said this and I meant it 
sincerely, I apologize, I don't have the information to that. 
And those are the kinds of things that you would have to go 
through the records. I don't know whether that happened or it 
didn't happen.
    Mr. Perlmutter. Okay. I guess at some point, SIPC placed MF 
Global in bankruptcy, and then that froze everything. And this 
will all, the story will be told, as you have said, over the 
course of the next few years. But I look back at CME, I look 
back at all of the regulations and laws we have in place, and I 
am trying to figure out today how--is there something that 
needs to be improved in Dodd-Frank or Sarbanes-Oxley or the 
1933 Act where some firewalls need to be built? And I guess 
until we really know this whole story, we won't know, because 
it seems like there, especially with CME, there should have 
been a lot of protections.
    Mr. Corzine. Congressman, I believe we need the facts to be 
determined so that we can figure out where the mistakes were, 
what was the cause of the problem.
    Mr. Perlmutter. Okay.
    I yield back. Thank you, Mr. Chairman.
    Chairman Neugebauer. Thank you.
    And the gentleman from New Mexico, Mr. Pearce, is 
recognized.
    Mr. Pearce. Thank you, Mr. Chairman.
    Governor, what was your pay when you were working with MF?
    Mr. Corzine. I was--I started out with a salary of $1.5 
million, and I think it was in the second year down to about 
$750,000 a year.
    Mr. Pearce. Any performance bonuses on top of that?
    Mr. Corzine. I had a guarantee when I joined the firm, 
which I took less than the guarantee. I don't--
    Mr. Pearce. How much of a guarantee?
    Mr. Corzine. I don't quite remember, sir.
    Mr. Pearce. Just approximately.
    Mr. Corzine. I think it was a million and a half. It could 
have been a million and three-quarters.
    Mr. Pearce. Mr. Abelow, how about you?
    Mr. Abelow. Congressman, my total compensation in the time 
that I was at MF was a guaranteed amount of approximately $3 
million.
    Mr. Pearce. Okay. I think, Mr. Corzine, that you had 
testified to Mr. Neugebauer that you didn't know anything about 
the $117 million loan when he was asking his first questions. 
Is that correct, that there is some loan that--
    Mr. Corzine. As I said, I don't know of any loan that was 
backed by customer funds. I wouldn't have authorized it. And as 
I said in my oral testimony, there were questions raised by 
JPMorgan about the transfer of funds from New York to London 
accounts, I don't know whether they were loans or I know it was 
based on the issues of overdrafts. I had oral confirmation from 
the people in Chicago. And as I said, I believe I have written 
confirmation from the people in Chicago that it was 
appropriately funded.
    Mr. Pearce. You testified to Mr. Grimm's questions that you 
didn't know about the window dressing, the article that 
appeared in the Wall Street Journal on November the 4th of this 
year. They were kind of walking back through. If you didn't 
know about that, kind of what level did things have to get to 
before you were notified? In other words, all these people 
below you scurrying around and putting things in place and 
taking things out, and you the CEO, you didn't have day-to-day 
knowledge, and it is not your background, not your expertise. 
What does a CEO actually--when do they have to come to you and 
say--what level does it have to reach before they notify you? I 
find this compensation package and your day-to-day knowledge 
not very thorough, frankly, in this testimony. And so what was 
the threshold at which they had to come to you?
    Mr. Corzine. Congressman, with regard to being out of 
balance with client funds, they would have to come on a much, 
much smaller scale than the hundreds of millions that I heard 
about on Sunday.
    Mr. Pearce. Yes. So the fact that we are sitting over here 
on this side of the desk and there is $1.2 billion missing and 
you have no day-to-day knowledge of it is just incredible. It 
is just incredible.
    I yield back, Mr. Chairman. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Florida, Mr. Posey, is recognized.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Pearce, although he said he did not read that article 
that Mr. Grimm was holding up, 3 minutes later in an answer, he 
said when he read articles about that problem. So one of us is 
confused there I think.
    Mr. Corzine, you stated that after, I think you used the 
term ``significant imbalances'' were discovered on October 
31st, no statements were sent out. I am looking at a statement 
dated November 7th. It indicates no imbalances whatsoever. And 
there are others besides the one I am holding in my hand here. 
How can that be?
    Mr. Corzine. Congressman, I am not trying to avoid the 
question, but I left the firm on November 3rd. And I would not 
know what was included in those statements even if I had access 
to my records.
    Mr. Posey. Okay. I am not saying that it is your fault, my 
fault, his fault, her fault, God's fault, nobody's fault. But 
isn't it clear that somebody is lying to the clients if they 
send out a statement that says there are no imbalances when, in 
fact, it is a week after I think you used the term 
``significant imbalances'' were discovered?
    Mr. Corzine. Congressman, I don't know how that 
confirmation or that notification was sent. So it would be hard 
for me to categorize it.
    Mr. Posey. It is a statement like they send out every 
single month. They have been getting the same statements for 
years. Just like all the others. That is how it was sent out. 
It is obviously a standard procedure, a standard policy.
    Mr. Abelow, can you shed any light on this?
    Mr. Abelow. Sir, I don't know what statement you have in 
front of you. I haven't seen it before.
    Mr. Posey. You have never seen one of your customers' 
statements before? You don't know what they look like?
    Mr. Abelow. Sir, you are referencing a statement on a 
specific date which I have not seen.
    Mr. Posey. But it is the same style statement every day. Do 
you change your statements every month?
    Mr. Abelow. Congressman, as I stated earlier, the operating 
company, the regulated company MF Global Incorporated, was 
placed under an SIPC trustee on, I believe, October 31st. So a 
statement subsequent to that date I wouldn't have any 
information about.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Posey. Slippery when dry.
    Chairman Neugebauer. The gentleman from Texas, Mr. Canseco, 
is recognized.
    Mr. Canseco. Thank you, Mr. Chairman.
    Just a couple of follow-up questions. Mr. Corzine, how much 
of the shortfall is due to slippage in collateral transfers, 
and how much was seized by creditors through margin calls after 
the firm was technically bankrupt?
    Mr. Corzine. Congressman, I don't know the answer to that 
question. And I would have to do a real analysis with people 
who knew how to read the thousands of pages. That is what I 
presume that the investigators are doing at this moment.
    Mr. Canseco. Any venturing, any opinion one way or the 
other?
    Mr. Corzine. Congressman, I am as interested in the answer 
to that as you are.
    Mr. Canseco. Thank you. Let me go to your Web site that 
proclaimed to the public in October, now this is October of 
this year, that MF Global has an extremely liquid and high-
quality balance sheet that consists primarily of client 
payables and short-term Treasuries and agencies, slash, 
contains minimal level three trading assets. Now, if those 
statements are true, then how did MF Global go bankrupt and 
lose over $1 billion in customer funds in less than a month 
after that statement was made?
    Mr. Corzine. Congressman, I think that statement is 
consistent with how our balance sheet looked. I think that once 
there is a loss of confidence, the financing techniques that I 
think we have talked about here today, repurchase agreements, 
and the need to put up additional margin calls, can put extreme 
pressure on a financial institution. It should not have put so 
much financial pressure that anyone would have improperly used 
customer funds.
    Mr. Canseco. Okay. Fair enough.
    Now, Mr. Abelow, there are news reports stating that Mr. 
Corzine had a personal trading account as CEO of MF Global. In 
fact, it is reported that he was making trades from his 
BlackBerry in the middle of meetings. Now, in your expert 
opinion, is it proper for a CEO of such a large company as MF 
Global to be engaging in such transactions?
    Mr. Abelow. Congressman, I have no frame of reference. I 
haven't worked directly for a CEO of a similar firm before.
    Mr. Canseco. Okay. Were customers or investors of MF Global 
ever made aware that the CEO of the company was spending so 
much time trading? You don't know whether he was out there 
trading or doing things for clients or for his own account?
    Mr. Abelow. I am not aware of any specific question or 
disclosure related to how the chairman of the company spent his 
time.
    Mr. Canseco. Thank you.
    I yield back the balance of my time.
    Chairman Neugebauer. Mr. Dold is recognized.
    Mr. Dold. Thank you, Mr. Chairman.
    I appreciate the second lightning round. I wanted to just 
get back into something that my colleague Mr. Renacci was 
talking about when he was going over kind of the role, I would 
say the unique role that the board played at MF Global in terms 
of trying to be involved in terms of risk and being able to--
the request to take on additional risk. Do you know of any 
other firm that operated like that?
    Mr. Corzine. I believe that delegations of authority on 
risk flow from boards in most major financial institutions.
    Mr. Dold. But how about day to day-type operations? My 
understanding was--
    Mr. Corzine. If there were major exposures, which certainly 
the euro sovereign RTM positions were a major exposure, then it 
would, in most companies, flow, I believe, to a board. 
Certainly as a CEO, I would want my board to be aware of the 
kinds of things that would be of risk to the company.
    Mr. Dold. Can you just give me some sort of an idea about 
what their qualifications were? Were they engaged former 
traders? Were there former management in terms of futures and 
equities that sat on the board?
    Mr. Corzine. There were--the lead director was a former 
senior officer at Merrill Lynch, which has an FCM, and is very 
active in futures markets. There was a gentleman in London who 
was a senior member of the management team at ICAP, which is 
also another significant futures and options player. There is--
    Mr. Dold. I think we can establish that there were some 
folks who were on the board.
    Mr. Corzine. Yes.
    Mr. Dold. I guess my point is it seemed to me when you were 
talking to Mr. Renacci that you were talking about having to go 
to the board to overrule certain things or to get additional 
risk and retention even outside of the monumental ones that you 
were talking about with the European sovereign debt. Maybe I am 
misinterpreting that.
    Mr. Corzine. There were requests to the board, certainly 
from time to time starting after December, as the position 
grew. And sometimes, the board said no.
    Mr. Dold. Okay. Governor, I just want to follow up with one 
last thing that Mr. Posey was talking about, and then I will 
yield back. The statements that went out--you said, ``I have no 
idea how the statements went out.'' The statement that he just 
held up in front of us, I assume that is a statement, that 
general looking statement is a statement that you have seen 
before.
    Mr. Corzine. Yes, sir.
    Mr. Dold. How about you, sir?
    Mr. Abelow. I didn't see it, so I will assume that it was a 
normal course statement.
    Mr. Dold. Okay, a normal course statement. The long and the 
short of it is you basically said you don't know how it would 
have gone out on November 7th because you had left just days 
prior. Had you still been there, would that statement have 
still said the same thing or would there have shown--
    Mr. Corzine. We are an operating business, and if we are 
sending out nonfactual information, something would have had to 
be done. But we would have had to correct that imbalance. We 
would have had to go more than just reconcile, we would have to 
had customer funds properly segregated.
    Mr. Dold. So are you saying that, if indeed, this did go 
out and no customer statements were augmented, that there was 
some impropriety that was going on after you left?
    Mr. Corzine. Congressman, I don't want to speculate about 
that. I can't believe that the trustee, who has a very high 
reputation, is doing--at least from my following of the 
information, trying to do everything he can to return customer 
funds to the clients. I would have to think that is an 
oversight or somebody forgot to turn off the computer.
    Mr. Dold. One last thing. Did MF Global use an off-the-
shelf risk-management program or was it proprietary?
    Mr. Corzine. To the best of my recollection, we had 
multiple risk management systems for different product lines.
    Mr. Dold. Off the shelf or proprietary?
    Mr. Corzine. Many of them were off the shelf, some were 
proprietary, and they all folded into the global risk 
management activities in our risk department.
    Mr. Dold. Thank you.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And I thank the panel. There are no further questions from 
the Members. This panel is dismissed. We will call up the 
second panel now.
    Before the second panel gets too comfortable, I would ask 
you to stand please, and raise your right hand.
    [Witnesses sworn.]
    Chairman Neugebauer. On our second panel, we have: Dan 
Berkovitz, General Counsel, Commodity Futures Trading 
Commission; Robert Cook, Director, Division of Trading and 
Markets, U.S. Securities and Exchange Commission; Terrence 
Duffy, executive chairman, CME Group Inc.; Richard Ketchum, 
president, chairman, and chief executive officer, Financial 
Industry Regulatory Authority; James Kobak, chief counsel to 
James Giddens, Bankruptcy Trustee for MF Global Inc.; and 
Thomas Baxter, general counsel, Federal Reserve Bank of New 
York.
    I would just remind all of you that your full written 
statements will be made a part of the record. We ask you to 
summarize your testimony in 5 minutes.
    Mr. Berkovitz, you are recognized for 5 minutes.

   STATEMENT OF DAN M. BERKOVITZ, GENERAL COUNSEL, COMMODITY 
               FUTURES TRADING COMMISSION (CFTC)

    Mr. Berkovitz. Good afternoon, Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee. Thank you for 
the opportunity to testify.
    Chairman Neugebauer. Mr. Berkovitz, would you make sure 
your button is on.
    Mr. Berkovitz. Is that better?
    Chairman Neugebauer. Much better.
    Mr. Berkovitz. Good afternoon. The Commission's highest 
priority at this time is returning money to MF Global customers 
as quickly as possible. We are working around the clock to 
determine what happened to and to locate all of the customer 
funds.
    The MF Global Bankruptcy Trustee, with the assistance of 
the CFTC, has transferred nearly all positions of customers 
trading on U.S. markets and soon will have transferred 
approximately $4.2 billion of customer property. Commodity 
customers will have quickly received approximately 72 percent 
of their account values.
    In FCM bankruptcies, commodity customers have priority in 
customer property. This includes segregated property, property 
that may have been illegally removed from segregation and is 
still within the debtor's estate, and property that was 
illegally removed but has clawed back into the debtor's estate 
by the trustee.
    If the customer property is insufficient to satisfy in full 
all the claims of the customers, part 190 of the Commission's 
regulations allows other property of the debtor's estate to be 
classified as customer property to make up any shortfall. A 
parent or affiliated entity, however, generally would not be a 
debtor unless customer funds could be traced to that entity.
    FCMs such as MF Global are subject to the Commission's 
financial and reporting requirements. Frontline oversight is 
carried out by designated self-regulatory organizations, such 
as the National Futures Association or the Chicago Mercantile 
Exchange.
    DSRO responsibilities include establishing and enforcing 
rules to ensure the financial integrity of STMs and the 
protection of customer funds. DSROs are required to examine 
each FCM every 9 to 15 months. Each FCM must submit to the 
Commission and to its SRO an annual financial report, certified 
by an independent public accountant. Annual reports are 
reviewed by the staff of the Commission's Division of Swap 
Dealer and Intermediary Oversight (DSIO) as well as the SROs.
    FCMs are also required to file monthly unaudited financial 
reports. Each report must include a statement of financial 
condition and a statement of segregated funds. The DSROs 
conduct a primary review of the monthly financial statements. 
The CFTC staff conducts limited scope examinations of FCMs, 
either as part of the assessment of the DSRO's examination 
function or on a for-cost basis. These examinations generally 
focus on specific issues at the firm and may include capital 
and segregation reviews.
    With respect to the protection of customer funds, by 
statute, an FCM must treat all money, security, and properties 
received from a customer to margin for the trades or contracts 
of that customer as belonging to that customer. All customer 
money, securities, and property must be separately accounted 
for and segregated from the FCM's proprietary funds. Funds 
deposited by one customer to margin for secure trades may not 
be used for another.
    An FCM must notify the Commission immediately of any 
occurrence of undersegregation and of significant margin calls 
or whenever its capital drops below minimum requirements.
    Section 4(d) of the Commodity Exchange Act permits FCMs to 
invest customer segregated funds in obligation to the United 
States, obligations fully guaranteed as to principal and 
interest by the United States and municipal securities. 
Commission regulation 1.25 permits additional types of 
investments.
    On December 5th, the Commission voted unanimously to amend 
regulation 1.25 to impose new restrictions on these types of 
investments. Under the revised rule, permitted investments are 
those identified by statute, as well as certificates of deposit 
and money market mutual funds, commercial paper, and corporate 
notes or bonds that are fully guaranteed by the United States 
under the Temporary Liquidity Guarantee Program. The new rule 
also includes various concentration limites on investments.
    All FCM investments made with customer funds under 
regulation 1.25 must be kept by the FCM in the customer 
accounts. Further, when investing customer funds, the value of 
the customer's segregated account must remain intact at all 
times.
    Thank you. I would be happy to answer any questions.
    [The prepared statement of Mr. Berkovitz can be found on 
page 107 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Cook?

  STATEMENT OF ROBERT COOK, DIRECTOR, DIVISION OF TRADING AND 
     MARKETS, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

    Mr. Cook. Chairman Neugebauer, Ranking Member Capuano, and 
members of the subcommittee, my name is Robert Cook, and I am 
the Director of the Division of Trading and Markets at the 
Securities and Exchange Commission. Thank you for the 
opportunity to testify on behalf of the Securities and Exchange 
Commission concerning the collapse of MF Global.
    The bankruptcy of this firm and the apparent shortfall in 
segregated accounts of futures customers has resulted in 
serious hardship for many MF Global customers.
    We are committed to working with the trustee and our fellow 
regulators to help return customer assets, as well as to 
investigate any potential violations of law that may have 
contributed to customer losses.
    MF Global's regulated U.S. subsidiary, MF Global Inc., or 
MFGI, was duly registered with the CFTC as a futures Commission 
merchant and with the SEC as a broker-dealer. As of October 
31st, MFGI had approximately 36,000 futures customers and 
approximately 330 custodial accounts for nonaffiliated 
securities customers.
    MFGI was also the member of several futures self-regulatory 
organizations, or SROs and securities to SROs. For securities 
activities, the frontline supervision of a broker-dealer is 
performed by the SROs of which the broker-dealer is a member, 
in this case FINRA and various securities exchanges.
    There has been significant attention given to the repo-to-
maturity transactions entered into by the firm on European 
sovereign debt. In the summer of 2011, SRO staff identified 
these transactions based on an analysis of MSGI's financial 
statement and questioned whether the firm was recognizing them 
appropriately for purposes of its net capital computation.
    The firm believed that the transactions should be subject 
to lesser capital charges than the SRO staff. The SRO staff, in 
consultation with and supported by SEC staff, ultimately 
required the firm to take the higher capital charges and to 
report the net capital deficiency for the month of July.
    Several months later, after reporting a substantial net 
loss with its stock, and with its stock and credit rating under 
pressure, MFGI entered the weekend of October 29th to 30th 
engaged in negotiations with various parties regarding 
potential strategic transactions, such as the sale of the 
firm's customer business to another firm.
    I participated in communications with the firm management 
during this period, together with other SEC staff and at times 
other regulators. My recollection is that the CFTC's request 
for more information about firm's computations for its 
segregation accounts for futures customers was one of the 
issues discussed with the firm on Sunday, October 30th.
    When the firm subsequently reported early in the morning on 
Monday a significant deficiency in those accounts and that 
negotiations for a strategic transaction had ceased, firm 
management attempted to explain to regulators how the 
deficiency had occurred and whether it could be remedied. After 
consultation with the CFTC, we determined together that the 
safest and most prudent course of action to protect customer 
accounts and assets was to initiate a liquidation proceeding 
under SIPA. A referral was made to SIPA that morning.
    Since then, we have been working with SIPC and the trustee 
to return securities and funds to the securities customers of 
MFGI. Last Friday, the court approved the sale and transfer of 
approximately 338 accounts held for nonaffiliated customers of 
MFGI. The trustee estimates that the initial transfer will 
restore 100 percent of the net equity for more than 80 percent 
of these securities customers.
    The SEC has a set of rules designed to protect customer 
property by prohibiting broker-dealers from using customer 
funds and securities to support the proprietary positions. The 
rule requires broker-dealers that hold securities or cash for 
customers maintain physical possession or control over the 
securities that customers have paid for in full.
    Alternatively, if a customer has a margin loan, the 
customer protection will strictly limit the amount of 
securities that can be used for the broker-dealer for financing 
purposes. As to cash, the broker-dealer must also maintain a 
reserve in an account for the benefit of customers in an amount 
that exceeds the net funds attributable to customer positions. 
These funds cannot be invested in any instrument that is not 
guaranteed by the full faith and credit of the U.S. Government.
    Together, with the applicable SEC capital requirements and 
SIPC protections, this regime is meant ensure that if a broker-
dealer fails, customer securities and funds will be readily 
available to return to those customers. The SEC will continue 
to work to identify further improvements to his customer 
protection regime.
    Thank you again for inviting me here today, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Cook can be found on page 
115 of the appendix.]
    Chairman Neugebauer. I thank the gentleman. Mr. Duffy?

 STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME GROUP 
                              INC.

    Mr. Duffy. Chairman Neugebauer, Ranking Member Capuano, and 
members of the subcommittee, I am Terry Duffy, executive 
chairman of the CME Group. Let me start by saying the actions 
of Mr. Corzine's firm, MF Global, have put a lot of market 
users in a tragic position.
    At CME Group, our efforts, with respect to the 
unprecedented loss of customer segregated funds caused by MF 
Global, have been to assist these customers and minimize market 
disruptions.
    My testimony summarizes reports from our staff, who were on 
site at MF Global along with the CFTC in the days immediately 
preceding its bankruptcy. My written testimony expands on the 
introductory statement and includes substantial background 
material. By the middle of the week of October 24th, MF Global 
had announced poor earnings and was downgraded by several 
credit rating firms.
    Sparking rumors that it would sell its brokerage business, 
CME was the designated self-regulatory organization for MF 
Global with responsibility for auditing its futures business.
    On Thursday, October 27th, two of our auditors went to MF 
Global's Chicago offices to review MF Global's daily 
segregation report for the close of business on Wednesday, 
October 26th.
    Wednesday's segregation report, which is not available 
until Thursday, showed full compliance. Our auditors asked for 
the material necessary to check the numbers on the report 
against the general ledger and third-party sources and began 
the process of tying out the numbers for Wednesday's report.
    That substantial review process of the Wednesday 
segregation report continued on Thursday and Friday. The MF 
Global segregation report for Thursday, October 27th, which was 
delivered to CME on Friday the 28th, also stated that MF Global 
remained in full compliance with segregation requirements.
    In fact, it showed that the firm held $200 million in 
excess of segregated funds. On Sunday, the CFTC informed us 
that they were aware of a draft segregation report for the 
close of business for Friday, October 28th, which showed a more 
than $900 million shortfall in required segregation. CFTC and 
CME staff and auditors returned to the firm on Sunday, October 
30th, and were informed by MF Global employees that the 
discrepancy was caused by ``an accounting error.''
    Our auditors worked with the CFTC, and devoted the rest of 
the day and night on Sunday to find the so-called accounting 
error. No such error was ever found. Instead, at about 2 a.m., 
on Monday morning, October 31st, MF Global informed both the 
CFTC and CME at approximately the same time that the shortfall 
was real and the customer segregated firms had been transferred 
out of segregation to the firm's broker-dealer accounts.
    After receiving this information, CME remained at MF Global 
while MF Global attempted to identify funds that could be 
transferred into segregation to reduce or eliminate the 
deficiency. A CME auditor also participated in a phone call 
with senior MF Global employees wherein one employee indicated 
that Mr. Corzine knew about the loans that had been made from 
the customer segregated accounts. CME Group has provided this 
information and the names of the individuals to the Department 
of Justice and the CFTC who are investigating these matters.
    On Monday, October 31st, the day the SIPC trustee took over 
MF Global, MF Global revised its segregation report from 
Thursday, October 27th, indicating that the alleged $200 
million in excess segregated funds should have been reported as 
a deficiency of $200 million. The shortfall in segregation on 
Thursday, October 27th, was hidden by the inaccurate report, a 
telling sign that regulators were being kept in the dark. It 
remains to be seen whether this failure to disclose permitted 
additional segregated funds to be improperly transferred.
    Throughout this time, the firm and its employees were under 
the direction and control of MF Global's management. Transfers 
of customer funds effectuated by MF Global management for the 
benefit of MF Global constitutes a very serious violation of 
our rules and of CFTC regulations. We met our obligations to 
all other clearing firms and their customers. Also, at all 
times, we held $1 billion in excess of the required amount of 
customer segregated funds on behalf of MF Global's customers.
    All of CME Group's efforts have been directed towards 
speeding recovery and access to their trading accounts, 
transferring their positions and providing the trustee with a 
$550 million guarantee from CME Group to encourage him to 
quickly release customer funds that were securely held at CME 
clearing. No other exchange or clearing entity in the United 
States or abroad has done the same as CME group has done. The 
FederalFly mandated customer segregation program has been in 
place since 1936.
    In that time, prior to the MF Global failure, no customer 
has ever lost its segregated funds because of the failure of a 
clearing member of the CME. Moving forward, we intend to work 
with Congress, regulators, and the industry leaders to 
strengthen safeguard systems at the firm level.
    I thank you very much for your time and attention, and I 
look forward to your questions, sir.
    [The prepared statement of Mr. Duffy can be found on page 
148 of the appendix.]
    Mr. Canseco [presiding]. Thank you, Mr. Duffy.
    Now, we will go to Mr. Richard Ketchum, president and CEO 
of the Financial Industry Regulatory Authority. Thank you.

STATEMENT OF RICHARD G. KETCHUM, PRESIDENT, CHAIRMAN, AND CHIEF 
  EXECUTIVE OFFICER, FINANCIAL INDUSTRY REGULATORY AUTHORITY 
                            (FINRA)

    Mr. Ketchum. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. Thank you for the 
opportunity to testify today.
    My name is Richard Ketchum, and I am chairman and CEO of 
the Financial Industry Regulatory Authority, or FINRA. When a 
firm like MF Global fails, there is always value in reviewing 
the events leading to that failure and examining where rules 
and processes may be improved. I commend the subcommittee for 
having this hearing to do just that.
    With respect to oversight of MF Global's financial and 
operational compliance with the securities laws, which is most 
relevant to today's hearing, FINRA shares oversight 
responsibilities for the Chicago Board Options Exchange and the 
SEC.
    For broker-dealers that are members of multiple SROs, the 
SEC assigns a designated examining authority, or DEA, to 
examine for, among other things, the firm's compliance with the 
Commission's net capital and customer protection rules. For MF 
Global, that DEA is CBOE.
    When FINRA is not the DEA for one of its regulated broker-
dealers, we work closely with the DEA and routinely analyze the 
firm's FOCUS report filings and annual audited financial 
statements as part of our ongoing oversight of the firm. While 
that monitoring focuses on a broad range of issues, it is 
particularly relevant to note that our financial surveillance 
team placed a heightened focus on exposure to European 
sovereign debt, beginning in the spring of 2010. During April 
and May, our staff began surveying firms as to their positions 
in European sovereign debt as part of our monitoring in this 
area.
    In a review of MF Global's audited financial statements 
filed with FINRA on May 31 of this year, our staff raised 
questions about a footnote disclosure regarding the firm's 
repo-to-maturity portfolio. During discussions with the firm, 
FINRA learned that a significant portion of that portfolio was 
collateralized by approximately $7.6 billion in European 
sovereign debt. According to U.S. GAAP, RTMs, or repos to 
maturity, are afforded sale treatment and therefore not 
recognized on the balance sheet.
    Notwithstanding that accounting position, the firm remains 
subject to credit risk throughout the life of the repo. 
Beginning in mid-June, FINRA, along with CBOE, had discussions 
with the firm regarding the proper treatment of the RTM 
portfolio. Our view was that while recording the repos as sales 
was consistent with GAAP, they should not be treated as such 
for purposes of the capital rule, given the market and credit 
risk those positions carried. As such, we asserted that capital 
needed to be reserved against the RTM position.
    FINRA and CBOE also had discussions with the SEC about our 
concerns. The SEC agreed with our assertion that the firm 
should be holding capital against these positions. The firm 
fought this interpretation throughout the summer, appealing 
directly to the SEC before eventually conceding in late August.
    MF Global infused additional capital and made regulatory 
filings on August 31st and September 1st that notified 
regulators of the identified capital deficiency and the change 
in net capital treatment of the RTM portfolio. Following this, 
FINRA added MF Global to alert reporting, a heightened 
monitoring process whereby we require firms to provide weekly 
information, including net capital and reserve formula 
computations.
    During the week of October 24th, as MF Global's equity 
price declined and its credit rating was cut, FINRA increased 
the level of surveillance over the firm. At the end of that 
week, FINRA was on site at the firm with the SEC as it became 
clear that MF Global was unlikely to continue to be a viable, 
stand-alone business. Our primary goal was to gain an 
understanding of the custodial locations for customer 
securities and to work closely with potential acquirers in the 
hope of avoiding SIPC liquidation. As has been widely reported, 
the discrepancy discovered in the segregated funds on the 
futures side of the firm ended those discussions.
    While FINRA believes that the financial security rules of 
the SEC, combined with SIPC, create a good structure for 
protecting customer funds, firm failures provide opportunities 
for review and analysis of where improvements may be warranted. 
FINRA has two proposed rules that we believe would assist us in 
our work to monitor the financial status of firms.
    One of the proposals would expedite the liquidation of a 
firm and, most importantly, the transfer of customer assets. 
Firms would need to contractually require their clearing banks 
and custodians to provide transaction feeds to the firm, 
regulators, and SIPC after the commencement of liquidation. The 
rule would also require carrying or clearing firms to maintain 
current records in a central location. The other proposed rule 
would require FINRA-regulated firms to file additional 
financial or operational schedules or reports as we deem 
necessary to supplement the FOCUS report.
    FINRA shares your commitment to reviewing MF Global's 
collapse. We will review our own rules and procedures, but 
would also be pleased to participate in a coordinated review 
with our fellow regulators to provide a broader assessment of 
where current processes may be enhanced.
    Again, thank you for the opportunity to share our views. I 
would be happy to answer any questions you may have.
    [The prepared statement of Mr. Ketchum can be found on page 
153 of the appendix.]
    Mr. Canseco. Thank you, Mr. Ketchum.
    Now, we proceed to Mr. James Kobak, chief counsel to Mr. 
James Giddens, Bankruptcy Trustee for MF Global.

   STATEMENT OF JAMES B. KOBAK, JR., CHIEF COUNSEL TO JAMES 
        GIDDENS, BANKRUPTCY TRUSTEE FOR MF GLOBAL, INC.

    Mr. Kobak. Chairman Neugebauer, Ranking Member Capuano, and 
members of the subcommittee, thank you for inviting me to 
testify today about efforts to identify, preserve, and return 
assets to the former customers of MF Global Inc.
    My name is James B. Kobak, Jr. I am lead counsel to James 
Giddens, the court-appointed trustee for MF Global Inc. under 
the Securities Investor Protection Act. I would like to provide 
an update on the actions we are taking to protect the former 
customers of MFGI.
    The trustee appreciates the interest of this committee and 
the direct encouragement for Members of Congress to return 
assets to customers of MF Global Inc. as quickly as possible, 
consistent with the law. We share that sense of urgency.
    The Office of the Trustee has been working closely and 
continuously with the Securities Investor Protection 
Corporation, the CFTC, and the SEC and has been receiving 
invaluable assistance on transfers from the CME.
    By statute, the trustee is the customers' advocate. His 
staff includes legal experts, consultants, and forensic 
accountants. We take very seriously our obligation to protect 
customers of the failed firm. We are focused on returning 
assets as quickly as possible but in a manner that is fair and 
consistent with the applicable provisions of the Securities 
Investor Protection Act, the Bankruptcy Code, and the relevant 
CFTC regulations. Every distribution we have made has been 
approved by the bankruptcy court. We are distributing as much 
as we can as soon as we can within the law.
    I am very pleased to report that distributions to nearly 
all of the approximately 36,000 former retail customers with 
U.S. futures positions, whether farmers, day traders or 
institutional investors, have been made within weeks of the 
bankruptcy filing. We are now in the process of implementing a 
third bulk distribution that will bring the total amount of 
customer distributions to more than $4 billion.
    The order approving that distribution was entered by the 
bankruptcy court on Monday. The first distributions in this 
bulk transfer were made yesterday. I believe they should be 
appearing in customers' accounts as of today and total $1.7 
billion. The remainder should be completed within 2 to 4 weeks.
    With this third transfer, retail commodities customers with 
U.S. positions will have received approximately 72 percent of 
the value of their accounts. We have also moved ahead with the 
court-approved transfer of MF Global Inc.'s approximately 330 
nonaffiliate securities accounts. This will return between 60 
percent and 100 percent of the assets in those accounts.
    At the same time, the customer claims process, which will 
assure that everyone is treated fairly in accordance with the 
law, is also up and running. Claim forms have been sent by mail 
and forms are available on our Web site. Claims are being filed 
and reviewed as we speak. And as we meet here today, some 
claims have already been determined and allowed.
    As part of his statutorily mandated duty, the trustee is 
also investigating the extent of the apparent shortfall in 
customer funds. The Department of Justice, the CFTC, and the 
SEC are also conducting investigations. We are coordinating 
with those investigations.
    Our investigation, however, is not a law enforcement 
investigation. It is primarily focused on identifying and 
recovering funds for customers.
    To understand the apparent segregation and compliance 
shortfalls, it is important to remember that there are three 
categories of segregated customer assets at MF Global Inc: 
first, there are customers with U.S. futures positions, which 
are primarily under the jurisdiction of the CME; second, there 
are U.S. customers with substantial foreign futures positions; 
and third, there are securities customers.
    At this time, we don't know with certainty the amount of 
the potential segregation and compliance shortfalls, but our 
best estimate of the figure remains that it is not less than 
$1.2 billion across all three categories of customer assets 
that I have just described.
    We arrive at this estimate by comparing the actual assets 
we believe are available or have collected from depositories 
with an estimate of the claims. The full amount of the 
shortfall cannot be known with certainty until the claims 
process is complete.
    No matter the final amount of the shortfall, this is, as 
the chairman has described it, completely unacceptable, and as 
the trustee characterized it in his testimony Tuesday, an 
appalling situation. The ultimate shortfall will likely be 
significant, and this will substantially impact the trustees' 
ability to make a 100 percent distribution to former customers 
in the immediate term.
    Exhaustive efforts to collect funds from U.S. depositories 
continue. Assets located in foreign depositories, however, are 
now under the control of foreign bankruptcy trustees and 
administrators. We have been and will continue to pursue these 
assets vigorously, but recovery may be more uncertain and may 
take more time.
    Mr. Chairman, Mr. Ranking Member and members of the 
committee, thank you for the opportunity to testify here today.
    [The prepared statement of Mr. Kobak can be found on page 
159 of the appendix.]
    Mr. Canseco. Thank you, Mr. Kobak.
    And now, we go to Mr. Thomas Baxter, general counsel, 
Federal Reserve Bank of New York.
    Mr. Baxter.

 STATEMENT OF THOMAS C. BAXTER, JR., GENERAL COUNSEL, FEDERAL 
                    RESERVE BANK OF NEW YORK

    Mr. Baxter. Good afternoon Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee. Thank you for 
inviting me to appear here today.
    I am Tom Baxter, general counsel of the Federal Reserve 
Bank of New York, and I will speak about the New York Fed's 
relationship with its primary dealers and, more specifically, 
our relationship with a former primary dealer, MF Global Inc.
    Let me start with a short summary of the New York Fed's 
relationship with the regulated institutions that we designate 
as primary dealers. Our relationship with this group of 21 
firms is a counterparty relationship, not a supervisory 
relationship.
    We are not a supervisor. Primary dealers serve as trading 
counterparties in the transactions that the New York Fed 
undertakes to implement monetary policy. As such, primary 
dealers are required to participate consistently as 
counterparties to the New York Fed in purchases and in sales of 
Treasury and agency securities.
    Primary dealers are also expected to provide the New York 
Fed's trading desk with market information and analysis that is 
helpful in the formulation and implementation of monetary 
policy and to participate in the New York Fed's auctions of 
U.S. Government securities on behalf of our Treasury.
    In evaluating whether a particular firm may be designated 
as a primary dealer, the New York Fed considers whether the 
firm has the experience and capability to meet the New York 
Fed's unique requirements, which are different from the needs 
of other market participants.
    As a result, the New York Fed has repeatedly and publicly 
stated that the designation of a firm as a primary dealer 
should not be regarded as a kind of Good Housekeeping Seal of 
Approval. And we have cautioned market participants that they 
should not take the primary dealer designation as a substitute 
for their own counterparty due diligence.
    Now, I will turn to the specific issues concerning MF 
Global. First, concerns have been raised about the New York 
Fed's application process for primary dealers. More 
specifically, the question has been asked as to how MF Global 
became a primary dealer.
    The application process for primary dealers is governed by 
our primary dealer policy, which is published on our public Web 
site. The rigorous application process is designed to assist us 
in obtaining dealers who will satisfy our highly specialized 
needs.
    MF Global first expressed interest in becoming a primary 
dealer in December 2008. It was not until February of 2011, 
more than 2 years later and hardly in a rush to judgment, that 
we designated MF Global as a primary dealer. In considering MF 
Global's application to become a primary dealer, we followed 
our primary dealer policy to the letter.
    As my written testimony explains in detail, the substantial 
record evidence fully supported the New York Fed's decision to 
designate MF Global as a primary dealer.
    Second, I would like to briefly address questions that have 
been asked about the prompt and progressive actions that the 
New York Fed took in late October 2011 as MF Global's financial 
condition deteriorated abruptly and quickly.
    First, we mitigated exposure by excluding MF Global from 
certain primary dealer operations.
    Second, to protect us against potential exposure to MF 
Global, we asked MF Global to execute an agreement to post 
margin to the New York Fed, and it did post margin.
    Third, the New York Fed informed MF Global that MF Global 
was suspended from conducting new business as a primary dealer.
    Through these actions, we protected the taxpayer interest 
and we sustained no loss.
    On October 31st, following the initiation of a proceeding 
by the Securities Investor Protection Corporation, the New York 
Fed terminated MF Global's status as a primary dealer. We also 
returned excess margin we had received from MF Global to the 
SIPC trustee in accordance with the trustee's directions.
    Let me finish by thanking the subcommittee for holding this 
hearing. The New York Fed joins this subcommittee and its 
members in sharing concern for those customers of MF Global who 
have sustained losses as a result of the firm's collapse. We at 
the New York Fed stand ready to assist the MF Global trustee 
and the Congress in their important roles in this matter.
    I am pleased to answer any questions you may have.
    [The prepared statement of Mr. Baxter can be found on page 
91 of the appendix.]
    Mr. Canseco. Thank you, Mr. Baxter.
    And thank you, gentlemen, for being here today.
    At this time, I will yield itself 5 minutes for questions.
    And I would like to begin by hearing from the CFTC and the 
SEC about regulatory coordination in the wake of Dodd-Frank. 
One of the big selling points of that bill was that regulators 
would work together, particularly through the FSOC, and in 
doing so, we would be able to avoid problems like the one we 
have at MF Global.
    So, Mr. Cook, last March the SEC began looking into the so-
called window dressing of quarterly statements by MF Global, 
and it was known by that point that the company had significant 
exposure to the European debt crisis. At this point, what kind 
of communication was going on between the SEC and other 
agencies?
    And there's a second part to my question. Was Secretary 
Geithner or FSOC notified and involved in the MF Global 
situation?
    Mr. Cook. Mr. Chairman, I am--I think the timeframe you are 
referring to, there may have been some ongoing review by our 
Division of Corporation Finance of some of the filings that 
were being made in the ordinary course. I'm not directly 
familiar with what questions they were raising; I think there 
were regular reviews of the filings. I'm not aware of any 
communications with other regulators at that time.
    Mr. Canseco. Mr. Berkovitz, do you have any--
    Mr. Berkovitz. I would add that typically there is 
consultation and coordination between the two agencies on these 
types of matters. If there is not something that would raise 
red flags, though, then it wouldn't necessarily be 
communication.
    Mr. Canseco. Was any communication sent to the Secretary 
Geithner or the FSOC?
    Mr. Berkovitz. I couldn't answer that in full, but I'm not 
aware of any. Throughout this period, I think that you are 
referring to in the review of the reports, that we had in the 
information that we obtained from our review of MF Global, as 
well as looking at the reports from the self-regulatory 
organization, we had not received any red flags that would be a 
major issue at that time.
    Mr. Canseco. The Dodd-Frank statute states that one of the 
objectives of the FSOC is to facilitate information-sharing and 
coordination among member agencies.
    There were obvious problems at MF Global. Was FSOC doing 
its job here, do you know, Mr. Berkovitz?
    Mr. Berkovitz. I am from the CFTC.
    Mr. Canseco. Right.
    Mr. Berkovitz. I would say, again, during that time period, 
based on the information that we had in terms of the money and 
the segregation accounts, that with respect to the issues that 
we look at with respect to MF Global, the protection of 
customer funds, how they were protecting customer funds, the 
daily reports that we were getting, the monthly reports that we 
had and that we had been obtaining from the self-regulatory 
organization from CME had not raised any red flags regarding 
the treatment of customer funds.
    So, in the normal course of business, absent red flags, it 
wouldn't necessarily rise to something that the FSOC would have 
been notified of.
    Mr. Cook. If I could add, sir, when I was addressing your 
earlier comment, I was thinking of the earlier time period I 
think you had started your question with. When it became clear 
that there were serious concerns with MF Global, there was a 
lot of discussion among various regulators. We were talking 
with the CFTC, the Fed Reserve Bank of New York, and the 
Treasury Department during that week about, and leading into 
the weekend about what was going on.
    FSOC has been talking about, and I don't want to speak for 
FSOC, but--
    Mr. Canseco. You are a board member of FSOC?
    Mr. Cook. Our chairman is one of the members.
    Mr. Canseco. Yes, all right.
    And you, Mr. Berkovitz, you're a member of FSOC, right?
    Mr. Berkovitz. The chairman of the CFTC is a member of the 
FSOC.
    Mr. Cook. FSOC had included exposure to European sovereign 
debt as one of the risk factors in its recent report assessing 
systemic risk, and obviously, after the bankruptcy filing, 
there was a call of FSOC on that day to discuss what the 
implications might be of this, of the bankruptcy.
    Mr. Canseco. Mr. Ketchum, do you have any comments on that. 
You are also a member of--or your organization is a member of 
FSOC?
    Mr. Ketchum. No, we're not. To the best of my knowledge, no 
self-regulatory agency is a member of FSOC.
    Mr. Canseco. All right. So you have no comment on that.
    There were obvious problems with MF Global. Do any of you 
have an opinion of whether or not FSOC was doing its job here?
    Mr. Cook. Sir, my view is that--my understanding that FSOC 
was really created primarily as a way to help monitor systemic 
risk, identify where there may be systemic risk and to deal 
with it. While the bankruptcy of MF Global is obviously a 
significant event and has caused enormous hardship for many 
individuals, it's not clear to me that it fell within the 
framework of a systemic risk.
    That being said, I think some of the discussions post--on 
that call after the bankruptcy, there was a--it was recognized 
that this is an opportunity to learn lessons about what we--how 
we--the regulatory structure works and whether there's any 
opportunities for further improvement.
    Mr. Canseco. Let me ask you something, the purpose of the 
FSOC is also to facilitate information-sharing and coordination 
among the member agencies and other Federal and State agencies 
regarding domestic financial service policy development, 
rulemaking, examinations, reporting requirements, and 
enforcement actions, and these are the duties of the FSOC.
    So both of your organizations were duty bound to exchange 
information. And was that not happening with regard to what you 
were hearing from MF Global at the time?
    Mr. Berkovitz. We had exchanged information. We were in 
communication with the SEC, and our staff was in communication 
with FINRA as well. Through this period, up until the last 
several days that have been described, the daily segregation 
reports, the monthly reports, the reports that we were getting 
from our DSRO had not indicated there were issues with the 
customer segregated funds.
    The absence of information coming to us from the reports 
from MF Global, from the DSRO, from our own review, and in the 
absence of information, this wouldn't be something that 
necessarily we would pass on to the FSOC, as Mr. Cook stated.
    Mr. Canseco. Thank you very much, gentlemen.
    I now yield 5 minutes to Mr. Capuano, the ranking member.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, I'm going to try to stick to the issues at 
hand. If you want to talk to FSOC, let's get them in here. I 
think it's a fair question to ask what they are going to do 
from this point forward, but they were put together for 
systemic risk. And this may or may not get to that point, but I 
don't think anybody has suggested yet that it is.
    So, in the meantime, Mr. Kobak, I would like to start with 
you. I understand and totally 100 percent agree that your first 
and primary responsibility is to the customers. But for the 
sake of discussion, I also presume that as a bankruptcy 
trustee, you were collecting information on all creditors, not 
just customers, is that a fair assumption?
    Mr. Kobak. That's correct. Our primary emphasis at this 
point is on customers, both on the securities and commodities 
side.
    Mr. Capuano. I understand that.
    Mr. Kobak. But we certainly have to do our duty for 
everyone.
    Mr. Capuano. But let's assume for the sake of discussion 
that all customers--and I'm not suggesting that they can--but 
for the sake of this discussion, let's assume that they can get 
to 100 percent of them. After the customers are paid, who is 
the largest creditor, to your knowledge, at the moment?
    Mr. Kobak. I believe the largest creditor is probably 
JPMorgan. They were creditor of the holding company but also of 
us.
    Mr. Capuano. Do you have any idea--and again, I'm not 
trying to be--
    Mr. Kobak. I know there was a very large revolving loan. I 
know they were the clearing bank. I'm not exactly sure what 
amount.
    Mr. Capuano. Millions, 500 million, a billion?
    Mr. Kobak. Hundreds of millions.
    Mr. Capuano. Hundreds of millions. Okay, so it's a 
regulated bank at the other end of this. Because the reason I 
ask is, as I understand it, when everything is said and done, 
where the collateral might come from, that's fine, we'll get 
into that in a minute with the CFTC.
    But in the final analysis, somebody had to loan money to 
get tie 30-40-1 ratio, and it appears on a very cursory review, 
that money had to come from the outside, and it probably came--
I won't say probably--but at least in this case a significant 
amount of it came from a regulated entity. Is that a fair 
statement?
    Mr. Kobak. I really don't know, Congressman. We haven't 
been there. We haven't really done an analysis.
    Mr. Capuano. I'm not trying to jump ahead. I guess I'm 
jumping ahead because that's what I have to do today. I think 
it's--I personally think that's where it's going to end up.
    Mr. Kobak, have you looked at the auditors or have you 
looked at the credit rating agencies, have you looked at any of 
the other regulated agencies with the presumption being at some 
point, you are going to have to go at everybody to try to get 
money from any place you can that is due to this company from 
anybody who might not have done their job? Have you started to 
look at them yet?
    Mr. Kobak. Step one has really been to look at the accounts 
to see if we can identify what the transactions were. I think 
as Mr. Corzine was suggesting today, another part of that is 
probably looking at money that should have been coming in to 
see whether it all got there. That's what we have been 
concentrating on today. We certainly will do the other things.
    Mr. Capuano. Mr. Baxter, do you know if the Fed has started 
looking at any of their regulated entities that might have been 
on the other side of these agreements?
    Mr. Baxter. You know, ranking member, that I can't talk 
about specific regulated institutions.
    Mr. Capuano. I'm not asking you to.
    Mr. Baxter. But the answer to your question generically is 
we were looking at certain institutions, banking institutions, 
before the bankruptcy, and we have continued to look at them 
after the bankruptcy.
    Mr. Capuano. Because I will tell you that eventually, I, 
myself, am going to want to go to ask questions. I'm not 
expecting you to know the answers today. But to make this mess, 
there had to be two parties. One party might have been MF 
Global, maybe or maybe not doing something wrong, but there had 
to be another party. And if it's another regulated entity out 
there giving loans in incredibly risky situations, this 
unfortunately sounds all too familiar, which I know it's too 
early yet, but I just want to make sure that the Fed is aware 
that I, for one, am going to want to go down that road when the 
time is appropriate.
    Mr. Berkovitz, for the CFTC, you just last week I think it 
was, I might be a week off, changed regulation 1.25. But that 
regulation, that change has been pending since May of 2009. 
That's 2 years it was officially put out there in October of 
2010, but you have been dealing with this for 2 years.
    Do you think that maybe you kind of waited a little too 
long?
    Mr. Berkovitz. Congressman, the Commission, as you noted, 
published an advance notice of public rulemaking in May of 
2009. We took the comments, the public comments we received on 
whether we should--
    Mr. Capuano. How many public comments did you get?
    Mr. Berkovitz. I think there were maybe--
    Mr. Capuano. Twelve.
    Mr. Berkovitz. Fifteen or something like that.
    Mr. Capuano. So 12, so it was not hundreds of thousands of 
public comments.
    Mr. Berkovitz. That's correct. And we issued a notice of 
proposed rulemaking in October of 2010 at that time. 
Subsequently--
    Mr. Capuano. I understand that, but do you think that maybe 
you should have acted a little quicker? The only reason I ask 
is because clearly, this is the way that MF Global went through 
it. Whether they did it right or not, it's clearly the 
incredible doors that were open by the CFTC through 1.25 to 
allow them to repo and double repo and hyper repo everything 
there was involved.
    Now from what I see, and again, I'm still catching up here, 
it looks like you finally closed the door. And the truth is the 
fact that you closed the door a week after the bankruptcy 
raises even more red flags that you knew that there was an open 
door, and you knew you should have closed it earlier. And so I 
guess the question is, if you had closed it earlier, we 
wouldn't be sitting here today.
    Mr. Berkovitz. All right, so I would like to clarify in 
terms of what regulation 1.25, the types of transactions it 
would allow and the types of transactions it does not cover. 
Regulation 1.25 covers--
    Mr. Capuano. So are you saying that MF Global has violated 
regulation 1.25?
    Mr. Berkovitz. No, Congressman, I'm saying that 1.25 covers 
what investment of customer funds may be, customer funds.
    Mr. Capuano. I understand. That's why we're trying to get 
back to customers, 1.25 is the regulation that for all intents 
and purposes enforces the so-called segregation of customer 
funds. But obviously, they weren't segregated, otherwise we 
wouldn't be looking for them. So, and as I understand it, 
everything I have read so far has indicated that MF Global went 
through 1.25, possibly legally, maybe not, not sure yet, to get 
at those funds in a way that was allowed by the CFTC.
    Now, whether they did it illegally is fine, but at least 
some of it, that door was open. And now that it's closed, the 
fact that you closed it so quickly after the bankruptcy, 
certainly indicates to me that was the problem. And you have 
have now closed the barn door after the horse is gone, which is 
fine. So, for me, I would like to know what changed, why all of 
a sudden? Did somebody on the board change their vote?
    Mr. Berkovitz. Congressman, we, as I was describing, this 
has been a process.
    Mr. Capuano. I understand the process, Mr. Berkovitz. Why 
wasn't it passed before the bankruptcy? You didn't have the 
votes?
    Mr. Berkovitz. The Commission was considering it through 
the summer.
    Mr. Capuano. All of a sudden, they woke up on December 4th 
and said, ``Oh, my God, we have to pass this today?''
    Mr. Berkovitz. There were a number of outstanding issues in 
the rule that the Commission was--
    Mr. Capuano. Do you realize how much this smells? This is 
like a dead fish sitting on the table to me. Because you--with 
the way you are implying it is that if this had never happened, 
somehow miraculously, on December 4th, they would have passed 
the change anyway, which, of course, is virtually impossible 
for me to believe since it had been hanging out there for 2 
years.
    Mr. Berkovitz. There is nothing in the change or in 1.25 
prior to the change which would have permitted a person to take 
customer out of segregated funds. The prohibition--
    Mr. Capuano. I am familiar with what 1.25 does. But I also 
understand what doors it opened up. It allowed them to be in 
sovereign debt. It allowed in-house repos, and you have now 
closed those doors, which I think is fine. As a matter of fact, 
as I understand it, Mr. Cook, you never opened those doors at 
the SEC, is that a fair statement, in-house repos and invading 
customers'--
    Mr. Cook. The reserve account on the security side needs to 
be invested in cash or Treasuries.
    Mr. Capuano. You didn't have this door open for the SEC 
side?
    Mr. Cook. I'm not--I don't know exactly everything they 
permitted.
    Mr. Capuano. Okay. That's--
    Mr. Berkovitz. If I could clarify, what 1.25 allowed before 
it was amended--
    Mr. Capuano. Mr. Berkovitz, I know what 1.25 did, but I 
also know how it was used, and that's why the door was closed. 
You clearly saw it as an open door, and I think that's fine, 
because it was, and I'm glad you closed it.
    But I have to tell you, it seems as though you were sitting 
on your hands for a year-and-a-half when you knew you should 
have shut the door. You knew there was a problem. Had you acted 
precipitously, we wouldn't be here today because MF Global 
wouldn't have been able to do this. That's the way I read it, 
and I wouldn't mind hearing a follow up at a later time, but 
have limited time here. I think I am already over my limited 
time, so I think I'm done even though I'll be back.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Berkovitz, Commissioner Sommers told the Senate 
Agriculture Committee on Tuesday, ``We have a very good idea at 
this point what happened to the money.''
    What happened?
    Mr. Berkovitz. Congressman, I think what Commissioner 
Summers was referring to was we have a very good idea of the 
initial transfers out of the segregation account.
    We have a lot of information about initially where that 
money went within the company. What we are continuing to look 
at, we are continuing to examine, is what was the nature of 
those transactions, what was the underlying purpose of those 
transactions, to what extent were they legitimate transactions, 
to what extent were they not legitimate transactions, and then, 
from there, what happened to those funds? So there are several 
other steps that we are looking at very, very closely to try 
and trace exactly where all that money went.
    Chairman Neugebauer. Was there one particular entity that 
got a lion's share of those transfers in the last day and hour?
    Mr. Berkovitz. I can't speak to that. That's where we're 
continuing to try to trace these funds, and that's an ongoing 
process that I can't really speak to. It's also part of our 
investigation. But we are, that is one of the questions that we 
are trying to track down.
    Chairman Neugebauer. Thank you.
    Mr. Duffy, you heard Mr. Corzine testify today. When asked 
about a $175 million transfer that may have been classified as 
a loan to a U.K. subsidiary, and he denied actually knowing 
about those transactions, do you agree with that testimony?
    Mr. Duffy. I can only tell the committee, which I told in 
the Senate, what I have been told. This committee asked for an 
explicit timeline of everything that CME Group knew, and we 
documented that and submitted it for the record. I think you 
submitted it earlier.
    In there, it had references of our employees who were on 
calls where the other employees of MF Global said Mr. Corzine 
was aware of the loans of the $175 million to the European 
subsidiaries. So that is what I know about it, sir.
    Chairman Neugebauer. Okay. And when you, I assume you all 
have been doing some postmortem of what went on as you're 
trying to help, be a part of recovering those funds?
    Mr. Duffy. We are not, sir, we are not allowed to do an 
investigation. The CFTC has asked us not to.
    Chairman Neugebauer. Okay. So your hands are off it at this 
particular point.
    Mr. Duffy. Our focus, as I said in my testimony, was CME 
Group put up $550 million to help the trustee put moneys back 
into the small farmers and ranchers, and that's what we have 
done, sir.
    Chairman Neugebauer. Thank you, sir.
    I think my friend from Texas--yes, I want to follow up on 
the testimony, I think the line of questioning about that 
interagency coordination. And I know that the SEC initiated 
some actions back in the summer, I believe, to require this 
entity to put up additional collateral; is that correct, Mr. 
Cook?
    Mr. Cook. Yes, sir, I just amplified that was initiated 
really by the front-line supervisors of FINRA and the CBOE, who 
initially identified the issue and then consulted with us and 
that resulted--
    Chairman Neugebauer. When did you first get concerned about 
this issue with this entity?
    Mr. Cook. This particular issue was raised by FINRA and the 
CBOE, I think in the June, July timeframe. And there were a 
number of conversations during that timeframe.
    Chairman Neugebauer. Mr. Berkovitz, when was kind of the 
first indication to the CFTC that there was a problem in MF 
Global?
    Mr. Berkovitz. It was the weekend, obviously--let me back 
up, the week of the 24th of October, after the downgrades, the 
ratings downgrades, the earnings statements, we became 
concerned about the protection of customer accounts and 
customer funds, so we sent people on site. I believe, it was 
the 27th of October.
    Chairman Neugebauer. This was about 90 days later, and it 
was about the last week of the game.
    Mr. Cook. Sir, if I might just amplify it, because I think 
you were talking about the bankruptcy in the week beforehand. 
The capital charge issue that came up in August was one that 
was discussed to clarify what are the facts, understand what 
are the issues and to ultimately reach a final determination 
where the firm was told they needed to take the charge. At the 
time, I understand the SEC staff did inform the CFTC staff 
about the issue that a capital charge was going to be taken. 
Under the normal rules, when someone has to take a capital 
charge of this nature in a way that suggested their capital 
charges earlier were inadequate, they have to file a notice to 
their regulators, which I believe they did, which would be to 
us and to the FINRA and to the CFTC. And then they were forced 
to restate their report, their financial report, which would 
then be filed with us and the CFTC all in the August, early 
September timeframe.
    Chairman Neugebauer. I want to go back to what you just 
said, Mr. Berkovitz, though you didn't acknowledge that August 
date. You said we became aware the problem was in the first 
week--
    Mr. Berkovitz. I think I answered a different question than 
the one you asked, and I apologize for that. Mr. Cook is 
correct, we were told about the capital issue in early August, 
when we were informed of the issue and the resolution of that 
issue at that time. So we were aware of that in the early 
August timeframe.
    Chairman Neugebauer. Okay. I thank the gentleman.
    Mr. Perlmutter?
    Mr. Perlmutter. Thanks, Mr. Chairman.
    It will be interesting, as the weeks and months go by and 
all of these facts really do unfold, because there are several 
sort of major things that I am concerned about. And I would 
like to first just sort of understand the process. Mr. Ketchum, 
you said we need to be able to get our hands on this quicker. 
But if I am not mistaken, the SIPC steps in and they can freeze 
everything by filing a bankruptcy. That is how we protect 
customers of broker-dealers.
    Mr. Ketchum. Congressman, the ultimate protection for 
customers of broker-dealers when there is a bankruptcy and 
liquidation is SIPC and the trustee, and should be. In many 
circumstances where a firm is in financial trouble, the 
regulators working with the firm are able to identify either 
transfer accounts or the sale of the firm, which avoids having 
customer accounts frozen and avoids the variety of impacts that 
come from SIPC liquidation. So we try to avoid that whenever we 
can.
    Mr. Perlmutter. That is sort of the last straw.
    Mr. Ketchum. Absolutely.
    Mr. Perlmutter. Okay. But in advance of that, you are 
saying you would like to be able to have some authority to 
force a sale or to protect--because it sounded to me like you 
are getting weekly sort of updates, and you guys got nervous a 
week or two in advance of the trustee stepping in and closing 
the company.
    Mr. Ketchum. We, of course, as you recall from my testimony 
and from Mr. Cook's earlier, we became concerned over the 
positions after the quarterly statement at the end of May, and 
made the initial request with CBOE for additional capital to 
meet the capital requirements we thought applied. With the 
support of the SEC, that finally occurred in August.
    We continued to monitor the firm. As time went on, the 
position didn't change. What changed over time was the gradual 
public recognition of the size of the position in foreign 
sovereign debt that the firm had, and with that, the ratings 
impact and the eventual withdrawal of liquidity support to put 
the firm into its spin in the last week.
    So we were very concerned about that. It was entirely 
working together with the other self-regulatory organizations 
and with the SEC. No, I don't think it is a matter of 
additional authority. It simply is the concern when you have a 
firm that takes a very substantial position.
    Mr. Perlmutter. In hindsight, somebody should have put them 
into bankruptcy a week before this. Maybe we would have saved 
that $900 million that seems to be floating around. Really, I 
am just trying to understand this because I am very concerned. 
This feels like deja vu all over again to me. Okay? And, Mr. 
Duffy, you and I have had conversations about CME and about how 
this would be the first time that money was lost from 
segregated accounts. I was counting on you guys sort of in 
this. And I appreciate that the CME has put up $550 million, 
which is towards the assistance to the customers. How does this 
happen? You clear twice a day. You see who has money and who 
doesn't.
    Mr. Duffy. It is very disturbing, sir. You and I have had 
many conversations. And I think one of the reasons you saw my 
testimony the way it was, it was a timeline to show that we 
were getting falsified segregation reports. And as we tied the 
segregation report out from Wednesday going into Thursday, 
Friday, the money was there as of Wednesday for the most part, 
80 to 90 percent tied out. So something happened on Thursday or 
Friday. We were doing everything possible to do it. We have 50 
auditors; we spend $11 million a year doing this. We audit 
every firm each and every year. We do spot audits. We do 
surprise audits. We have done things to make sure our system 
never fails. Our system has never failed in 75 years. In our 
opinion, someone has violated the law here. And it is hard to 
have a cop on every street.
    Mr. Perlmutter. If somebody--if there is an embezzlement, a 
fraud, whatever, we have to just deal with it. The FBI is in 
this. But I was hoping that the system with that was in place, 
especially through--
    Mr. Duffy. The system didn't fail, sir.
    Mr. Perlmutter. All right. So as this unfolds, I want to 
see that.
    Mr. Duffy. I am trying to show that in my testimony.
    Mr. Perlmutter. Now, I would like to turn my question to 
Mr. Baxter, because here you have this primary dealer, MF 
Global. I don't remember if Lehman Brothers was a primary 
dealer. I think it was. In monitoring these guys who are doing 
deals with you, you started getting nervous. You cut them off 
in earlier October. Mr. Ketchum was nervous about things over 
the course of the summer through August. Maybe the books were 
getting cooked. We have two regulators over there. And finally, 
the bankruptcy trustee comes in, boom, locks it down, is able 
to return $4 billion, which is 72 percent as of today.
    I am curious, and this is where Mr. Capuano was going, did 
the banks come in--and if they did, they were doing their job--
and sweep all the cash that then left the customers holding the 
bag?
    Mr. Baxter. Let me review some of the--
    Mr. Perlmutter. I said a lot there. I apologize.
    Mr. Baxter. And I hope I don't replicate that.
    Let me review some of the activities of the New York Fed 
during the week of October 24th, which was the week preceding 
the bankruptcy. It started with a downgrade on Monday, the 
24th. The next day, there was a large loss declared by MF 
Global. And already in the market there were rumors--and not 
only rumors, they were confirmed--about the large position 
taken in sovereign debt by MF Global.
    What those three things did, Congressman, is they acted 
together to generate a loss of confidence that started a run on 
MF Global. And the run that went on MF Global really went on 
the funding side. And MF Global funded itself in the repo 
market the same way that Bear Stearns funded itself in March of 
2008. You will recall, Congressman, that the run began on March 
11th, and by March 14th, Bear Stearns had no liquidity.
    Mr. Perlmutter. Right.
    Mr. Baxter. Similarly with Lehman, which you mentioned, the 
run began on September 9, 2008, and, again, it began on the 
repo side of the book, and by September 12th, that Friday, the 
Lehman Brothers broker-dealer was out of liquidity.
    So a part of what you see happening here relates to the 
funding and relates to funding assets that are not liquid. So 
what you see happening is the run starts abruptly, and it is 
vicious in its downward spiral on these firms. So consequently, 
when we saw what was happening early in the week on October 
24th, on October 26th, I called my counterparts at the 
Commission, and one of my colleagues called counterparts at the 
CFTC, and said, given what we have seen in other recent 
experience, we think that we ought to be picking up the pace 
with respect to our crisis management with respect to MF 
Global. So with respect to the earlier questions about 
communication among the governmental entities, including the 
Fed, there was, I think, good communication that we had a 
crisis on our hands.
    Now, turning for just a minute to the other piece of this 
question, which relates to the secured parties and the 
unsecured parties, I want to make three points, Congressman, 
because we were one of those secured parties that protected 
themselves and protected the American taxpayer.
    Mr. Perlmutter. You said you had extra margin.
    Mr. Baxter. Yes. And I want to make three points of what we 
did. And by making these points, I don't want to in any way 
come across as insensitive to those who lost money by reason of 
this bankruptcy. But for the purpose of this hearing today, I 
think there are three important points as to why we avoided a 
loss.
    First, our margin account was on our books, and we 
controlled it. It wasn't on the books of MF Global. All right? 
Second point, we received margin in the form of cash, and the 
proceeds came in, in a wire transfer of funds. And there was 
absolutely no evidence, in looking at that $4.2 million wire 
transfer, that it in any way connected to any customer funds. 
Third point, and perhaps the most important, we had an express 
representation in writing from MF Global that the property 
transferred to us as margin was MF Global's own property. If 
that representation turns out to be false, a Federal criminal 
offense has been committed.
    Mr. Perlmutter. And the gentleman sitting next to you will 
come and collect that money.
    So with that, I would yield back.
    Chairman Neugebauer. I thank the gentleman.
    I recognize the gentleman from Florida, Mr. Posey.
    Mr. Posey. Thank you very much, Mr. Chairman.
    First for Mr. Kobak, both you and Mr. Giddens in your 
previous testimony, I believe, stated that no matter the exact 
size of the shortfall, speaking of segregated funds, its 
probable size is significant and will substantially affect the 
trustee's ability to make a 100 percent distribution to former 
MF Global, Inc., customers. Is that still your opinion today?
    Mr. Kobak. Yes, it is, unfortunately.
    Mr. Posey. And thank you for just the yes-or-no answers. 
They are very rare around here, and we really do appreciate it.
    I know that you do not want to speculate while your 
investigation is still under way, but based on Mr. Duffy's 
testimony and other reports, it seems highly probable that 
customer funds were transferred out of segregated accounts and 
commingled with MF's own funds--I don't think anybody is 
doubting that at this point--probably to meet margin calls on 
European bond positions. Does that--
    Mr. Kobak. That is certainly something we are looking into.
    Mr. Posey. Okay. Assuming for the moment that is, in fact, 
what happened, it would mean that the missing customer funds 
will never be found in some overlooked or unreported account 
somewhere, as had been hoped for by many customers when they 
first discovered that a substantial sum of money was missing 
from their accounts, because if the money was being used to 
back those bond positions, we know that those bonds were sold 
in mid-November, correct?
    Mr. Kobak. That is our suspicion as well. It doesn't mean 
we are not looking at it carefully. We stay up late at night 
thinking of--
    Mr. Posey. We take ``yes'' for an answer around here. Thank 
you.
    According to a detailed report in the Wall Street Journal, 
those bonds were sold at a loss, and at an additional discount 
or bargain price, so to speak, to buyers that included JPMorgan 
Chase and George Soros. Have you seen the reports in the Wall 
Street Journal?
    Mr. Kobak. I have looked quickly at the Wall Street 
Journal, yes.
    Mr. Posey. All right. Thank you.
    I know you are not responsible for dealing with the 
bankruptcy proceedings for MF Global, but is it true that once 
the wall has been breached between customer segregated funds 
and corporate funds, the money could have been moved via a 
whole range of intracompany transactions, internal repos, etc., 
to virtually any part of MF Global or to the counterparties who 
were financing those bond positions?
    Mr. Kobak. If the question is, is it possible, I believe it 
is possible. Whether it happened or not, we don't know. That is 
what we are looking at.
    Mr. Posey. ``Possible'' is fine.
    It strikes me that what we have here is a situation where 
the segregated funds belonging to MF Global, including the 
honest, hardworking families in my district's money, were 
misappropriated to support a way too big speculative bet by Mr. 
Corzine and the board at MF Global. Since the bet was closed at 
a loss in a transaction that I believe needs to be investigated 
further, we could be looking at an absurd and totally unjust 
situation in which money has been taken from customers' pockets 
only to find its way into the pockets of big bankers and hedge 
fund managers.
    I know that you need time to do your work, and you have no 
right to interfere with the bankruptcy proceedings. That is the 
responsibility of the Judiciary Branch, obviously. But if this 
committee can find a way to help reverse the travesty, 
obviously that is what we want to do. And that is in large part 
why we are here right now. It is just essential, obviously, to 
protect the sanctity of segregated accounts if we are ever 
going to restore confidence to the commodity markets and the 
U.S. markets in the future.
    Final question: Mr. Capuano poses a really, really 
interesting question. Let me just frame this a little bit 
differently. Is it true that JPMorgan was one of the main 
depository banks for customers' segregated bank accounts?
    Mr. Kobak. I believe it was a depository, but any funds 
that they--I am not actually sure it was a customer bank. And 
we have gotten from virtually all the domestic depositories the 
funds they were holding. It is really the foreign funds that 
are our problem.
    Mr. Posey. Okay. And they were also the providers of the 
main line of credit to MF Global, over a billion dollars?
    Mr. Kobak. There was a substantial line of credit, I think, 
to the holding company, and I think it was on behalf of a 
syndicate of banks. But JPMorgan, I believe, was the lead of 
that syndicate.
    Mr. Posey. Okay. And they would probably be unable to 
recover all of those loans if customers were made whole.
    Mr. Kobak. I don't know whether that is true or not at this 
time.
    Mr. Posey. Possible?
    Mr. Kobak. It is possible.
    Mr. Posey. Probable?
    Mr. Kobak. I would say possible.
    Mr. Posey. All right. We will settle on possible.
    JPMorgan and Soros purchased the MF bonds in mid-November; 
is that correct?
    Mr. Kobak. That is what I read in the paper.
    Mr. Posey. That is what the article says. By then, everyone 
in the world was well aware of a missing $1.2 billion in 
customer funds, correct?
    Mr. Kobak. I certainly was aware of it. I assume others 
were.
    Mr. Posey. Okay. Do you think they should be concerned 
about the possibility of buying stolen goods?
    Mr. Kobak. I really don't know what the circumstances of 
those sales were.
    Mr. Posey. Mr. Baxter, do you? Yes or no would work.
    Mr. Baxter. There are provisions in law for a bona fide 
purchaser, and those transactions, which I don't remember as 
vividly as perhaps I wish I did, Jim, and you may help, but I 
think the bankruptcy court might have approved some of those 
transactions. And I assume the bankruptcy court would not have 
approved transactions if the bankruptcy court felt they were 
violative of law.
    Mr. Posey. Mr. Ketchum?
    Mr. Ketchum. I know no more with respect to the 
liquidation, Congressman, than that. I do have some 
recollection that there was approval of those transactions from 
reading the story, but I know nothing more directly.
    Mr. Posey. Okay. Mr. Duffy?
    Mr. Duffy. I have no other knowledge other than what I read 
in the paper also, sir.
    Mr. Posey. Mr. Cook?
    Mr. Cook. I have nothing further, sir.
    Mr. Posey. Mr. Berkovitz?
    Mr. Berkovitz. I can't really comment on where the money, 
where the transactions really may have gone. We are trying to 
trace these, and we are trying to get the money back.
    Mr. Posey. Do you think it would be reasonable for 
customers to expect some clawback? Starting with Mr. Baxter.
    Mr. Baxter. Again, there are protections in law for 
transferees who are bona fide purchasers and have no knowledge 
that the property they are acquiring has in any way tainted in 
title or otherwise. And I don't know the facts, Congressman, as 
to what the purchasers may or may not have known.
    Mr. Posey. If the purchase had been made after everyone was 
aware you have $1.2 billion missing, I think even the most 
extraordinarily naive person would say there is $1.2 billion 
missing here somewhere, I wonder why I am getting such a 
bargain on this.
    Mr. Baxter. And perhaps Mr. Kobak is more familiar to 
answer this than I am, but we have worked in a couple of 
bankruptcies together, and oftentimes it is important to be 
able to liquify some assets, particularly if the market is 
declining and those assets are losing value. So you shouldn't 
jump to the conclusion, Congressman, that a sale is necessarily 
bad for the bankruptcy estate. It wasn't for some of the 
estates that I acted as liquidator for, and I suspect that Jim 
would agree with me on this.
    Mr. Posey. And again, I am trying to think of customers 
first, just like the customer advocate is supposed to think of 
customers first. And I can't help, as far removed as it is--I 
can't help but be reminded of Madoff, and I can't help but be 
reminded of how effective the clawback has been for some of 
those poor people who were exploited by Madoff. And I am just 
trying to get an idea if there is a possibility here. Maybe 
there is not. But it was just an interesting concept brought 
forth.
    Could I get a response from any of those others? I think 
they are all going to plead ignorance on this, but--
    Chairman Neugebauer. There will be lightning answers here, 
please.
    Mr. Kobak. Okay. I don't know if I would call them 
clawbacks. There are legal theories that you avoid transfers, 
you can attack transactions. That is what we are going to look 
into. I am not sure if the transaction you are talking about is 
specifically our transaction, but it is certainly something we 
will be looking into. But we have to find a basis, a cause of 
action. If we find it, I can assure you we will pursue it very 
diligently.
    Mr. Posey. Okay.
    Mr. Ketchum. I neither have the facts nor the bankruptcy 
expertise to be able to speculate, Congressman.
    Mr. Duffy. I don't have the expertise, but I will say one 
thing. I think that if customer segregated funds are the ones 
that are missing, they do not have SIPC protection or other 
things of that nature, I believe that they should be first in 
line in any circumstance whatsoever to get this money back.
    Mr. Posey. Thank you, Mr. Duffy. I do, too.
    Mr. Cook. I don't have the specific facts, and I am not a 
bankruptcy expert. I think your original question was would it 
be reasonable for a customer to look for clawback? And I think 
if I were a customer, I would want every possible avenue to be 
pursued vigorously. I don't know whether there is--I don't know 
the technical details of the law here to be able to know 
whether there is hope that would occur here.
    Mr. Berkovitz. We are absolutely committed to getting 
customer money back to the customers.
    Mr. Posey. Thank you.
    Thank you, Mr. Chairman.
    I yield back, and I thank you for the extra time.
    Chairman Neugebauer. Mr. Miller is recognized.
    Mr. Miller of North Carolina. Thank you. I want to make 
another try at the questions that I asked earlier of the first 
panel, without satisfactory results, maybe because of my 
questioning, maybe because of their answering.
    As I understand it, MF Global bought more than $7 billion 
of European sovereign debt, which was 100 percent financed 
through the repo market. The sovereign debt itself was the 
collateral, which is pretty stunning. Mr. Capuano earlier asked 
how they got to 40-to-1 leverage. Maybe that was how. But at 
some point, the lenders figured out that was maybe not such a 
good idea, either because of the debt, or the sovereign debt 
that was pledged as collateral, or because of MF Global, and 
they issued a margin call, and then there began a mad scramble 
to come up with the money. They sold assets. And then I think 
Mr. Baxter, and before that Mr. Abelow, said that what happened 
was a classic run like used to happen to a depository 
institutions, if you know the movie, ``It's a Wonderful Life.'' 
The other lenders decided that they maybe needed a little more 
security, too, and it went downhill from there.
    But in the mad scramble, the question is what happened to 
the money or to the assets that were in clients' segregated 
accounts? The reality is that segregated accounts get used all 
the time. It is supposed to be segregated, yes, but they can 
get at those accounts. A Reuters article a week ago set out 
verbatim a paragraph in MF Global's client contract: ``Consent 
to loaner pledge. You hereby grant us the right, in accordance 
with applicable law, to borrow, pledge, repledge, transfer, 
hypothecate, rehypothecate,'' and on and on. Mr. Corzine said, 
yes, but there were limits to that under CFTC.
    But the question is--I guess for Mr. Berkovitz--was it 
legal? Was there a legal way for MF Global, under the CFTC 
rules that existed at the time, to use assets in client 
accounts as security for any kind of short-term loan for MF 
Global? And whether it was legal or not, is there a reason to 
think that might have happened?
    Mr. Berkovitz. I can't speak to what MF Global did or what 
they didn't do. That is the matter that we are currently 
looking into. What I can say is under our regulations, the 
customer funds remain the property of the customer, and they 
can't be pledged to--on behalf of the company as security for a 
loan or something like that.
    Mr. Miller of North Carolina. It could not legally have 
been done?
    Mr. Berkovitz. Correct.
    Mr. Miller of North Carolina. And you cannot speak to 
whether there is reason to think--any evidence that did, in 
fact, happen.
    Mr. Berkovitz. I can't speak to anything that they may or 
may not have done factually.
    Mr. Miller of North Carolina. Okay. And then, several 
Members have asked questions about whether there was a way to 
structure the transaction so they could, in fact, borrow funds 
in clients' accounts, whether through internal repo or 
whatever. Was there, in fact, a legal way with the CFTC rule 
that was in effect at the time for them to borrow from their 
own clients?
    Mr. Berkovitz. Under the regulation 1.25 in effect at the 
time, they could have done an internal repurchase agreement. 
But the customer segregated funds would have to remain intact 
and whole at all times. The value of the customer funds would 
have to be preserved. They could not reduce the value of those 
funds or take customer funds.
    Mr. Miller of North Carolina. They could borrow from them 
and offer something as collateral?
    Mr. Berkovitz. I wouldn't say ``borrow from.''
    Mr. Miller of North Carolina. It is a repo transaction.
    Mr. Berkovitz. It is a repo transaction where they are 
putting something of equal value back into the customer 
account.
    Mr. Miller of North Carolina. Okay. And was the thing of 
equal value, was there a way that they could have created an 
instrument on their loan that would have been permissible 
collateral for repo transactions?
    Mr. Berkovitz. They would only have been able to do that 
with permissible investments under the regulation. They could 
only use a repo transaction with permissible investments.
    Mr. Miller of North Carolina. And can you speak to whether 
there is reason to think something like that happened?
    Mr. Berkovitz. I can't speak factually to that.
    Mr. Miller of North Carolina. Okay. Again, a couple of 
people have used the term ``run on the banks.'' That used to 
happen to depository institutions all the time, and then we had 
safety and soundness regulations, and then we had deposit 
insurance. It hasn't happened in 70 years really. Before the 
financial crisis, we had a repo market, a shadow banking system 
that was equal in size to all bank deposits. Stunning amounts 
of money were sloshing around every night. Bear Stearns was 
borrowing $40 billion a night in the repo market. There was a 
run on Bear Stearns, there was a run on Lehman, there was a run 
on the entire financial system in that week after that Lehman 
collapse. Now, it has happened again.
    Is there reason to think that maybe this completely 
unregulated shadow banking system that actually no one in 
Congress knows much of anything about, but seems to create a 
remarkable instability for our entire financial system, that 
maybe we ought to pay attention to that; there ought to be some 
limitation on how many times a given asset can be made 
collateral, and then collateral again, and then collateral 
again, or there should be some required haircut so there is a 
limitation on how much can be borrowed? Is there some reason to 
think there should be some limitation, or should this just go 
on the way it has over the last 3 or 4 years?
    Mr. Duffy, do you want to answer a question?
    Mr. Duffy. I won't answer on behalf of CME. I will answer 
it on behalf of myself.
    I absolutely think you are correct. I think there needs to 
be some reining in of this type of activity. One of the things 
that Mr. Corzine kept saying was he was bringing leverage 
ratios down from 37 to 30. He failed to say that he also took 
the debt from $1 billion to $6.3 billion, too. So there are a 
couple of other things in there. I do believe, and this is me 
speaking personally, that these leverage ratios need to be 
adjusted.
    Mr. Miller of North Carolina. Okay. Actually, I think all 
of you were equally qualified to speak to this, but, Mr. 
Berkovitz, how about you?
    Mr. Berkovitz. I can't really speak to the issue on shadow 
banking, although I would note that under Dodd-Frank, there are 
a number of additional measures to reduce systemic risk, to 
increase transparency in the marketplace for a variety of swap 
transactions. But I can't really speak to questions of shadow 
banking.
    Mr. Miller of North Carolina. Mr. Baxter? New York Fed is 
deeply involved in all this stuff.
    Mr. Baxter. Thank you, Congressman.
    One additional point I would note in terms of references to 
banks, banks also fund short term with respect to deposits, and 
they fund longer-term assets like loans. But banks, of course, 
have access to the liquidity facilities of the Federal Reserve.
    Mr. Miller of North Carolina. Right.
    Mr. Baxter. The shadow banking system, which consists of 
nonbanks primarily, broker-dealers, they do not have access to 
the discount window at the Federal Reserve. And as you may 
recall, one of the changes effected in Dodd-Frank is some of 
the provisions that we used--and I am speaking here about 
Section 13, subdivision 3 of the Federal Reserve Act to lend to 
broker-dealers--that provision was changed to make it much more 
difficult for the Fed ever to loan to a single company that was 
facing insolvency, or a single company for the purpose of 
taking assets off the balance sheet like we did with respect to 
Bear Stearns.
    So that is one point I would make to you right off the bat, 
is there is a difference, because the banking system has access 
to the liquidity facilities of the central bank, whereas the 
shadow banking system generally does not. Now, that is a 
generalization. There are some exceptions.
    Second point: Just by way of historical reference, you 
mentioned Lehman. You may also remember that the week after 
Lehman, there were several prominent investment banks, and I 
won't name names because I shouldn't, that became--
    Mr. Miller of North Carolina. There weren't that many.
    Mr. Baxter. --that became bank holding companies.
    Mr. Miller of North Carolina. Right.
    Mr. Baxter. And again, the reason for that relates to this 
structural feature of having access to the liquidity facilities 
at the central bank.
    Mr. Miller of North Carolina. Mr. Chairman, I know, but one 
more question along my earlier lines about the way that a 
transaction could have been structured to borrow money from 
client segregated accounts. Could MF Global have issued any 
kind of instrument on their own, a bond, commercial paper, 
whatever, that would have been an asset that they could have 
used in an internal repo and borrowed the client's funds?
    Mr. Berkovitz. I won't speak to MF Global, but I will just 
speak--hypothetically speaking, you could put a corporate--a 
highly rated corporate bond could be a subject of a repo.
    Mr. Miller of North Carolina. Your own corporate bond?
    Mr. Berkovitz. You couldn't put your own bond in. You could 
not put your own bond in.
    Mr. Miller of North Carolina. Okay. All right.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Ohio, Mr. Renacci, is 
recognized.
    Mr. Renacci. Thank you, Mr. Chairman.
    Mr. Baxter, MF Global's application to become a primary 
dealer with the Federal Reserve Bank of New York was approved 
despite the firm's history of compliance failures, internal 
control problems, and incomplete disclosures to regulators. 
Apparently, compliance problems and poor recordkeeping 
continued at MF Global until the firm's collapse. If the New 
York Fed had a surveillance provision for primary dealers in 
place, do you think weaknesses in MF Global's books would have 
been caught?
    Mr. Baxter. The first point, Congressman, is we were not 
acting as MF Global's supervisor; we were acting as MF Global's 
counterparty. And as MF Global's counterparty, we were 
concerned about our financial risk, and we were concerned about 
our reputational risk. That is why it took the application of 
MF Global more than 2 years to be approved.
    And with respect to reputational risk specifically, one of 
the concerns arose from the enforcement action that the CFTC 
did in December of 2009 against MF Global. And under our 
policy, the institution facing a material enforcement action 
goes into a kind of penalty box period for a period of a year. 
We put that MF Global application through that full 1-year 
penalty box. We checked to make sure it had remediated the 
enforcement problems that resulted in the 2009 action, and 
there were no new problems during that 1-year penalty box 
period. And as a result of that, in February of 2011, so more 
than a year from the date of the enforcement action, we decided 
to approve the designation of MF Global as our counterparty.
    Mr. Renacci. What was that date again? I am sorry?
    Mr. Baxter. It was February 2011.
    Mr. Renacci. Okay. And was there any review past that? Was 
there any surveillance past that?
    Mr. Baxter. Past that, we continued to receive weekly FR 
2004 reports from MF Global. We continued to receive the 
monthly FOCUS reports from MF Global. We continued to meet 
regularly with MF Global staff. And most importantly, we were 
transacting business on behalf of the government with MF Global 
and looking at their trading activity done through us.
    Mr. Renacci. And in those reports you were receiving, 
subsequent to that, were you seeing any weakness in MF Global?
    Mr. Baxter. What happened after the date we approved it, so 
February of 2011, is these repo-to-maturity trades in European 
sovereign debt were put on. To the credit of FINRA, FINRA 
discovered those in the summer of 2011. They were reported to 
us by MF Global in late July of 2011. And we were looking at 
the situation at MF Global throughout that period.
    Now, we have two particular capital requirements for 
primary dealers. One is a minimum capital requirement of $150 
million. That was always satisfied. The other is that our 
primary dealers need to satisfy the SEC net capital rules. And 
after the experience through the summer of 2011, MF Global 
brought itself into compliance with the SEC net capital rules. 
So there was no problem under our policy, which we apply 
evenhandedly across all 21 dealers.
    Mr. Renacci. I noticed you used the word ``counterparts.'' 
And I guess I would question why it is necessary for the 
Federal Reserve Board of New York to designate a select firm of 
group of firms as primary dealers if the New York Fed maintains 
that its primary dealers are only counterparts?
    Mr. Baxter. We impose specific burdens on the 21 
institutions that we designate as primary dealers: one, they 
have to participate in our trades in the open market to 
implement monetary policy; two, they have to provide us with 
market intelligence related to our monetary policy function; 
three, they have to participate in every auction we conduct on 
behalf of the Treasury for U.S. Treasury securities; and four, 
they have to be ready to make markets for us for the $3 
trillion in assets we have under management for foreign central 
banks and monetary authorities, dollar reserves. So there are 
burdens that every one of the primary dealers has to agree to.
    And so, not every primary dealer can experience those 
burdens, and there are situations, Congressman, where primary 
dealers withdraw and can no longer satisfy our very specific 
requirements. But they are our requirements. They are our 
requirements because of the types of counterparty activities we 
engage in. And they assure that the primary dealers that are 
designated meet the needs of the Fed and the United States.
    Mr. Renacci. Last but not least, do you monitor any of the 
communications released by the primary dealers which reference 
their status as primary dealers? Given the market perceptions 
about primary dealers, wouldn't it be wise for the Federal 
Reserve Bank of New York to compel all primary dealers 
referencing their primary dealer status in oral or written 
communication to explicitly disclose that a primary dealer 
designation does not constitute an endorsement by the Federal 
Reserve?
    Mr. Baxter. I hear that suggestion, Congressman. And, on 
our Web site, we publish prominently that the primary dealer 
designation should not be regarded as a substitute for 
counterparty due diligence. But I hear your suggestion that 
maybe we should do more and monitor what all of the 21 are 
saying. Now, that is a significant burden on us, but maybe it 
is a burden we need to undertake. So I will take that under 
advisement, sir.
    Mr. Renacci. All right. Thank you. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    So we are going to do a lightning round. I don't know who 
our timekeeper is here, but we are going to do a 2-minute 
round. So I ask the Members to pick the question they want to 
ask, and I would ask our panel to be brief in their answers.
    With that, I recognize the ranking member, Mr. Capuano, for 
2 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    I don't need a response to this, Mr. Berkovitz, but this is 
a CRS report dated November 28, 2011, on MF Global. And in a 
footnote on page 2, which is ridiculous it is this small, they 
are talking about segregated accounts can't be commingled. But 
they also cite Section 4(d)(f)(3)(a) that has an exception 
permitting commingling ``for convenience.''
    I don't expect you to answer that today, but I would like 
to hear from you at some point in the future as to exactly how 
big of a loophole that might be. Not today. Another time. But 
it certainly raises questions. And I ask it really only because 
I have such high regard for the CRS, if they put something in 
there, it raises my concern.
    I guess for the entire panel, I don't expect that you will 
be familiar with an article, but I haven't read a news article 
as often, as frequently I have read this one. I have read it 3 
times now--actually 4 times, very slowly, because it is very 
difficult. It is above where I am capable of understanding. But 
it is a Reuters article entitled, ``MF Global and the Great 
Wall Street Rehypothecation Scandal.'' It was published on 
December 7th by a Christopher Elias out of the U.K. And I am 
not going to suggest anything here is accurate, but I would 
like you all to go back and take a look at this later on, and I 
would love to have some of your comments on this to see what 
you think he says.
    The reason I mention it is it goes through a long 
explanation, which I have to admit I have a hard time 
following--this is above my pay grade, but I am trying--is 
that--on some really serious questions. I will read you one 
paragraph near the end. After he talks about rehypothecation, 
which, I have to be honest, I am still struggling exactly what 
that is, but it is basically loans on loans, ``With collateral 
being rehypothecated to a factor of four, according to IMF's 
estimates, the actual capital backing banks' rehypothecation 
transactions may be as little as 25 percent. This churning of 
collateral means that the rehypothecated transactions have 
created enormous amounts of liquidity, much of which has no 
real asset backing.''
    Now, I have to be honest, that sentence reads like 
something I read not too long ago about mortgages, and it 
concerns me deeply. And he goes on in the next page listing big 
companies that, in his estimation, have taken advantage of weak 
collateral rules, incredible leverage by pledging and 
repledging collateral. And he lists JPMorgan as having sold or 
repledged $410 billion of collateral received under customer 
margin loans, derivative transactions, securities borrowed, and 
reverse purchase agreements; Morgan Stanley at $410 billion; 
and interestingly enough, Interactive Brokers at $8 billion. 
They are the ones you were trying to sell MF Global to.
    And again, I am not trying to bushwhack you, but I would 
really love you each to take a good look at this and let me 
know what you think about this article and why you think I 
shouldn't be concerned. And I would specifically ask that those 
of you who are on the FSOC bring this article back to the FSOC 
and ask them, because again, the FSOC, in my estimation, was 
created very clearly, unequivocally, to make sure that there 
was no systemic risk. This article raises concerns it may be 
there, and nobody is watching. So I look forward to your 
responses.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Ketchum, I wanted to go back to something. In late 
September of 2010, I think you all did a call-around asking 
firms if they had sovereign debt exposure in Europe. And can 
you tell me what the response from MF Global was in that 
September 30th call-around?
    Mr. Ketchum. Mr. Chairman, I don't recall whether it was in 
the September 30th call-around or sometime shortly thereafter, 
but the response was they had no positions in European 
sovereign debt.
    Chairman Neugebauer. And it subsequently turned out they 
did have exposure.
    Mr. Ketchum. To be most generous to them, it could be that 
they interpreted the fact that it was a repo-to-maturity and 
not required to be reported as an asset for accounting purposes 
that they didn't view it as a position. But that certainly 
wouldn't have been what we expected. They had credit and market 
risk, and they should have responded and explained it to us.
    Chairman Neugebauer. Did you ever have any--once you 
discovered later on, and I think you discovered in March or--
    Mr. Ketchum. We discovered it at the end of May.
    Chairman Neugebauer. End of May. Did you bring that to 
their attention that you were concerned that they had not 
previously disclosed that?
    Mr. Ketchum. I believe my staff did raise it with them. I 
don't know the details. I would be glad to get back to you on 
it. But we are concerned with it. They should have been far 
more forthright than they were.
    Chairman Neugebauer. And so is there--one of the things we 
want to do is when we get through with all of this, we want to 
do something productive with it. We want to make sure that we 
make the system better, but at the same time, we don't make the 
system more onerous. So we want to be careful here. But I think 
it appears to me down the road that disclosure of these kinds 
of transactions, that would need to be a little bit clearer, 
and some guidelines of reporting those, because obviously what 
Mr. Corzine thought was a risk-free transaction turned out to 
be an extremely risky transaction.
    Mr. Ketchum. I absolutely agree with you, Mr. Chairman. I 
think it should be looked at both, frankly, from a GAAP 
accounting standpoint, and indeed that is one of the reasons 
why we have a rule before the SEC that would give us the 
authority to require much more extended disclosure than exists 
in our present FOCUS--or the SEC's present FOCUS forms.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Colorado.
    Mr. Perlmutter. I appreciate everybody's testimony today. 
This is going to be something we are all going to be looking at 
for a while, to know exactly when you force a sale or merger, 
demand more capital, close the institution, because you want to 
allow companies to operate if they can. But here, we have other 
people's money, and that is why we have this ability for the 
SIPC to just come in and shut the doors and preserve what 
exists.
    So I just have a question for the SEC and for those of you 
who look at this, because when we went through this type of 
thing before, there was a lot of short selling going on, there 
was a lot of rumor mongering going on, there was a lot of 
driving a company that is sort of wounded into the ground. And 
so I would--as part of all your investigation, I would really 
like to know that was going on, and who benefited by it, if it 
is possible to check something like that out, because we have 
seen it in the past, and it really hurts the system. And I 
would just ask you to do that.
    And I have a million questions, so I am not going to ask 
any more, and I am just going to wish you all happy holidays.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Florida, Mr. Posey, is recognized for 2 
minutes.
    Mr. Posey. Thank you very much, Mr. Chairman.
    Mr. Duffy, I believe in a Senate hearing you were asked to 
basically butt out of any investigation. Could you elaborate on 
that a little bit?
    Mr. Duffy. Only to what I know, sir.
    We were told that the CFTC had asked us not to get involved 
in an investigation; that they were going to proceed with the 
investigation, so we were no longer a part of the 
investigation. So you would have to ask them why. I don't know.
    Mr. Posey. Do any of you have any interest in pursuing an 
investigation of your own? Other than just being observers 
about what you read in the newspaper or what somebody tells 
you, did anyone else beside Mr. Duffy attempt to pursue your 
own investigation? Just anybody raise your hand if you did.
    Good. I would like to hear about it. I would like to hear 
from all of you.
    Mr. Chairman, if I can have time.
    Mr. Kobak?
    Mr. Kobak. Part of our statutory duties, as I said in my 
remarks, is to do a thorough and independent investigation. We 
are doing that. We are trying to coordinate it with the other 
investigations that are going on.
    Mr. Posey. But you weren't asked to butt out?
    Mr. Kobak. No.
    Mr. Posey. Okay. Mr. Ketchum?
    Mr. Ketchum. We weren't asked to butt out. We provided 
support to the trustee, and we understood that the SEC and the 
CFTC were both investigating this. It was not a matter of 
butting out, but of allowing the agency to do their work.
    Mr. Cook. Yes, sir. We are looking at many things related 
to this.
    Mr. Posey. You haven't been asked to butt out?
    Mr. Cook. No, sir.
    Mr. Posey. Mr. Berkovitz?
    Mr. Berkovitz. We are investigating what happened to the 
funds.
    Mr. Posey. Everybody is investigating, and Mr. Duffy is the 
only guy who was asked to butt out. Does anybody have any idea 
why that could be? Nobody has any idea why Mr. Duffy's 
organization is the only one that was asked not to do so?
    Mr. Duffy. Just so it is clear, sir, all the information I 
have testified on is information we have gathered in our own 
internal interviews prior to us being asked not to investigate 
further. So that is what I have testified.
    Mr. Posey. Did they tell you why? I find that incredulous.
    Mr. Duffy. I guess you would have to ask the CFTC why. I 
don't know.
    Mr. Posey. Why?
    Mr. Berkovitz. I am not familiar with what has been 
referred to, but even if I were, I couldn't talk about it.
    Mr. Posey. With the Chair's permission, and I am sure 
everyone left on this panel would be intensely interested in 
knowing that at the earliest possible moment you are able to 
tell us, why you would ask Mr. Duffy not to participate in an 
internal investigation. And I hope you will write that down and 
not forget it. At the earliest possible time that you feel 
ethically, morally, or legally able to tell us why you would 
tell him not to conduct an internal investigation, not to 
discover any facts on his own that he possibly could, we 
greatly would look forward to having your explanation on that.
    Chairman Neugebauer. I thank the gentleman for his 
questioning.
    The gentleman from Texas, Mr. Canseco.
    Mr. Canseco. Thank you, Mr. Chairman.
    I just have a very brief question, because most of the 
questions have already been asked.
    So, Mr. Duffy, MF Global had a very spotty compliance 
record and paid about $87 million in fines to regulators in 
2007. Was there anything in MF Global's past that would give 
CME concern about the segregation of customer funds at the 
company?
    Mr. Duffy. No. Again, we do random audits. We audit each 
and every one of our firms every year, as we are required to 
do. We do spot audits. We get daily segregation reports. We do 
third-party tie-outs. They have had some disciplinary actions, 
I think they were fairly de minimis, throughout the years. But 
when they took over after Refco failed, we never took them off 
daily reporting. Most firms don't have to report daily. It 
comes a day or so later. And we have continued to keep a close 
watch on all of our firms, including MF Global.
    Mr. Canseco. Thank you very much. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And I apologize to the gentleman, Mr. Miller, for skipping 
over him. So you are recognized.
    Mr. Miller of North Carolina. That is fine, Mr. Chairman. I 
will just accept double the time.
    The only proposal that I can recall in Dodd-Frank that got 
at the repo market, which was a huge part of the financial 
crisis, was a proposal from the FDIC and Sheila Bair to limit 
how much could be paid, or to give the FDIC discretion in 
receivership to pay less than 100 percent of secured 
transactions, which was obviously aimed at the repo market. But 
all the debate in Congress was about mortgages on office 
buildings, which made me think that Congress does not really 
understand the shadow banking system and the repo market. And 
someone really needs to, because this is very important.
    And it is also very much the case that the industry does 
not want us to understand it, because if we did understand it, 
we might start to pay attention and figure out how much of a 
risk it really posed to us.
    I have a couple of questions about proposals that have been 
made to limit repo transactions. One is, and I mentioned it 
earlier, to limit the number of times a given collateral--Mr. 
Capuano used the term ``rehypothecation,'' and then he admitted 
he wasn't exactly sure what that meant, but it is the same 
collateral being used as--the same instrument, the same asset 
being used for collateral for multiple transactions. Should 
that be used ad infinitum like double mirrors, where you just 
see forever, or should there be some limit on the number of 
times a given asset can be hypothecated?
    Mr. Duffy?
    Mr. Duffy. As I said earlier, sir, I do believe that there 
needs to be a limit on how much any particular security can be 
leveraged out. So, if it is 20 times over, and we are all 
looking to get the same security back at the same time, and 
there are 20 of us looking for one thing, 19 of us are going to 
have a problem. So I do believe that there needs to be some 
kind of limit to that type of behavior.
    Mr. Miller of North Carolina. Anyone else? Okay.
    Mr. Cook. Sir, I would just add I think there are a lot of 
complicated issues there. Repos are a very valuable financing 
tool in the markets. And I think, frankly, repos-to-maturity 
may have their purpose. I am not here to defend them, but they 
do cut down certain risks. They potentially create others.
    I think you are raising an important question. I know the 
ranking member has asked us to look at this article. I have 
looked at it, and I look forward to discussing it further. But 
I think it is hard to say--there is a difference between 
leverage and allowing rehypothecation.
    Mr. Miller of North Carolina. Then let us go to leverage. 
It is pretty stunning that MF Global was able to have 100 
percent financing of their purchase of sovereign debt, more 
than $7 billion in sovereign debt, through the repo market. 
Should there be essentially a margin requirement? Should there 
be some requirement of a haircut to limit the vulnerability to 
the repo system?
    And I understand the immediate need right now for 
liquidity, and imposing anything immediately would have a 
problem in the world economy given where things are. But if we 
ever pull out of where we are, should there be a limit on--
should there be a required haircut or essentially a margin 
requirement? Mr. Cook?
    Mr. Cook. I believe that was, in fact, the effect of 
requiring them to take a capital charge--through the 
discussions with FINRA and the SEC, take the capital charge for 
these positions. I think the question, the broader question of 
leverage is a very important one. I think there are a number of 
policy issues we need to think through there. There are 
different types of leverage. And so, you can have two firms 
that have the same degree of leverage, but very different 
risks. And I think the question of how we approach that is an 
important one to think about further. I don't want to use up 
your time answering that question.
    Mr. Miller of North Carolina. Anyone else? I am now past my 
time.
    Mr. Ketchum. I would just underline what Mr. Cook said. I 
think you raise a very important issue from the standpoint of 
viewing leverage, particularly with respect to assumptions in 
most of the financial oversight, from banking to securities 
firms, with regard to matched book leverage that is built in. 
But the exposure to that leverage varies dramatically by asset 
quality and dramatically by the nature and the maturities of 
that matched book.
    So I think you raise an important issue that all of us 
should go back and review, but I think Mr. Cook is right, there 
is also a great deal of an exceptionally critical part of 
financing that is built into the repo market.
    Mr. Miller of North Carolina. One last question, at the 
chairman's indulgence. Sheila Bair's argument for her haircut 
on the repo market is that there needs to be some market 
discipline. There was none; that lenders in the repo market 
were making their decisions based entirely upon the collateral. 
When Bear Stearns was obviously listing in the water, Lehman 
was listing in the water, everyone knew they were in deep 
trouble, and the result of the favored position of repo 
transactions was that when the FDIC finally arrived, there was 
just this smoking crater in the ground instead of an 
institution that actually may have had some franchise value and 
had some assets.
    Do you think there is any discipline in the repo market? 
And what can be done to create some discipline in the repo 
market?
    Mr. Cook. I will take a stab, sir. It is, again, a 
complicated question.
    I think in some respects, Lehman and Bear are examples 
where counterparties looked beyond the collateral, because 
those entities, as I understand it, were not able to finance 
themselves even using Treasuries. So there is a discipline in 
that sense. But that is also part of the challenge is if you 
become highly dependent on financing yourself, including using 
very high-quality collateral, and there is some reputational 
issue that is out there, then you have a significant liquidity 
problem.
    I think one way to come at your question--I am sure there 
are many--is to think about the appropriate capital treatment 
of these transactions, whether they are being properly 
addressed through capital charges.
    Chairman Neugebauer. I thank the gentleman. Good questions.
    The Chair notes that some Members may have additional 
questions for the panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    We thank this panel. I would remind members of the 
committee that we believe that additional hearings on this 
issue are warranted, and we are going to look at credit rating 
agencies, and some of the accounting practices that have been 
discussed today, risk management, internal controls. Some of 
those issues we think are important. And I think the ultimate 
product that we want to deliver when we get all of the 
information back that we requested, and get reports back from 
the various people who are looking at that, is for this 
committee to publish a finding and let that finding then be a 
part of the record. And we can then ascertain if there are 
additional things we can do, in working with the industry, to 
make sure that we make whatever fine-tuning adjustments that 
need to be made to make sure that we do not have to have 
another hearing like this in the future.
    We thank the panel. You have been very patient. I know it 
has been a long day. And so, go ahead and take the rest of the 
day off.
    With that, this committee is adjourned.
    [Whereupon, at 6:25 p.m., the hearing was adjourned.


                            A P P E N D I X



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